Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 56291-PE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED DISASTER RISK MANAGEMENT DEVELOPMENT POLICY LOAN (DPL)

WITH A

CATASTROPHE DEFERRED DRAWDOWN OPTION (CAT DDO)

IN THE AMOUNT OF US$100 MILLION

TO

THE REPUBLIC OF PERU

November 3, 2010

Sustainable Development Department Country Management Unit for Bolivia, Chile, Ecuador, Peru, and Venezuela Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 56291-PE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED DISASTER RISK MANAGEMENT DEVELOPMENT POLICY LOAN (DPL)

WITH A

CATASTROPHE DEFERRED DRAWDOWN OPTION (CAT DDO)

IN THE AMOUNT OF US$100 MILLION

TO

THE REPUBLIC OF PERU

November 3, 2010

Sustainable Development Department Country Management Unit for Bolivia, Chile, Ecuador, Peru, and Venezuela Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ii

REPUBLIC OF PERU - GOVERNMENT FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of August 3, 2010)

Currency Unit = Peruvian Nuevo Sol 1 Peruvian Nuevo Sol (PEN) = 0.355239 US Dollar (US$)

1 US$ = 2.815 PEN

WEIGHTS AND MEASURES Metric System

ABBREVIATION AND ACRONYMS

ANA National Water Authority (Autoridad Nacional del Agua) BCRP Central Bank of Peru (Banco Central de Reserva del Perú) CAPRA Central America Probabilistic Risk Assessment CAT DDO Catastrophe Deferred Drawdown Option CAF CCIDEP

Andean Development Corporation (Coorporación Andina de Fomento) Coordination Agency for Spatial Data Infrastructure (Comité Coordinador de la Infraestructura de Datos Espaciales)

CEA CENEPRED

Country Environmental Analysis National Center for Disaster Risk Estimation, Prevention and Reduction (Centro Nacional de Estimación, Prevención y Reducción del Riesgo de Desastres)

CEPLAN National Center for Strategic Planning (Centro Nacional de Planeamiento Estratégico)

CFAA Country Financial Accountability Assessment CMRRD COFOPRI

Multisectoral Commission on Risk Reduction in Development (Comisión Multisectorial para la Reducción de Riesgos en el Desarrollo) Agency for Formalization of Informal Property (Organismo de Formalización de la Propiedad Informal)

CPS Country Partnership Strategy DDO Deferred Drawdown Option DGPM General Bureau for Multiannual Programming of the Public Sector

(Dirección General de Programación Multianual del Sector Público) DIPECHO DPL

Disaster Preparedness of the European Commission’s Humanitarian Aid Department Development Policy Loan

DRM Disaster Risk Management ECHO ENV DPL

European Union through its Commission for Humanitarian Aid Environmental Policy Development Loans

EPS FDI

Water and Sanitation Service Providers (Empresas Prestadoras) Foreign Direct Investment

GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery GoP Government of Peru

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GTZ German Agency for Technical Cooperation (Deutsche Gesellschaft für Technische Zusammenarbeit)

HFA Hyogo Framework for Action HIPC Heavily Indebted Poor Countries IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development IDA International Development Association IDF Institutional Development Fund IEG Independent Evaluation Group IFC International Finance Corporation IGP Geophysical Institute of Peru (Instituto Geofísico del Perú) IMF International Monetary Fund INEI National Institute of Statistics and Information Technology (Instituto

Nacional de Estadísticas e Informática)JICA Japan International Cooperation Agency JSAN Joint Staff Advisory Note LDP Letter of Development Policy MDGs Millennium Development Goals MEF MINAM

Ministry of Economy and Finance (Ministerio de Economía y Finanzas) Ministry of Environment (Ministerio del Ambiente)

MINEDU MINSA

Ministry of Education (Ministerio de Educación) Ministry of Health (Ministerio de Salud)

MTEF Medium-Term Expenditure Framework MVCS Ministry of Housing, Construction and Sanitation (Ministerio de

Vivienda, Construcción y Saneamiento) OAS Organization of American States (Organización de Estados

Americanos) OPI Investment Planning Office (Oficina de Programación de Inversión) PAHO PBL

Pan American Health Organization Policy-Based Loan

PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFM Public Financial Management PHRD Japan Policy and Human Resources Development Trust Fund PIP Public Investment Project (Proyecto de Inversión Pública) PNPAD PPE-RVAE

National Disaster Prevention and Response Plan (Plan Nacional de Prevención y Atención de Desastres) Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (Programa Presupuestal Estratégico de Reducción de Vulnerabilidad y Atención de Emergencias por Desastres)

PREVEN Program for El Niño Vulnerability Reduction (Programa de Reducción de Vulnerabilidades frente al Evento Recurrente de El Niño)

ROSC Report on the Observance of Standards and Codes SDC Swiss Agency for Development and Cooperation SDR Special Drawing Rights SENAMHI National Meteorological and Hydrological Service (Servicio Nacional

de Meteorología e Hidrología) SFLAC Spanish Fund for Latin America and the Caribbean SIAF Integrated Financial Management System (Sistema Integrado de

Administración Financiera)

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SINADECI SINPAD

National Civil Defense System (Sistema Nacional de Defensa Civil) National Information System for Disaster Prevention and Response (Sistema Nacional de Información para la Prevención y Atención de Desastres)

SNIP National Public Investment System (Sistema Nacional de Inversión Pública)

SUNASS TSA

National Oversight Office for Sanitation Services (Superintendencia Nacional de Servicios Sanitarios) Treasury Single Account

UCPS Sectoral Program Coordination Unit (Unidad Coordinadora de Programas Sectoriales)

UNDP United Nations Development Programme UN/ISDR WSP

United Nations International Strategy for Disaster Reduction Water and Sanitation Program

Vice President: Country Director:

Sector Director: Sector Manager:

Task Team Leader:

Pamela Cox Carlos Felipe Jaramillo Laura Tuck Guang Zhe Chen Joaquin Toro

Republic of Peru Development Policy Loan with a Catastrophe Deferred Drawdown Option

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ......................................................................................................... 1 I.  INTRODUCTION ............................................................................................................................ 2 II.  COUNTRY CONTEXT ................................................................................................................... 3  A.  Economic Developments .................................................................................................... 3  B.  Macroeconomic Outlook and Debt Sustainability ........................................................... 8 III.  DISASTER RISK MANAGEMENT IN THE GOVERNMENT’S DEVELOPMENT AGENDA ........................................................................................................................................... 9 IV.  BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ..................................................... 16  A.  Link to Country Partnership Strategy ............................................................................. 16  B.  Collaboration with IMF and other Agencies ................................................................... 16  C.  Relationship with other Bank Operations ........................................................................ 17  D.  Lessons learned .................................................................................................................. 18  E.  Analytical Underpinnings .................................................................................................. 19 V.  PROPOSED DEVELOPMENT POLICY LOAN WITH A CATASTROPHE RISK DEFERRED DRAWDOWN OPTION ................................................................................ 20  A.  Description of Operation ................................................................................................... 20  B.  Policy Areas ........................................................................................................................ 22 VI.  OPERATION IMPLEMENTATION ............................................................................................. 27  A.  Poverty and Social Aspects ................................................................................................ 27  B.  Environmental Aspects ...................................................................................................... 30  C.  Implementation, Monitoring and Evaluation .................................................................. 31  D.  Fiduciary Arrangements .................................................................................................... 31  E.  Disbursement and Audits .................................................................................................. 33  F.  Risks and Risk Mitigation ................................................................................................. 33 

ANNEXES

Annex 1: Letter of Development Policy ....................................................................................................... 36 Annex 2: Peru DPL with a CAT DDO Policy Matrix .................................................................................. 48 Annex 3: The Process for Declaring a State of Emergency ......................................................................... 49 Annex 4: Peru-IMF Relations ........................................................................................................................ 52 Annex 5: Country Disaster Risk Profile ....................................................................................................... 53 Annex 6: Flowchart of the Simplified Procedure to Implement Investment Projects in an Emergency 57 Annex 7: Seismic Risk Projects in Lima and Callao .................................................................................... 58 Annex 8: Peru at a Glance (includes country map) ..................................................................................... 59 

The World Bank Group greatly appreciates the close collaboration of the Government of Peru in the preparation of this Development Policy Loan with a CAT DDO. This operation, and the overall program it supports, has been prepared by a team composed of Joaquin Toro (Task Team Leader, LCSUW); Francis Ghesquiere, Fernando Ramírez-Cortés, Oscar A. Ishizawa, Zuzana Tomkova, Armando Guzmán, Iris Roca Rey, Violeta Wagner, Trish Barrett, Tiguist Fisseha, and Aires Zulian Nunes da Conceicao (all LCSUW); Emma Phillips (DRM LABS); Javier Illescas (LCSPE); Raul Tolmos (LCSEN); Maria Elizabeth Dasso (LCSSO); Mariana Montiel (LEGLA); Patricia De la Fuente Hoyes (CTRFC); Lourdes Linares (LCSFM); and Mara La Rosa (LCC6C). This operation was undertaken under the general guidance of Carlos Felipe Jaramillo (Country Director, LCC6C), Laura Tuck (Sector Director, LCSSD), Guang Zhe Chen (Sector Manager, LCSUW), Michel Kerf and Ousmane Dione (Sector Leaders, LCSSD). Peer reviewers were Salman Anees (ECSS6), Christoph Pusch (GFDRR), and John Daniel Pollner (ECSF2).

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Republic of Peru Development Policy Loan with a Catastrophe Deferred Drawdown Option

LOAN AND PROGRAM SUMMARY

Borrower Government of Peru Implementing Agency

Ministry of Economy and Finance (Ministerio de Economía y Finanzas)

Financing Data

IBRD Loan Terms: Variable spread loan with a maturity of 13.5 years including a grace period of 11 years in the amount of US$100 million

Operation Type

Development Policy Loan with a Catastrophe Risk Deferred Drawdown Option (CAT DDO)

Main Policy Areas Disaster Risk Management Key Outcome Indicators

National Budget (2012 and 2013) includes a specific budget allocation for the PPE-RVAE (coordinator: DGPP-MEF) Baseline 2010: no budget allocated

At least 20% completion of studies of structural vulnerability of MINSA hospitals that qualify for retrofitting. Baseline: 1 studies of structural vulnerability in hospitals in 2010

90% of MINSA hospitals evaluated with the Hospital Safety Index Baseline: 12% of hospitals (8 total) with HSI by 2010

All PIPs for new hospitals built after 2011 included risk analysis during the formulation phase Baseline: Not accounted in 2010 (coordinator: Ministry of Health)

At least 4 water and sanitation service companies (EPS) adopted standard technical guidelines to incorporate disaster risk management in their management framework developed by SUNASS. (coordinator: National Direction of Sanitation) Baseline: 0 EPS

MEF mobilized a pool of financial instruments to better respond to and reduce the financial impact of disasters (coordinator: DNEP-MEF)

MEF revised its current framework for implementation of post-disaster public investments (coordinator: DGPM-MEF) Baseline: SNIP 2008 for emergency project

Program Development Objective(s) and Contribution to CAS

The development objective of the proposed operation is to strengthen the Government’s capacity to mobilize resources in the case of disaster and to promote risk reduction.

Risks and Risk Mitigation

The proposed loan is considered low risk. Although the prior actions required for this loan are finalized, progress of the program could be affected by the low risk of resource availability, political risks, coordination risks, ownership of the program and implementation procedures, or the medium risk of the legal and institutional reform of the National Civil Defense System (SINADECI) being promoted by the GoP. MEF will take the lead in mediating the reform discussions. On the macroeconomic front, Peru’s solid macroeconomic and fiscal policies in recent years have stabilized the economy, limiting the impact of the global crisis. This suggests that, in the absence of unexpected policy shifts, it is unlikely that the macroeconomic situation will become incompatible with lending during the course of this proposed operation.

Operation ID P120860

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International Bank for Reconstruction and Development

Program Document for a Disaster Risk Management DPL with a CAT DDO for the Republic of Peru

I. INTRODUCTION

1. Peru’s vulnerability to disasters triggered by natural events is a hindrance to the country’s sustainable development. According to the World Bank study of natural disaster hotspots, Peru ranks 20th among the world’s economies most vulnerable to multiple natural hazards.1 The country has a population of approximately 28 million, with 76 percent living in urban areas and 86.6 percent living in the coastal and mountain regions, which are exposed to seismic, volcanic, flood, landslide and frost hazards, as well as to the El Niño/La Niña phenomena. The country has a history of high geological activity: over the past century it has suffered at least six major earthquakes (Lima 1940, Arequipa 1948, Ancash 1970, Nazca 1996, Arequipa 2001 and Pisco 2007). The high-risk seismic hazard zones are concentrated along the coastal region, home to the nation’s capital, Lima (see Annex 5, Country Disaster Profile). Since 2004 the Government of Peru (GoP) has taken significant steps to move from a reactive to a proactive approach toward disasters by formulating and implementing the National Plan for Disaster Prevention and Management (SINADECI-DS Nº 001-A-2004-DE-SG dated January 15, 2004), and by including disaster risk analysis in the formulation of Ministry of Economy and Finance (MEF) investment projects. The current administration has made disaster risk management one of its main priorities. 2. The GoP requested a Development Policy Loan (DPL) with a Catastrophe Deferred Drawdown Option (CAT DDO) to strengthen the Government’s capacity to mobilize resources during a disaster and promote risk reduction. The GoP will begin implementing the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (Programa Presupuestal Estratégico de Reducción de Vulnerabilidad y Atención de Emergencias por Desastres, PPE-RVAE) under the results-based budgeting framework and will focus primarily on health, water and sanitation as priority sectors. In addition, the formulation of an overall financial strategy, while seeking the right balance of emergency funds, excellent debt management service, and greater market access to additional funding, may be considered one of the key aspects of this operation. Throughout this process, the MEF aims to increase its capacity to mobilize resources in the event of a disaster and to strengthen financial and technical mechanisms related to investments in vulnerability reduction. 3. The GoP is implementing a set of activities related to disaster risk management under the framework of a national vulnerability reduction policy. This document describes the actions undertaken to date by the GoP in support of these activities. The Bank agrees that this national policy constitutes a good foundation to further reduce the country’s exposure to disaster risk in a sustainable manner.

1 World Bank, Natural Disaster Hotspots, 2005, Table 7.2: Countries at Relatively High Economic Risk from Multiple Hazards, p. 89.

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4. Development Objective: The overall development objective of the proposed operation is to strengthen the Government’s capacity to mobilize resources in the case of disaster and to promote risk reduction. This objective will be achieved by supporting the following aspects of disaster risk management: i) risk reduction policies in public investment, ii) vulnerability reduction actions in priority sectors, and iii) financial mechanisms for protection against disasters resulting from natural events.

II. COUNTRY CONTEXT

A. Economic Developments 5. Prior to the global economic crisis, Peru enjoyed a period of broad-based rapid economic growth. In 2008 Peru displayed one of the strongest growth performances in the Latin American and Caribbean region, with growth accelerating from 6.4 percent in 2005 to 9.8 percent. Rising commodity prices fueled export growth but the economic expansion from 2006 to 2008 was also based on buoyant domestic demand and was led by the private sector. Consumption and investment contributed about equally to economic growth. Private investment rose from 15 percent of the gross domestic product (GDP) in 2005 to around 22 percent of GDP in 2008, supported by a positive outlook and sound macroeconomic management. Strong capital inflows led to a reserve build-up and placed pressure on the appreciation of the Nuevo Sol. FDI inflows surged from US$2.5 billion in 2005, around 3.2 percent of GDP, to US$6.5 billion in 2008, around 5 percent of GDP. Bond spreads declined and in 2008 Peru’s sovereign foreign currency rating was upgraded to investment grade, first by Fitch and Standard and Poor’s in 2008 and then by Moody’s in 2009, reflecting strong growth performance, prudent fiscal and liability management, and the resulting improvement in solvency indicators. 6. Sound macroeconomic management during the boom years created the fiscal space needed for countercyclical policies to soften the impact of the global economic crisis. The GoP maintained a prudent fiscal policy through the commodity boom period, running fiscal surpluses in the three years to 2008, with the overall budget surplus peaking at 2 percent of GDP in 2008. The authorities saved resources in a fiscal stabilization fund, which saw its balance increase from US$314 million in 2005 to US$1.8 billion in 2008 (around 1.4 percent of GDP). The authorities also lowered public debt from 38 percent of GDP in 2005 to 24 percent in 2008. Public external debt decreased from 28 percent of GDP in 2005 to 15 percent in 2008. In parallel, the Central Bank (Banco Central de Reserva del Perú, BCRP) accumulated net international reserves that increased from US$14 billion in 2005 to US$31 billion in 2008—close to five times the stock of short-term external debt and 11 months of imports of goods and services. 7. Despite the magnitude of the challenges generated by the global economic crisis, financial and exchange rate stability was preserved. In the wake of the Lehman Brothers bankruptcy in mid-September 2008, the sharp increase in risk aversion in global financial markets was quickly felt in Peru. From mid-September to late October 2008, net international reserves fell by US$3.3 billion, or close to 10 percent of holdings. However, the Central Bank avoided sharp fluctuations in the exchange rate. The global economic crisis also had a relatively limited impact on the Peruvian financial sector, which did not rely heavily on short-term external borrowing or on exotic asset-based derivatives. In addition, there was no credit

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crunch: the growth of credit to the private sector remained positive, slowing down gradually to an annual rate of 9 percent at its low point in December 2009. 8. Economic growth decelerated sharply in 2009 but remained positive, as external demand and an anticyclical public spending program propped up growth. GDP growth stood at 0.9 percent in 2009, down from 9.8 percent in 2008, driven largely by a fall in domestic demand that was prompted by the global economic crisis. Within domestic demand, the drop in private investment was particularly sharp. Thus, private investment went from contributing around half of the growth in 2008 to a negative contribution in 2009. In contrast to the situation in previous years, the overall contribution to GDP growth of domestic demand was also negative in 2009. On the external side, the global crisis led to a decline in exports, which fell by 15 percent in 2009. However, imports decreased more, by 26 percent, as imports of capital and intermediate goods dropped sharply due to the virtual standstill in private investment. The terms of trade recovered in the second half of 2009 and for the year as a whole the terms of trade index remained broadly unchanged. These factors, together with the decrease in profit remittances (largely by foreign mining companies operating in Peru), explain why the current account balance turned from a deficit of 3.3 percent of GDP in 2008 to a slight surplus of 0.2 percent of GDP in 2009.

Figure II.1: Real GDP growthAnnual percentage change

Figure II.2: General government budget balancePercent of GDP

Source: INEI. Source: BCRP.

9. In response to the economic slowdown, the authorities launched a two-year economic stimulus plan in 2009 amounting to US$4.8 billion, or about 3.5 percent of GDP. The plan focused primarily on increased public expenditures and attempts to balance the need for a stimulus in the short term, which also reflected medium-term priorities. Infrastructure projects accounted for around 51 percent of planned expenditures. In particular, about US$412 million were allocated for priority projects and US$567 million have been allocated to projects that were already in execution but had undisbursed budget balances in 2008—effectively funding the “carryover” of those projects into 2009. An additional US$912

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million were earmarked for infrastructure projects to be selected and implemented by regional governments. Other large items in the economic stimulus plan include US$313 million for a range of social protection policies as well as US$386 million to fund the fuel subsidies in place through a Fuel Stabilization Fund. Moreover, the “duty drawback” paid to compensate exporters for the import duties paid on inputs was temporarily increased. As of end-July 2010 the disbursement ratio of the total economic stimulus plan was around 94 percent. 10. The fiscal stimulus plan, combined with lower fiscal revenues, caused a fiscal deficit of 1.9 percent of GDP in 2009. Peru’s budget balance turned negative in 2009 due to lower revenues and increased public expenditure associated with the economic stimulus plan. The existing Fiscal Responsibility and Transparency Law sets two limits: (i) the fiscal deficit is not to exceed 1 percent of GDP, and (ii) the growth of the Central Government’s current expenditures is not to exceed 3 percent per annum in real terms. However, article 5 of this law states that in cases of national emergency or international crisis the legislature may, at the request of the executive, grant exceptions to the fiscal rules for a period of up to three years. The administration proposed legislation—which the Congress approved—to increase the limit on the fiscal deficit to 2 percent of GDP in both 2009 and 2010. In addition, the limit on the real growth of current expenditures by the Central Government—set at 3 percent by the Fiscal Responsibility and Transparency Law—was also temporarily lifted to 10 percent in 2009 and 8 percent in 2010. Finally, several fiscal rules for subnational governments were also modified: the most important is that the deficit limit was raised from 3 percent to 4 percent, excluding investment, for nonfinancial expenditures. In terms of deficit decomposition, this can be explained by both a 12 percent drop in Central Government tax revenue and a strong expansion of nonfinancial expenditures, particularly public investment.

Table II.1: Key Economic Indicators (percent unless otherwise noted)

2007 2008 2009 2010 2011 2012 2013

GDP growth rate 8.9 9.8 0.9 8.0 5.5 5.5 5.5 Growth of real domestic demand 11.9 12.1 -2.9 10.9 6.2 6.2 6.2 Inflation rate, CPI (period average) 1.8 5.8 2.9 1.4 3.0 2.0 1.8 Nonfinancial public sector balance/GDP 3.3 2.0 -1.9 -1.5 -1.0 -0.4 0.4 Public debt/GDP 29.7 24.0 26.7 23.4 22.3 21.1 19.8 Public external debt/GDP 18.7 15.1 16.3 14.2 13.6 12.6 11.6 Exports (FOB), change p.a. 17.5 13.1 -14.7 21.5 6.1 6.5 7.6 Imports (CIF), change p.a. 31.8 45.1 -26.1 22.5 9.7 10.0 10.0 Trade balance/GDP 7.7 2.4 4.6 4.6 3.9 3.3 2.9 External Current Account/GDP 1.4 -3.3 0.2 -0.4 -0.9 -1.4 -1.9 Terms of Trade (deterioration -); change 2.4 -2.9 -5.5 11.0 -0.4 -0.1 0.7 Net international reserves (NIR), US$ billion 28.6 32.2 33.1 42.5 44.2 46.0 48.2 NIR, in months of G&S imports 13.9 11.4 15.4 16.3 15.4 14.7 14.0 NIR, as % of public external debt 143 167 161 198 196 205 216

NIR, as % of Money Stock 80 89 88 95 90 87 85 Source: Banco Central de Reserva del Perú (BCRP), Ministry of Economy and Finance (MEF)—Marco Macroeconómico Multianual 2011–2013, World Bank staff, IMF staff.

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11. In parallel, the Central Bank eased monetary policy as inflation decreased and exchange rate appreciation pressures resumed. The Central Bank cut its policy rate each month from February to August 2009, bringing the rate to 1.25 percent for a cumulative easing of 525 basis points since the beginning of 2009. This monetary policy easing took place in a context of declining inflation, down to 0.25 as of December 2009, and growth deceleration. In addition, the Central Bank adopted a number of measures aimed at supporting the flow of credit, such as reducing reserve requirements, accepting new instruments as collateral for liquidity operations, and extending the term of liquidity management operations.

Figure II.3: Monetary policy reference rate and inflation

Percent

Figure II.4: Exchange rate and international reserves

Nuevos soles per US$ (left scale), and US$ billion (right scale)

Source: BCRP. Source: BCRP.

12. In 2010, as the economic recovery continues to gather pace, the authorities have begun to withdraw the expansionary stance of fiscal and monetary policies. Economic activity has recovered since 2009, with growth reaching 8 percent in the first half of 2010 (Figure II.1). Growth was fueled by domestic demand, which increased by 11.1 percent. Private investment has picked up sharply, increasing by 28 percent in the first half of 2010. In response, the authorities announced a series of measures in May 2010 aimed at controlling the pace of public spending. In particular, a new limit for ministries and agencies has been set on the growth of public spending on goods and services for 2010, not to exceed 3 percent in nominal terms. This new measure more than fully reverses the loosening of the constraint on the growth of public expenditure that had been temporarily set for 2010 at 8 percent in real terms and is in fact tougher than the normal limit envisaged under the Fiscal Responsibility and Transparency Law. In addition, new measures have been put in place to limit the increase in public investment, which had grown by 26 percent in real terms in 2009. Thus, public investment projects that have been granted budgetary funds but have yet to start disbursing will only be allowed to disburse 25 percent of their budget allocation. With regard to monetary policy, the Central Bank raised the benchmark rate, which had been held at 1.25 percent through April 2010 at each of its meetings, bringing it to 3 percent as of September 2010. The increase in interest rates is a preventive measure to preempt inflationary pressures in an environment of accelerating growth, despite the lack of substantial inflationary pressures

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thus far (see Figure II.3). In parallel, the Central Bank has stepped back on the extent of intervention in the foreign exchange market on the back of strong capital inflows. In the three months to end-August 2010, net international reserves increased by US$5.6 billion (Figure II.4). 13. Fast economic growth in recent years has been accompanied by poverty reduction and job creation. Poverty fell from 48.7 percent to 34.8 percent between 2005 and 2009, while extreme poverty was reduced from 17.4 percent to 11.5 percent (Table II.2). The continued reduction in poverty is remarkable given that 2008 saw high food price inflation and that economic growth slowed down in 2009 as a result of the global economic crisis. The poverty reduction in 2009 was concentrated mainly in urban areas, especially in Lima, and took place at a lower rate than in previous years. Poverty incidence remains highly unequal in geographic terms, with some regions posting poverty rates above 60 percent.

Table II.2: Poverty Rates, 2004–2009 (percent)

Total poverty

Extreme poverty

2004 2005 2006 2007 2008 2009 09–04(ppts) 2004 2005 2006 2007 2008 2009

09–04(ppts)

National 48.6 48.7 44.5 39.3 36.2 34.8 -13.8 17.1 17.4 16.1 13.7 12.6 11.5 -5.6

Coast urban 37.1 32.3 29.9 25.1 23.4 21.4 -15.7 5.6 4.0 3.0 2.1 2.4 2.3 -3.3 Coast rural 51.2 50.0 49.0 38.1 34.8 40.6 -10.6 13.8 13.4 14.4 10.5 7.9 9.2 -4.6

Sierra urban 44.8 44.4 40.2 36.3 33.5 31.3 -13.5 13.6 11.6 10.3 8.5 9.2 6.8 -6.8 Sierra rural 75.8 77.3 76.5 73.2 68.8 65.6 -10.2 44.0 46.6 46.5 40.8 37.4 33.2 -10.8

Selva urban 50.4 53.9 49.9 40.3 31.3 32.5 -17.9 18.7 22.5 18.1 11.0 7.2 8.8 -9.9 Selva rural 63.8 65.6 62.3 55.3 49.1 57.4 -6.4 30.4 28.0 24.6 23.4 20.7 23.8 -6.6

Metropolitan Lima 30.9 32.6 24.2 18.5 17.7 14.1 -16.8 1.3

2.0

0.9 0.5 0.7 0.2 -1.1

Source: Instituto Nacional de Estadística e Informática (INEI).

14. While inequality of opportunity remains high, Peru has made substantial progress in addressing it. The Human Opportunity Index, which measures equality of opportunity in access to social services, shows substantial improvement between 1995 and 2006 when compared to other countries in the region (Figure II.5). Increased public investments in water, sanitation and electricity in recent years support a trend toward reduction in inequality of opportunity. Despite this progress, large opportunity gaps remain a challenge for policy makers.

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Figure II.5: Human Opportunity Index, change from 1995 to 2006 Average annual change in index

Source: World Bank

B. Macroeconomic Outlook and Debt Sustainability 15. Although uncertainty about the near-term outlook remains elevated due to risks to the global economy, prospects for Peru continue to be positive provided that a sound policy framework is kept in place. While the slowdown in growth in 2009 was acute, Peru was one of the few economies in the region that avoided negative growth that year. Following a rapid pickup in economic activity from the end of 2009 driven both by domestic demand and a recovery of commodity prices, the most likely scenario for 2010 is one of substantial recovery. Growth is expected to increase to around 8 percent in 2010 and to hover around 5.5 percent over the medium term. Downside risks to this baseline scenario include a weaker-than-expected recovery of the global economy, which could soften both demand and prices for key commodities of the Peruvian export sector such as copper, gold and zinc. A weaker-than-anticipated global economy would not only translate into decreased external demand for Peruvian exports but, most importantly, could also affect domestic confidence and investment, as it did in 2009, slowing down the rebound in domestic demand, which is once again expected to be the key driver for overall growth in Peru. 16. Peru’s debt servicing indicators show a robust position, helped by an active liability management policy. Peru’s total public debt in 2009 stood at US$34 billion, or 26.4 percent of GDP. Net international reserves closed 2009 at US$33 billion, with about 15 months of imports of goods and services and nearly 200 percent of foreign currency deposits. The country’s debt service profile and its currency and interest risk exposures continued to improve in 2009 as a result of active debt management policies and Peru’s access to various funding sources, including multilateral banks, U.S. and European markets, and local markets. In particular, in the third quarter of 2009, the authorities prepaid debt with the Paris Club for US$952 million while in May 2010 they engaged in a prepurchase and exchange of bonds totaling US$1.8 billion that resulted in a lengthening of maturities and a rebalancing toward domestic-currency-denominated debt. The country’s debt management strategy aims to mitigate refinancing risk, increase the share of domestic debt in nuevos soles (the share of debt in domestic currency has increased from 15 percent of total debt in 2004 to about 40

9

percent in 2009), lengthen the maturities of fixed-rate debt, and continue to develop the market for international sovereign bonds. Finally, in parallel with the withdrawal of the fiscal and monetary stimulus, Peru returned to the international bond markets, raising US$1.261 billion in April 2010. 17. A debt sustainability analysis suggests that the public debt position is resilient to a range of simulated negative shocks. The recently completed Article IV consultation by the International Monetary Fund (IMF) in April 2010 included an updated debt sustainability analysis. The results of this debt sustainability analysis, which was conducted under assumptions similar to those reflected in the macroeconomic outlook, are provided in Table II.1 above. In particular, public debt is expected to decline under the baseline scenario to below 20 percent of GDP by 2015. Public external debt is expected to decline to below 11 percent of GDP by 2015. A series of sensitivity analyses based on historical standard deviations of key variables suggest that the public debt profile is unlikely to differ significantly from the baseline and support the assessment that public debt sustainability is not a major concern in the medium term. 18. Notwithstanding the uncertainty about the near-term outlook, Peru’s macroeconomic policies are deemed adequate for the proposed loan. Fiscal policy remains prudent because the expansion of Government expenditure in 2009 and 2010 does not threaten fiscal sustainability. In line with the temporary nature of the economic stimulus plan, the Government has already begun to take actions to curb the expansionary stance of fiscal policy; this is particularly noteworthy in light of the upcoming presidential elections that will take place in April 2011. Similarly, monetary and exchange rate policy is also supportive of macroeconomic and financial stability.

III. DISASTER RISK MANAGEMENT IN THE GOVERNMENT’S DEVELOPMENT AGENDA

19. Peru is at high risk for both geological and hydro-meteorological hazards. The country has high seismicity; the most active hazard zones are concentrated along the coastal region, in and around the capital, Lima. Southern Peru has 15 active volcanoes, while the southern coast has a long history of powerful tsunamis. Landslides are also a recurring hazard for the communities located on hillsides and mountainsides around the country. The northern coast of Peru is highly vulnerable to El Niño oscillations, which are characterized by prolonged torrential rains. Approximately 23 percent of Peru’s population lives in flood-prone areas. Moreover, the southern region of Peru is prone to droughts, frosts, severe cold and other hydro-meteorological events. GoP strategy for a disaster risk management framework 20. Peru’s general development policy framework includes disaster risk reduction policies in its poverty reduction and sustainable development policies. The National Agreement (Acuerdo Nacional, September 2004) defines thirty national policies; the tenth of these policies—poverty reduction—highlights the importance of promoting disaster risk management through the allocation of resources for prevention, response and reconstruction activities. In the current Government Plan (2006–2011), the National Defense objective includes activities that will: (i) improve the National Civil Defense System (Sistema Nacional

10

de Defensa Civil, SINADECI), (ii) strengthen national and international cooperation networks, and (iii) promote a culture of disaster prevention and awareness by encouraging civil society participation. The National Environmental Policy (DS N°012-2009-MINAM) takes risk management into consideration with regard to the utilization and exploitation of natural resources. 21. The institutional reform of the National Civil Defense System (SINADECI) is one of the GoP’s current priorities. SINADECI was established by Decree Law 19338 on March 29, 1972 as part of the National Defense Strategy. The objective was to provide assistance during a disaster, ensure the rehabilitation of the affected population, raise awareness about the Civil Defense System, and ensure the uninterrupted development of the country’s activities. This system consisted of a hierarchical structure led by the National Defense Institute, and was focused primarily on emergency response with the direct or indirect involvement of three levels of government (national, regional and local). With the exception of the respective ministries and decentralized offices that provide such functions as the implementation of reconstruction works, the abovementioned institutions focus primarily on immediate post-disaster response and disaster prevention actions. SINADECI has since been modernized, as discussed below. 22. In 2004, the National Disaster Prevention and Response Plan (Plan Nacional de Prevención y Atención de Desastres, PNPAD) was approved by Presidential Decree N°001-A-2004-DE/SG, replacing Presidential Decree Nº 036-DE/SG (November 23, 1989) which established the National Civil Defense Plan. The National Civil Defense Plan focused exclusively on emergency response. The new plan is a SINADECI instrument composed of the Civil Defense Plans (i.e., Prevention and Disaster Management Plan, Emergency Operations Plan, Contingency Plan and Civil Defense Security Plan), the National Plan for Disaster Prevention and Management, and the Integrated Information System. The PNPAD’s main objective is to improve the country’s disaster risk management strategy by incorporating the concept of prevention in the political agenda to achieve an integrated, orderly, efficient and decentralized system. The PNPAD has six strategic focus areas: (i) promotion of risk evaluations of adverse natural and technological events, (ii) strengthening of prevention and risk reduction activities, (iii) incorporation of the concept of prevention in investment planning, (iv) institutional strengthening, (v) community participation in disaster prevention activities, and (vi) optimization of emergency response and disaster management. Despite these changes to the PNPAD approach, its implementation is still aimed at emergency response, except in key sectors that have incorporated new disaster risk management approaches. 23. Within this context, the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF) took a lead role in incorporating risk reduction policies in the National Public Investment System (Sistema Nacional de Inversión Pública, SNIP). In June 2000, the Government of Peru created the SNIP (Law N° 27293) as a platform to ensure the optimization of public resources for investment projects. The National Public Investment System Law N° 27293 was modified and updated by Laws N° 28522 dated May 25, 2005, and N° 28802 dated July 21, 2006, as well as Legislative Decrees N° 1005 and N° 1091, published on May 3, 2008 and June 21, 2008, respectively. Since then, the MEF has determined the principles, procedures, methodologies and legal framework that regulate the SNIP. The law applies to all public institutions and nonfinancial public enterprises at three levels of government (national, regional and local). Since 2004, the MEF’s General Bureau

11

for Multiannual Programming of the Public Sector (Dirección General de Programación Multianual del Sector Público, DGPM), in collaboration with the German Agency for Technical Cooperation (GTZ), developed regulatory and methodological instruments to include disaster risk analysis in the process of formulating investment projects. The goal is to have both the sectors and the regions evaluate the hazard and vulnerability conditions to which new projects could be exposed, while also identifying and incorporating any necessary mitigation measures. This regulation is currently part of the Sectoral Investment Project Identification as well as the Formulation and Social Evaluation Guidelines2 for the health, agriculture and education sectors. This mechanism positively affected investment security; it is key to strengthening the country’s regional technical capacity, increasing access to information on hazards, and facilitating compliance with this law. 24. The SNIP established a protocol for investment projects, to be followed in the event of a state of emergency declaration triggered by an adverse natural event. This system requires a special technical form called the Emergency Public Investment Project, which must be completed by the sector or by regional and local governments for rehabilitation projects to be implemented as a consequence of a disaster. When a project is considered eligible by the MEF, the sector or the regional or local government can either use its respective budget or apply for the emergency funds required to implement the project. See Annex 6 for the flowchart of the process. 25. The MEF’s improvement of the SNIP information system and in particular the risk reduction investment program is another noteworthy achievement. In 2001, the GoP launched a national website to ensure the transparency of public finances, including data since 1999. It also includes the category of “disaster prevention” to classify a portfolio of investment projects. In 2009, this website was revised and the category of disaster prevention was changed to “disaster risk management and emergencies.” The MEF currently has the first specific national database that allows the monitoring of these investments. Since 2004, investments in vulnerability reduction projects have increased (Figure III.1). Most of the registered investments are related to El Niño/La Niña flood control effects, such as riverside protection structures or rehabilitation works.

2 R.D. No. 006-2005-EF-68.01 for the Education Sector, R.D. No. 002-2006-EF/68.01for the Health Sector, R.D. No. 009-2007-EF/68.01 for Agriculture Sector.

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Figure III.1: Total Budget and Disaster Prevention Budget in Investment Projects:

2004–2009 (millions of S/.)

Source: SIAF – Ministry of Economy and Finance.

26. In the past decade, Peru and other countries in LAC have been transitioning from an emergency management perspective to a disaster risk management approach. Weaknesses remain in relation to the existence of a comprehensive institutional structure, a legal and policy framework, and the GoP’s capacity to design and implement risk reduction policies. The recognition of these weaknesses has stimulated discussions and institutional actions under a new disaster risk management approach. Thus, disaster risk management (DRM) actions in Peru have not yet resulted in an integrated and comprehensive national program. The lack of an integrated disaster risk management strategy motivated the GoP to work on improving the SINADECI framework by proposing the establishment of a new national system that proactively mainstreams the practice of disaster risk management. The Peruvian Congress is currently discussing several draft laws to further modernize the disaster risk management framework. Country progress achieved so far toward establishing a coherent national disaster risk management framework 27. The MEF is spearheading the disaster risk management reform agenda. It is playing a strong leadership role is promoting three policy areas: i) risk reduction policies in public investment, ii) vulnerability reduction actions in GoP priority sectors, and iii) mechanisms for financial protection against disasters resulting from natural events. 28. In 2010 the GoP created the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (Programa Presupuestal Estratégico de Reducción de Vulnerabilidad y Atención de Emergencias por Desastres, PPE-RVAE) (Urgent Decree No. 024-2010 dated April 1, 2010) under the results-based budgeting approach, which the MEF is also developing in other sectors. This approach allocates budget funds to sectors and regions according to GoP priorities, goals, courses of action, and expected impacts of the

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2004 2005 2006 2007 2008 2009

Total B

udget (m

illions of S/.)

Disaster Prevention Budget (m

illions of S/.)

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program. Under this program the GoP will define: (i) priority vulnerability reduction goals and outcomes, (ii) lines of investment and budgets, (iii) the sectors and regions involved, (iv) a mechanism to allocate funds, and (v) a monitoring and information system. Overall, it will help to remove some of the main obstacles to risk management in Peru due to the current dispersion of investments in this area, the absence of an institutional planning process, and the lack of monitoring and evaluation mechanisms. Taking into account the cross-cutting nature of this topic, it will be necessary to design the program in phases, then bring it up to scale and adjust it during the implementation phase. The MEF established the thematic framework during the first stage of the project, identified general objectives, and prioritized several courses of actions in the health and education sectors. 29. Seven sectors were consulted in the design of this operation:3 health, education, housing (including water and sanitation), infrastructure, agriculture, environment, economy and finance. This dialogue confirmed that the disaster risk management policies in the sectors are defined and adjusted according to the approach and priorities of each institution instead of through a national program. An imbalance exists between the PNPAD and the disaster risk management sector plans. As result, coordination and articulation of these plans are weakened. From a long-term perspective, it is expected that, after the SINADECI reform, the policy framework will be reviewed and actions from sectors and regions will be aligned. In any case, the ongoing vulnerability reduction process in these sectors will facilitate the transition to a comprehensive national strategy. 30. The Government is reducing vulnerability in key priority sectors. The health, education, water and sanitation sectors have demonstrated progress in reducing vulnerabilities in a more systematic manner. In fact, these sectors are part of the pilot for the MEF’s Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response. 31. In 2010, the health sector began the implementation of the Safe Hospitals Policy. The Government established the Safe Hospitals Policy (D.S. N°009-2010-SA dated April 24, 2010), which includes a broad framework for vulnerability reduction in health facilities. Hospital and other health facilities will implement this policy through the Investment Master Plans (Ministerial Resolution N. 386–2010/MINSA dated May 13, 2010). The courses of action will be mainly related to: (i) implementing the Pan American Health Organization’s (PAHO) Safe Hospitals Index;4 (ii) carrying out studies of the structural vulnerability of infrastructure; (iii) structural retrofitting; (iv) vulnerability reduction of nonstructural elements (e.g., architectural features of hospitals, fastening equipment to walls, ensuring that gas elements are properly stored); (v) updating of technical specifications for new infrastructure; and (vi) contingency plans. With the implementation of this policy, the Ministry of Health (Ministerio de Salud, MINSA) is strategically reducing vulnerability in its current infrastructure, as well as constructing safer infrastructure. This is the first time that a sector is designing and implementing a long-term disaster risk reduction program in Peru. 32. The water and sanitation sector is one of the sectors most vulnerable to natural hazards in Peru. Taking into account the impact of recent disasters in water and sanitation

3 The abovementioned consultations took place through meetings with GoP officials as well as through the use of a survey. 4 PAHO developed the Safe Hospitals Index to provide a snapshot of the probability that a hospital or health facility will maintain operations during and after an emergency situation.

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infrastructure, the Government took measures to reduce vulnerability. Presidential Decree D.S. N° 011-2006-VIVIENDA, approved on May 8, 2006, integrates disaster risk reduction in the National Building Regulations (Normas Técnicas del Reglamento Nacional de Edificaciones) for water and sanitation infrastructure. On February 5, 2007, a new regulation for the Quality of Provision of Sanitation Services was approved by Resolution of the Board of Directors (R.C.D. N° 011-2007-SUNASS-CD). Annex 5 of this law includes a section in its Annex 5 on the measures to be adopted by water and sanitation service companies (EPS) in emergency situations. The EPS are obligated by law to implement a contingency plan for emergency situations, including one for disasters caused by natural events. After the 2007 Pisco earthquake, the Water and Sanitation Program (WSP) has worked on a pilot project in all the areas affected (i.e., Pisco, Chincha and Ica). The goal is to develop institutional capacity for designing and implementing vulnerability reduction policies. Technical guidelines were developed with respect to risk reduction policies for new public investments and management practices. 33. Risk management policies in the education sector showed limited progress. One of the first actions of the Ministry of Education (Ministerio de Educación, MINEDU) was to include disaster risk management concepts in primary and secondary curricula through the RM5 0341-2009-ED, passed on November 18, 2009. Teachers should include a course to describe the main concepts of disaster risk management, from hazard identification and prevention measures to emergency management. However, MINEDU still needs a comprehensive vulnerability reduction program, such as the one in the health sector. The GoP is pushing to increase the education sector’s capacity to reduce seismic risk. The current priorities are aimed at developing a clear diagnosis of current infrastructure vulnerability, improving current inventory and updating the technical specifications for safer new schools. The education sector will undoubtedly face a lengthy process to review the disaster risk management policy and strengthen its capacity. 34. The actions developed in Peru by the health, water and sanitation sectors, as well as in the economic and financial sector, constitute a modernization of disaster risk management policies and approach. The Government selected these three sectors to define the matrix of policies under this DPL with CAT DDO. MEF included the economic and the financial sector in a Policy-Based Loan (PBL) from the Inter-American Development Bank (IADB), as mentioned below. 35. Throughout this process the GoP has requested technical and financial support both from the IADB and the World Bank to advance in key priority areas regarding disaster risk management policies, such as: institutional reform of the SINADECI, risk management policies, risk reduction capacity, and financial response capacity in the case of disaster. The IADB is preparing the first of three operations in the amount of US$25 million under a Programmatic Policy-based Loan (PBL) entitled the “Program to Reduce Vulnerability to Disasters”. The PBL is composed of three different operations to be negotiated in 2010, 2011 and 2012; each consists of a unique disbursement with a common matrix. The operation supports the institutional reform and the development of policies and mechanisms for risk management. The overall objective of the IADB operation is to strengthen and modernize the regulatory, institutional and public policy framework for integrated disaster risk management. The Programmatic PBL has four main pillars: (i) risk

5 Ministerial Decree (Resolución Ministerial).

15

identification, (ii) risk reduction with a focus on the environment and housing sectors, (iii) emergency and post-disaster management, and (iv) financial disaster risk management. This World Bank DPL with a CAT DDO will complement the IADB operation in completing the country’s risk reduction approach. 36. The MEF has taken steps to implement mechanisms of financial protection against economic losses caused by disasters. After the evidence of damages and losses from catastrophic events, such as El Niño in 1998 and 1999 (US$3.5 billion), the Pisco earthquake (US$3 billion), as well as estimated damages and losses due to a potential earthquake in Lima (US$30 billion),6 the MEF is focused on protecting against financial losses caused by natural events through a mix of financial instruments. For this purpose, the MEF created a set of financial protection actions. The Public Sector Indebtedness Law (Ley de Endeudamiento del Sector Público) No. 29290 of 2009 authorizes the MEF to negotiate and hold contingent financing (e.g., lines of credit), indebtedness operations, and coverage instruments, among other financial tools related to disaster risk management. Therefore, the MEF is now taking action and has obtained a contingency credit in the amount of US$300 million from the Andean Development Corporation (Corporación Andina de Fomento, CAF) through Presidential Decree Nº 120-2010-EF dated May 27, 2010. Simultaneously, the MEF renewed its contingency fund for emergencies in the amount of US$17.8 million through the 2010 Public Sector Fiscal Balance Law (Nº 29467) published on December 8, 2009. 37. The MEF’s financial protection strategy so far has identified sources that will be available in case of a catastrophic event. Its objective is to obtain resources for a possible occurrence of natural and/or technological disasters in order to use them in financing the recovery and reconstruction of infrastructure and public services. Although the GoP has not yet developed a comprehensive disaster risk financing strategy, it has approached the World Bank and the IADB with the purpose of receiving technical support to create such a strategy. 38. The GoP is working on a comprehensive financial strategy to address economic losses due to disasters triggered by adverse natural events. As previously mentioned, the MEF is seeking new steps to increase financial response capacity in the event of disasters. The MEF will develop a proposal for a financial protection strategy that integrates the current adopted financial instruments (reserve funds and contingency credits) and will identify new potential instruments (e.g., CAT Bonds, insurance, etc.). This strategy will include information gathering and inputs on progress made in seismic risk analysis, and will update and prepare detailed exposure inventories and data on losses associated with disasters. In this way, the GoP will have a more efficient risk financing strategy than is in place today. The use of new instruments and tools will comprise part of the modernization of risk financing protection in Peru. 39. Peru is on the path of strengthening its capacity for post-disaster investment. The MEF has identified two actions that will support the implementation of the financial protection strategy: (i) the critical update of procedures for post-disaster investments in SNIP regulation; and (ii) the conduction of a broader diagnosis of the current framework for implementation of post-disaster investments. The Bank will provide technical assistance to support the MEF in these activities.

6 Catastrophe Risk Profile, IADB Study C0009-08, April 2009 (preliminary report).

16

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. Link to Country Partnership Strategy 40. The Country Partnership Strategy (CPS) for the 2007–2011 period, which was presented to the World Bank Board on December 19, 2006, identifies two main, broad development priorities for Peru: sustainable and increasing economic growth as well as significant poverty reduction. Additional objectives that support these two goals can be organized into three pillars: (i) economic growth (i.e., maintaining macro stability and reducing vulnerabilities, accelerating growth, widening the growth base, and making growth sustainable), (ii) social development (i.e., meeting basic needs; promoting and developing a new social contract in education, health and nutrition), and (iii) modernization of the State (i.e., modernizing State institutions). The World Bank Group supports these development goals though a mix of Development Policy Loans (DPLs), DPLs with a Deferred Drawdown Option (DPL-DDOs) up to US$1.25 billion, investment lending, and analytical and technical assistance. Total lending assistance under the CPS, in accordance with the 2009 CPS Progress Report, may reach US$2.75 billion.7 41. The proposed disaster risk management DPL with a CAT DDO fits directly into the CPS’ first pillar of economic growth under the cluster of maintaining macro stability and reducing vulnerability. The GoP’s own goal related to this cluster is to “consolidate the macroeconomic policy framework, and reduce vulnerabilities of disasters and social conflicts.” The DPL with a CAT DDO will provide bridge financing in the event of a disaster triggered by adverse natural events, enabling a quicker response to address emergency needs while supporting policies to mitigate risks. 42. The proposed DPL with a CAT DDO supports the GoP agenda with additional coverage for addressing external shocks caused by disasters. This DPL with a CAT DDO focuses on adverse natural events and complements other DPLs in Peru, such as the First and Second Programmatic Environmental Development Policy Loans/DDOs. The objectives of these programs are to maintain fiscal stability and provide support to the Government’s development programs. 43. The implementation of the DPL with a CAT DDO, along with an active Bank dialogue, will help promote an active risk reduction agenda. The GoP will increase risk reduction measures by incorporating risk reduction policies in investment planning, strengthening vulnerability reduction activities in priority sectors, and developing risk financing strategies. This operation helps the Bank to engage the GoP in matters regarding the medium- and long-term risk reduction agenda. B. Collaboration with IMF and other Agencies 44. IADB Participation: As mentioned previously, the MEF requested a DPL with a CAT DDO from the World Bank, and a Policy-Based Loan (PBL) from the IADB. The IADB and the Bank actively discussed the different institutional approaches, including but not limited to the rationale for engagement, the nature of each other’s participation, as well as the

7 The original CPS planned on US$3.5 billion.

17

type of coordination and division of responsibilities. The GoP established the courses of action and priorities for both operations. As a result, joint missions took place in November 2009 and January 2010, which resulted in the drafting of a Concept Note, ensuring the complementary policy matrixes of each instrument. During the design of their respective operations and with the assistance of the MEF’s Coordination Unit for Sectoral Programs (Unidad Coordinadora de Programas Sectoriales, UCPS), both the IADB and the Bank agreed on a set of coordination mechanisms. Two levels of coordination among the GoP, IADB and the Bank were defined: (i) at least one yearly thematic workshop organized by the GoP to allow joint analysis of the collaboration, at which time recommendations to the GoP could be generated if there were to be a need to strengthen IADB and/or World Bank programs, and (ii) information sharing regarding both programs (e.g., technical reports, institutional databases, operations schedule, joint workshops and other documents). 45. Other Disaster Risk Management Partners: The Bank pursued an active dialogue with various agencies engaged in disaster risk management projects and technical cooperation in Peru, including: the United Nations Development Programme (UNDP), the European Union through its Commission for Humanitarian Aid (ECHO), the IADB, the Japan International Cooperation Agency (JICA), the Swiss Agency for Development and Cooperation (SDC) and the German Agency for Technical Cooperation (GTZ). The key initiatives supported through these collaborations are primarily seismic and tsunami disaster mitigation projects in the provinces of Lima and Callao. 46. IMF Collaboration: The Bank maintains a regular dialogue with the IMF on macroeconomic policy in Peru. In addition to the ongoing exchange of views between the two institutions, on January 30, 2009 staff jointly reviewed the specific financial sector issues identified in the Article IV Consultations. The IMF assessment of the current macroeconomic situation is contained in the Fund Relations Note (Annex 3). C. Relationship with other Bank Operations 47. The GoP requested that the Bank provide technical support by: (i) providing technical assistance on probabilistic risk modeling using the CAPRA software platform, and (ii) supporting actions to increase the institutional technical capacity of the agencies involved. The former will be financed by a Spanish Trust Fund for Latin America (SFLAC) grant and the latter by an Institutional Development Fund (IDF) project. In addition, the GoP will receive support from IDB, GTZ, and the Disaster Preparedness of the European Commission’s Humanitarian Aid Department (DIPECHO) in areas complementary to this operation.

48. Improving the quality and availability of hazard and risk information facilitates the incorporation of risk analysis in the National Public Investment System. One of the main problems in Peru related to risk reduction investments is the lack of national hazard and risk information, which is required to conduct further risk analysis for investment projects. Since Peru’s highest risk stems from seismic activity and the greatest exposure is concentrated in Lima, the GoP is urgently updating seismic studies and maps at both the national and city levels (i.e., Lima). The Geophysical Institute of Peru (Instituto Geofísico del Perú, IGP), with Bank assistance, will update the national seismic hazard map. The Bank will support the IGP with technical assistance, using the probabilistic risk assessment platform developed by the Central American Probabilistic Risk Assessment (CAPRA) initiative. Other studies will work

18

on updating and improving the seismic micro-zoning of Lima. Close coordination between these projects will be ensured during the design. A table with a brief summary of different projects is presented in Annex 7 of this document. If the hazard studies eventually become a risk reduction plan and if resettlement were to occur, the Bank would work with the Government to provide the best practices for resettlement. 49. The Water and Sanitation Program (WSP) is developing a disaster risk reduction project in southern Peru, the region affected by the August 2007 earthquake. The project supports capacity building in disaster risk management for public water and sanitation agencies with respect to risk reduction issues. The results obtained in this pilot project serve as the starting point to assist the Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento, MVCS) in the inclusion of risk reduction policies and management tools in the water and sanitation sector. 50. The Global Facility for Disaster Reduction and Recovery (GFDRR) supports the implementation of the disaster risk management component of the Vilcanota Valley Rehabilitation and Management Project (P082625). The project objectives focus on managing and mitigating natural hazards, building institutional capacity, and implementing an early warning system for flash floods and mudslides in Machu Picchu Pueblo, Cusco. D. Lessons learned 51. The design of this operation takes into account lessons learned from the first three DPLs with a CAT DDO in Colombia (2008), Costa Rica (2008) and Guatemala (2009). The main lessons drawn from these operations include: (i) aligning actions and activities with government priorities, (ii) identifying institutional weaknesses that could obstruct operational processes, (iii) avoiding long delays in project signing and effectiveness, and (iv) ensuring inter-institutional coordination and having a clear process for resource allocation. 52. Disaster risk should be proactively managed rather than treated as an exogenous shock to economic growth and development. The need for active supervision is well documented in a wide array of studies and also serves as the underpinning of the Hyogo Framework for Action (HFA).8 Latin American countries are aware that mitigating disaster risk is a key element of sustainable development. 53. Ex ante investments and local capacity building are necessary to increase coordination for response and reduce the impact of disasters. During 1997 and 1998, the country experienced particularly large economic losses due to the El Niño phenomenon. The Bank’s assistance during the prevention and reconstruction phases helped minimize damages and losses to the economic and social infrastructure sectors and also enhanced institutional capacity to forecast and respond to future El Niño events.

8 The HFA was formulated as a comprehensive, action-oriented response to international concern regarding the growing impact of disasters on individuals, communities and national development. Based on a careful study of trends in disaster risk and on practical experience in disaster risk reduction, and subject to intensive negotiations during 2004 and early 2005, the HFA was adopted by 168 governments at the World Conference on Disaster Reduction in Hyogo, Japan, January 18–22, 2005.

19

54. Peru learned valuable lessons from its own post-disaster recovery processes. For instance, the difficulties faced during reconstruction in southern Peru after the Pisco earthquake (2007) demonstrated the need to strengthen institutional capacity for planning and implementing post-disaster recovery processes in a coordinated and efficient manner. It is critical to develop specific policies, coordination and financing mechanisms in order to clarify and distinguish among institutional responsibilities during the emergency, rehabilitation and reconstruction phases. 55. Ex ante risk financing instruments help limit the interruption of ongoing development programs. During an emergency, an unprepared government may be obligated to tap into its development program resources, thereby interrupting financial arrangements. This represents an administrative burden and hinders an effective disaster response. The DPL with a CAT DDO establishes the basis for an ex ante approach that is in line with the country’s risk financing strategy and consequently allows for uninterrupted development progress in case of a catastrophic event. 56. Rapid and flexible financing is critical for early recovery. On average, 50 percent of the economic losses associated with large disasters occur in the post-disaster phase. Peru and other countries have required immediate liquidity in the aftermath of a disaster event to quickly reestablish critical services. With access to untied liquidity, the GoP is able to accelerate recovery, minimize business interruption, and secure the operation of critical public facilities (e.g., health services). E. Analytical Underpinnings 57. The general framework for the analysis and preparation of the DPL with a CAT DDO operation is based on a number of key documents and publications, including the following:

The Global Assessment Report on Disaster Risk Reduction (UN/ISDR 2009). This is a comprehensive review and analysis of natural hazards that threaten humankind. It provides evidence on how, where and why disaster risk is increasing globally. This text places Peru in the larger context of disaster risk management.

The Hyogo Framework for Action (HFA 2005). This document, endorsed by the Government of Peru at the World Conference for Disaster Reduction in 2005, provides the guidelines for comprehensive disaster risk management actions. Peru used this framework to organize its National Disaster Risk Management Plan.

The Berger-Cetec report on the Study for the Institutional Strengthening of the SINADECI (IDB Loan No. 1056/OC-PE-BID 2002). This study includes a comprehensive diagnostic of the structure, legal framework and functionality of the SINADECI as well as three proposals to improve and strengthen the system. It has provided an analytical baseline for the design of both the IADB and World Bank operations.

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Catastrophe Risk Financing in Developing Countries (Cummins, Mahul–The World Bank 2009). The book makes a compelling case for public intervention to enhance catastrophe risk financing strategies and also lays out steps on how to mitigate the economic and fiscal impacts of disasters. This work provides the theoretical framework for the Peru DPL with a CAT DDO operation.

“The Definition of State Responsibility: Its Exposure to Natural Disasters and the Development of Mechanisms to Cover Residual Risk” (Definición de la responsabilidad del Estado y su exposición ante desastres naturales y el diseño de mecanismos para la cobertura de los riesgos residuales del Estado), a study conducted in Colombia by Evaluación de Riesgos Naturales (ERN) in 2005. ERN is a consortium of academics and specialists in disaster risk management. The study provided information for Institutional Strengthening and Risk Financing Strategies in the Colombian National Program for Disaster Prevention and Mitigation (Programa Nacional para la Prevención y Mitigación de Desastres, PNPMD). It outlines the importance of the legal aspects of disaster risk management with regard to the extent of Government responsibility (including concepts such as moral hazards), while also indicating the various mechanisms available to finance residual disaster risk.

V. PROPOSED DEVELOPMENT POLICY LOAN WITH A CATASTROPHE RISK DEFERRED DRAWDOWN OPTION

A. Description of Operation 58. The development objective of the proposed operation is to strengthen the Government’s capacity to mobilize resources in the case of disaster and to promote risk reduction. 59. The DPL with a CAT DDO is a new financial product that was approved by the Bank’s Board of Directors on March 5, 2008. The DPL with a CAT DDO can help address Peru’s immediate liquidity needs in the aftermath of a catastrophic disaster. The DPL with a CAT DDO is a flexible, prompt financial tool to address the risks to which the country is prone. It will enable the GoP to focus on emergency response measures in the aftermath of a disaster, rather than spend valuable time and resources for fund-raising activities. So far there are only three DPLs with a CAT DDO approved by the Bank Board: in Costa Rica, Colombia and Guatemala. 60. The Government will be able to access funds from the facility upon the declaration of a State of Emergency as a result of the occurrence of an adverse natural event. The maximum amount of DPL with CAT DDO funding constitutes 0.25 percent of the national GDP of the country or up to US$500 million, whichever represents the smaller of the two amounts. Loan pricing is in line with standard IBRD terms, which include a 0.50 percentage point front-end fee. The funds may be drawn down over a three-year period and renewed up to four times for a total of 15 years. The signing of the DPL with a CAT DDO is contingent upon the client maintaining a sound macroeconomic policy framework and the existence of a disaster risk management program.

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61. The DPL with a CAT DDO instrument is designed as a “bridge financing” mechanism in the event of a disaster generated by adverse natural events. In discussions with the GoP, the Bank clarified that the DPL with a CAT DDO will help reduce the GoP’s fiscal vulnerability in the event of a catastrophic adverse natural event. Moreover, in line with the Bank’s Catastrophe Risk Financing Framework, the GoP was advised that small-scale disasters should be covered by the Government’s own reserve funds because this instrument covers less frequent and more severe disaster events. To make this more explicit, the Bank shared with GoP officials a note including the Bank’s risk financing framework for disasters triggered by adverse natural events. 62. One of most distinctive characteristics of a DPL with a CAT DDO operation is to promote policy reforms with a focus on disaster risk reduction measures. Under this DPL with a CAT DDO, the GoP will begin implementing the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (PPE-RVAE) under the results-based budgeting framework while focusing primarily on health, water and sanitation as the priority sectors. Thus, the preparation of an overall financial strategy can be considered one of the most pertinent, if not the most important, aspects to be adopted by the GoP. 63. Drawdown condition, financial features and renewals are as follows:9

Drawdown Triggers. Funds may be withdrawn upon the declaration of a State of Emergency10 (Estado de Emergencia) by a Presidential Decree (see Annex 3 for more details). Taking into account that the law (PD No. 069-2005-PCM) enables the use of this declaration in a catastrophic disaster, it has been agreed between the Government and the Bank that the declaration is a valid drawdown trigger for the DPL with a CAT DDO. A disaster is defined as one that is generated by phenomena that are either natural/geological (e.g., earthquakes, tsunamis, volcanoes, landslides, etc.) and/or hydro-meteorological (e.g., floods, hurricanes, El Niño/La Niña, storms, surges, etc.).11

Financial Features. The financial features of the DPL with a CAT DDO are similar to those available for the Deferred Drawdown Option for Development Policy Loans (DDO-DPLs), with one exception: the DPL with a CAT DDO would have a revolving feature by which the amounts repaid prior to the closing date would be available for drawdown.

Drawdown Period and Renewals. The drawdown period for this operation will be three years and may be renewed up to four times. Renewals require that the original program remain largely in place. The adequacy of the macroeconomic framework and of a disaster risk management program will then be reconfirmed upon renewal. Renewal will take place no earlier than one year and no later than six months prior to the expiration date.

9 “Memorandum of the President to the Executive Directors. Subject: Proposal to Enhance the IBRD DDO and to Introduce a DDO Option for Catastrophic Risk (CAT-DDO),” Document No. 42396, World Bank, January 29, 2008. 10 According to the country’s Preliminary Regionalization Law, Decree 70/86. 11 Taken from the National Disaster Prevention and Response Plan (Plan Nacional de Prevención y Atención de Desastres).

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B. Policy Areas 64. Three policy areas have been identified for this operation: (i) risk reduction policies in public investment, (ii) vulnerability reduction actions in GoP priority sectors, and (iii) mechanisms for financial protection against disasters resulting from natural events. From these three policy areas, four prior actions are identified as those that support this operation and are illustrated in Table V.1.

Table V.1 Government of Peru’s Prior Actions

Policy Areas Prior Action

Risk reduction policies in public investment

The MEF adopted a Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (Programa Presupuestal Estratégico de Reducción de Vulnerabilidad y Atención de Emergencias por Desastres, PPE-RVAE) under the results-based budgeting framework (Urgent Decree No. 024-2010 dated March 31, 2010).

Vulnerability reduction actions in GoP priority sectors

The Ministry of Health adopted the National Policy for Safe Hospitals in the Event of Disasters (Política Nacional de Hospitales Seguros ante Desastres, DS N° 009-2010-SA dated April 24, 2010).

The SUNASS Board of Directors approved a resolution under the Regulation for Quality of Provision of Sanitation Services, establishing special measures for emergency situations (R.C.D. N° 011-2007-SUNASS-CD-Annex 5 dated February 2, 2007).

Financial protection mechanisms against disasters resulting from natural events

The Parliament passed the National Public Sector Borrowing Law (Law 29466 dated December 10, 2008), which allows the MEF to start building its mechanism for financial protection from disasters.

65. The Government and the Bank will maintain a close policy dialogue during the implementation of the program throughout the drawdown period. The Bank will conduct two supervision missions per year to monitor the program. First Action Policy: Risk Reduction Policies in Public Investment 66. The first identified prior action related to risk reduction policies in public investments is that the GoP created the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (PPE-RVAE) under the results-based budgeting. This action represented a significant improvement in the MEF’s involvement in disaster risk management and especially in vulnerability reduction activities. The main challenge will be to establish a permanent dialogue between the MEF and the sectors and regions and an effective results monitoring system to ensure the sustainability of the PPE-RVAE. 67. The GoP is seeking ways to further increase the efficiency of risk reduction investments through the use of results-based budgeting. Under the PPE-RVAE, the MEF will progressively establish specific interventions in the national annual budget to allocate

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funds to sectors and regions, according to the program’s priorities; courses of action, results and impacts are expected to be included in disaster vulnerability reduction and emergency response. 68. The design phase of the PPE-RVAE focused on the vulnerable populations under natural hazards. This model, together with an explanatory manual, was also developed by the MEF in other sectors under its results-based budgeting approach. The design phase ended in July 2010. 69. The PPE-RVAE defined five priority sectors for specific interventions: health, education, transport, environment and housing (including water and sanitation). For the national budget in 2011, the PPE-RVAE will develop an inventory of actions through a diagnostic of the disaster vulnerability activities and investments that the priority sectors made in the past years. One of the strong candidates for a pilot phase in 2011 is the health sector due to its recently adapted Safe Hospitals Policy. In the coming years, the PPE-RVAE will work with other priority sectors to define specific interventions in disaster vulnerability and emergency response. These specific interventions will receive a budget allocation and will be monitored and based on their performance. 70. The GoP expects that this process will eventually help to overcome current obstacles related to dispersion of risk reduction investments, weak planning, low inter-institutional coordination and absence of monitoring and evaluation mechanisms. After designing the PPE-RVAE during the first half of this year, the GoP began the implementation of the Strategic Program with the incorporation of a specific allocation for the 2011 national budget. The Government agreed that budget allocations for the specific interventions identified in the dialogue with the priority sectors will be included in the national budget starting in 2011. The budget allocation is expected to become permanent, but will be assured at least through 2013. The Bank will support this reform by funding specific interventions for the Strategic Program which strengthens technical capacity by identifying specific disaster vulnerability interventions. These interventions are already a part of the MEF’s National Directorate of Public Budget (Dirección General de Presupuesto Público, DGPP) when implementing the PPE-RVAE. Second Action Policy: Vulnerability Reduction Actions in GoP Priority Sectors 71. The GoP has begun to reduce vulnerability in some sectors, such as in the health, and water and sanitation sectors, which are prioritized in the Disaster Vulnerability Reduction and Emergency Response Program. 72. The second prior action is that the Ministry of Health (MINSA) adopted the National Policy for Safe Hospitals in the Event of Disasters. This policy includes a broad framework for vulnerability reduction in health facilities. For the first phase of the implementation, most of the activities are related to inventory and diagnosis of the current infrastructure. A second phase will include a structural vulnerability analysis of MINSA that will inform the design and implementation of vulnerability reduction programs for health facilities. The new Strategic Program for Disaster Vulnerability and Emergency Response will be critical to ensure the sustainability of the health sector’s involvement in vulnerability reduction activities.

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73. The MINSA is working in coordination with PAHO under the framework of the Safe Hospitals Initiative. During 2010, the MINSA evaluated thirteen hospitals in Peru using the Safe Hospitals Index12 and trained a number of evaluators during several workshops. 74. Under this framework, the GoP agreed to: (i) evaluate 90 percent of MINSA hospitals using the Hospital Safety Index, and (ii) carry out a structural vulnerability evaluation in at least 20 percent of qualifying13 MINSA hospitals and specialized institutes.14 In coordination with the DGPM, the MINSA launched a set of training activities for PIP formulators to improve risk analysis for public investment project formulation and to generate new hospital designs. The expected outcomes are that MINSA will continue to reduce vulnerability in its current infrastructure by building safer facilities. 75. The third prior action is that SUNASS adopted special measures for emergency situations to be adopted by the EPS under the Regulation for Quality of Sanitation Services approved by resolution of the Board of Directors. After the 2007 Pisco earthquake, the GoP strengthened and further integrated disaster risk management policies in the workings of the water and sanitation sector. On February 5, 2007, a new regulation for Quality of Provision of Sanitation Services was approved (R.C.D. N° 011-2007-SUNASS-CD). This regulation included a section in its Annex 5 on the specific measures to be adopted by the EPS during emergency situations. The EPS are obliged by this regulation to develop and adopt a contingency plan for emergency situations, including for disasters caused by natural events. 76. The main challenge for the sector and for the GoP is to strengthen the abovementioned regulation and incorporate disaster risk management policies in EPS operations. So far the EPS have focused on introducing emergency response plans. The Government intends to adapt a more forward-looking disaster risk management approach. 77. As previously mentioned, WSP started a pilot project in the areas affected by the 2007 Pisco earthquake, developing guidelines for the EPS to incorporate risk reduction policies in new public investments and management practices. It is expected that by 2011, the EPS of the southern region will adopt these guidelines for their operations. 78. Based on these developments, the GoP will prepare standard technical guidelines to incorporate disaster risk management in the EPS management framework. It is expected that at least four EPS will adopt these guidelines by 2013. 79. The Bank will support this third prior action with technical assistance in probabilistic risk assessment for the health sector as well as vulnerability studies for the water and sanitation sector. Improved national and city-specific seismic hazard studies will be conducted in Peru and especially in Lima. The Bank will support the GoP in the development of a disaster risk assessment of MINSA health facilities in Lima through the CAPRA platform. Partnerships among these Ministries, a local university and a government

12 PAHO developed the Safe Hospitals Index to provide a snapshot of the probability that a hospital or health facility will maintain operations during an emergency situation. 13 Structural vulnerability evaluations will be carried out only in hospitals and specialized institutes that can be retrofitted or structurally reinforced. 14 Health facilities II.2 (regional hospitals), III.1 (national hospitals) and III.2 (specialized institutes).

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technical agency will be required in order to conduct these assessments. The Water and Sanitation Program (WSP) is supporting the water and sanitation sector to develop vulnerability studies for EPS, using the experience of their work in the area affected by the 2007 Pisco earthquake. Third Action Policy: Financial Protection Mechanisms against Disasters Resulting from Natural Events 80. The fourth prior action is the adoption of the National Public Sector Borrowing Law (Law 29466 dated December 8, 2009) that allows the MEF to borrow resources in emergency situations. This is a first step toward financial protection against disasters. The GoP has made several improvements in recent years. The MEF contingency fund for emergency public investment projects, managed in coordination with INDECI under the SINADECI framework, was renewed in 2010 in the amount of US$17.8 million through the 2010 Public Sector Fiscal Balance Law. The GoP also signed a contingency credit line against disasters with the CAF for US$300 million and is preparing another contingency credit line with the IADB. 81. The challenge for the GoP is to find the right balance of financial instruments to build a comprehensive risk financing protection strategy. Simultaneously, the GoP needs to improve the way in which resources are spent during emergency situations and during the rehabilitation and reconstruction phases. 82. The GoP is looking for the best setup for the available risk financing instruments, while working on a comprehensive risk financing strategy. In the coming years, the GoP is expected to diversify the availability of risk financing instruments by acquiring other contingency loans, developing insurance schemes, and issuing CAT bonds, among others (Box V.1). The GoP expressed its willingness to continue funding and probably to expand the MEF contingency fund. 83. The GoP is working on a diagnosis of expenditures in post-disaster situations to facilitate and offer post-disaster resources in a more efficient manner. This diagnosis will review the country’s emergency investment mechanisms and budget processes. An in-depth review of SNIP mechanisms available for emergency projects will be conducted. This diagnosis will also include the review of every procedure in emergency situations, such as procurement and budget allocations.

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Box V.1: Catastrophe Risk Financing Strategy

A risk financing strategy should differentiate between a range of higher-frequency/lower-cost events and lower-frequency/higher-cost events. Lower layers of risk (higher-frequency/lower-cost events) can generally be financed through reserve mechanisms, special budget appropriations, and budget reallocations. These sources of funds are rarely sufficient to face higher layers of risk for which other risk financing instruments are generally needed. This DPL with a CAT DDO operation is designed to provide liquidity in the case of medium-size (or cumulative) disasters that cannot be funded with internal reserves and to provide bridge financing while other sources of funding are being mobilized in the case of a major disaster. The diagram below shows an example of the use of the DPL with a CAT DDO as part of a risk financing strategy for a given country. The contingent loans can occupy higher layers of the strategy.

Source: World Bank, Financial and Private Sector Development - Global Capital Markets Development - Non-Bank Financial Institutions Unit (FPD-GCMNB), 2008.

84. The prior action agreed with the Government is consistent with the five good practice principles on conditionality, as identified by the Bank’s 2005 review and its updates. Box V.2 describes how this disaster risk management DPL with a CAT DDO is aligned with each of these principles.

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Box V.2. Operational Consistency with Good Practice Principles for Conditionality

Principle 1: Reinforce ownership Alignment with government goals: This operation is driven by the Government of Peru (GoP) and enjoys

solid ownership in the country. The DPL with a CAT DDO supports the courses of action and priorities established by the Government, which are part of the National Disaster Risk Management policy framework. This operation recognizes the priority given to disaster risk management by the GoP.

Timely and demand-driven analytical support: With the support of GTZ, IADB and the Bank, the GoP, through the MEF, developed studies that assess vulnerability and will serve as inputs for relevant policy implementation.

Principle 2: Agree up-front with the Government and other financial partners on a coordinated accountability framework The proposed loan is based on a coherent framework of expected outcomes developed in accordance with the GoP’s program and is coordinated with the IMF. Jointly designed policy matrix: The Bank and the Government prepared an operational policy matrix,

agreeing on the prior action for Board approval and expected program outcomes drawn from the Government’s 2006–2011 Plan.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The Bank’s technical support in this operation has two main courses of action according to GoP

requirements: (i) providing technical assistance on probabilistic risk modeling using the CAPRA software platform, and (ii) supporting actions to increase institutional technical capacity in the agencies involved. The former will be financed by a SFLAC grant and the latter by an IDF project. In addition, the GoP will receive support from IDB, GTZ and DIPECHO in areas complementary to this operation.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement DPLs with a CAT DDO are approved for three years and, unlike other Bank budget support operations,

the DPL with a CAT DDO only requires that the adequacy of the macroeconomic framework be established at effectiveness and reconfirmed at renewal.

Funds may be drawn down upon the occurrence of an adverse natural event resulting in a declaration of a State of National Emergency (Estado de Calamidad Pública) by Presidential Decree No. 069-2005-PCM. This drawdown is conditioned on continued satisfactory implementation of the matrix activities.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support The policy matrix contains outcomes defined by the Borrower that are closely linked to the supported policy actions. This will help the Bank and the Government review progress during project implementation.

VI. OPERATION IMPLEMENTATION

A. Poverty and Social Aspects 85. This operation is expected to have significant positive impacts on poverty and other social issues. 86. Disasters triggered by natural events disproportionately impact the poor. Improvements in national disaster risk management and vulnerability reduction strategies are

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expected to benefit the poor. Globally, 99 percent of people affected by approximately 6,000 registered large-scale disasters between 1970 and 2002 were from the southern areas. In Peru, over the last three decades close to 11 million people have been affected by various natural hazards, including droughts, extreme temperature (cold and heat waves), earthquakes and floods, to name a few. The large majority of those affected belong to the lowest income quintiles. 87. The socioeconomic conditions in Peru increase vulnerability to socionatural hazards. More than one-third of Peru’s population (39.3 percent) lives below the poverty line and 13.7 percent subsists in extreme poverty (INEI 2008),15 with a sharp disparity between urban and rural rates: 25.7 percent and 64.6 percent, respectively. According to National Information System for Disaster Prevention and Response (Sistema Nacional de Información para la Prevención y Atención de Desastres, SINPAD) figures for 1995–2007, the regions hardest hit by disasters were Apurímac, Loreto, Lima, Cajamarca, Puno and Cusco, where poverty rates are highest. Compounding the problem are weak institutions and a dearth of planning instruments to deliver social policies more efficiently. 88. Unplanned urban development and the population distribution intensify Peru’s vulnerability to disasters. While approximately 76 percent of Peruvians are urban dwellers, cities are growing very quickly and haphazardly. There has been a sharp shift in population distribution by regions and lopsided land occupation. The coastal area is home to 54.6 percent of the total population, the Andean region to 32 percent, and the Amazon Basin to 13.4 percent. One-third of the provinces (home to over 71 percent of Peru’s population) are at very high or high risk of seismic activity. Informal and illegal settlements account for a large share of city growth, especially in Lima, with several consequences for sustainable development. More than 4,000 human settlements and 900,000 households countrywide have yet to see land title regularization problems resolved (50 percent of Lima’s settlements are informal, for instance), so residents of these communities are living without basic services such as water and sanitation or access to public housing programs.16 89. The implementation of the Disaster Risk Management DPL with a CAT DDO is expected to have a positive social impact on Peru. Since this DPL with a CAT DDO supports more efficient allocations of the national budget for disaster reduction activities, vulnerability reductions in key priority areas and financial instruments will allow the Government to respond faster to disasters; especially for the poorest population, its implementation is expected to have a positive impact on poverty reduction and social welfare. 90. The project will also have indirect benefits for the poor. Since the DPL with a CAT DDO reduces the risk of interruption and diversion of resources from other national development plans, the prior action taken by the GoP is expected to have indirect poverty and social benefits. Consultation 91. The selection of key sectors and priority areas addressed by the proposed DPL with a CAT DDO was based on the Bank’s analytical work and on a comprehensive

15 National Institute of Statistics and Information Technology (Instituto Nacional de Estadísticas e Informática). 16 See Habitat International Coalition (2005).

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series of consultations led by the Ministry of Economy and Finance (MEF) with the inputs and active participation of various government sectors and agencies and the IADB, to ensure compatibility with other programs. The core sectors and themes supported by the DPL with a CAT DDO were selected based on the following: (a) the level of national priority agreed on by the MEF; (b) supplementary support from other grants; and (c) the level of sectoral support and commitment. 92. In addition, stakeholder consultations relevant to the proposed DPL with a CAT DDO were carried out through: (a) the CPS review; (b) the Country Risk Profile; and (c) the National Agreement policy review, involving all relevant government sectors, i.e., MEF and the health, education, and water and sanitation sectors, as well as with the Humanitarian Network led by Office for the Coordination of Humanitarian Affairs (OCHA). These consultations included several meetings, including two joint missions with IADB in which the progress and recommendations of the Policy Matrix and ongoing dialogue were presented and widely discussed. Finally, many of the actions supported by the proposed DPL with a CAT DDO have implicit consultations due to the nature of the policy instrument used (e.g., decrees; resolutions; contingency and action plans). 93. Furthermore, the Peruvian Government possesses mechanisms to ensure adequate consultation opportunities that include public hearings (commonly used in the mining and energy sectors) in order to discuss environmental and social concerns in an open and transparent manner, thus demonstrating that public consultation is well established in the Government system.

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Table VI.1. Examples of Civil Society Initiatives in Disaster Risk Prevention in Peru Civil society organizations Areas of intervention Association of Municipalities of the Southern Region of Lima (Asociación de Municipalidades del Area Sur de Lima, AMASUR)

Agreement for disaster risk prevention in Pachacamac, Pucusana, Sta. María del Mar, Punta Negra, Villa Ma. del Triunfo, San Bartolo, Punta Hermosa, Lurín, San Juan de Miraflores, and San Borja, Villa El Salvador.

Poverty Reduction Roundtable Comittee/Risk Management Group (Mesa de concertación de lucha contra la pobreza/Grupo de Gestión de Riesgos)

National approach: (a) Roundtable Committee (Lima) and (b) 857 Committees in the area surrounding Lima.

NGO (e.g., ITDG), Disaster prevention and good governance program

District of Morrope, Tucume, Illimo and Picsi in Lambayeque; Rioja and Moyobamba (San Martin); Yungay, Ranrahirca and Huaraz in Ancash; Soritor, Yuracyacu and Moyobamba in San Martín; Tumbes, Piura, La Libertad, Cajamarca, Ayacucho, Huancavelica, among other areas.

Pisco Sin Fronteras (volunteers) Pisco, Chincha, San Andrés and Tupac Amaru. JOVOS (Youth Volunteers in Risk Prevention) Lima: basin of R. Rímac, Chosica, Matucana,

San Mateo, Ricardo Palma, Chaclacayo, Surco; La Victoria, Centro de Lima, San Juan de Lurigancho, Moquegua: Samegua, Torata, Ilo, lloque,Ubinas; Arequipa: San Juan de Taucani, Alto Selva Alegre; Ica: Nasca, and Puno: Sandia, Cuyocuyo, Alto Inambari.

NGO DESCO (prevention initiative) Activities from Villa El Salvador to Cerro Azul Blog “Muévete Ciudadano” Muéveteciudadano.blogspot.com National Association of Community Development Centers (Asociación Nacional de Centros de Desarrollo, ANC): NGO umbrella organization

About 200 NGOs in Lima and provinces.

B. Environmental Aspects 94. The DPL with a CAT DDO is expected to have significant synergies with reforms recently implemented by the GoP in the environmental and natural resources management sectors. Good disaster risk management integrates sound environmental management practices and vice versa. For instance, Peru has implemented an anchoveta fishing quota system that has allowed pressure on this strategic fishery to be reduced; this in turn may favor its current and future resilience to extreme events such as El Niño. Moreover, the regulation of the National System for Environmental Impact Assessment enacted in 2009 clarifies the roles and responsibilities performed by the Ministry of the Environment (Ministerio del Ambiente, MINAM) as well as competent sectoral, regional and local authorities on Environmental Impact Assessment (EIA) matters. Terms of reference to prepare semi-detailed and detailed EIAs, contained in this regulation, require that project proponents identify aspects related to vulnerability and hazards of anthropogenic and natural origin associated with the project’s area of influence. Peru also recently created the National Water Authority (Autoridad National del Agua, ANA) whose major responsibilities are integrated water resources management and river basin management. MINAM recently prepared the Policy Guidelines for Territorial Zoning. These guidelines include promoting the incorporation of risk analysis in the planning and preparation of investment projects, identifying and assessing high-risk areas, and disaster prevention strategies. With regard to water resource management linked to hydrological risks, the World Bank is supporting the

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GoP with a US$20 million loan to: (i) improve water resource management capacity at the national level, and (ii) improve water resource management in selected river basins. A subset of critical activities consists of developing and improving water resource management plans and hydrological and decision-making models, upgrading hydro-meteorological observation networks and transmission systems, and strengthening the capacity of the regional offices of the National Meteorological and Hydrological Service (Servicio Nacional de Meteorología e Hidrología, SENAMHI). In particular, this operation’s prior actions will help the Government of Peru support policy areas, such as: (a) strengthening the institutional, regulatory and policy frameworks for risk management; (b) reducing vulnerabilities in strategic sectors; and (c) strengthening financial protection mechanisms in the event of disasters. 95. On May 27, 2009 Peru enacted a new National Environmental Policy (Política Nacional del Ambiente) and is currently preparing the National Environmental Action Plan (Plan Nacional de Acción Ambiental). The GoP also enacted key reforms through three Environmental Development Policy Loans (ENV DPL), based on the recommendations of the 2006 Country Environmental Analysis (CEA). Some of the actions mentioned in the previous paragraph were supported by the three existing ENV DPL loans.17 96. Peru is highly exposed to adverse natural conditions and is also considered to be one of the most vulnerable countries to climate change. It is regularly exposed to devastating climate-related disasters, in particular floods, landslides and droughts. Peru’s northern coast is especially vulnerable to El Niño oscillations, which bring heavy rain and floods as well as severe droughts. In the mountains, climate change makes its presence felt in terms of a drastic reduction in ice, snow and permafrost, which leads to a dramatic loss of water and strong cold fronts. Climate change could increase disaster risk in the coming years in Peru. C. Implementation, Monitoring and Evaluation 97. The Government will monitor the progress of the proposed operation during the entire drawdown period. Given the characteristics of the DPL with a CAT DDO, the Bank is responsible for monitoring both the macroeconomic environment and the implementation of the program supported by the DPL during the drawdown period (a period of three years, which may be extended for up to four additional three-year periods, subject to satisfactory program implementation and a sound macroeconomic policy framework at the time of the extension). This will be done through frequent visits to the country and regular communication with the MEF and key sectors. D. Fiduciary Arrangements 98. In 2009, the Bank undertook a review of Peru’s Public Financial Management (PFM) while preparing a series of DPLs that included the Programmatic Fiscal Management and Competitiveness DPL series, the Environmental DPL series, and the REACT DPL 11. The review of the status of PFM in Peru was further complemented by a joint assessment with other development partners following the Performance Measurement Framework (Public Expenditure and Financial Accountability, PEFA) assessment, whose final report was published and disseminated in June 2009.

17 A third ENV DPL was approved on August 5, 2010.

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99. The PEFA assessment concluded that from the perspective of the six budget dimensions measured by the framework, the PFM is functioning well and is in line with international best practices. The main findings of the PEFA assessment are summarized below: (i) The Central Government’s budget is a reliable and credible financial tool, despite the discrepancies between the executed and initial budget. Overall, the budget formulation follows international best practices. It is an orderly, institutionalized and transparent process, with public access to key information in a timely manner. The documentation attached to the Budget Bill submitted to Congress for review is also fairly comprehensive. (ii) The predictability of budget resources and internal controls of budget execution are also working relatively well. Budget execution is well documented and the Consolidated Government Financial Statements (Cuenta General de la República) are prepared annually and submitted in a comprehensive document that contains information regarding revenues, expenditures, and financial assets and liabilities, and is audited within the legally established time periods by the Office of the Comptroller General (Contraloría General de la República, CGR). The annual audit covered approximately 69 percent of public institutions (for 2009), and it is conducted pursuant to the respective regulations and within the time frames established by law.18 (iii) Legislative scrutiny of the annual budget bill is conducted in accordance with well-established procedures, which are also used in examining the General Account. However, there is limited capacity in the Congress for following up on the audit recommendations, which are not always implemented due to lack of capacity. 100. The most critical reforms necessary to improve the management and efficiency of public finances and spending initiated during the last two years are well advanced and were completed in early 2009. A new budget classification system and a new accounting chart were adopted, in line with international standards, and are operating in all government ministries and agencies. The implementation of the Treasury Single Account (TSA) at the Central Government level is progressing well, with sufficient coverage to meet international standards. The foundations for performance-based budgeting made steady progress with the development of well-defined performance indicators that link priority policies and programs. The reforms in the area of performance-based budgeting included several policies and procedural changes and expansion of the strategic programs in the 2009 budget. Continued efforts are currently in place to fully implement the TSA and to ensure common standards, a timely budget and financial reporting by all levels of Government (i.e., central and subnational). 101. Efforts to continue modernizing the budget and improving Peru’s public financial management (PFM) could be scaled up by prioritizing activities within the PFM reform agenda, using the results of the country PFM performance (complemented by other sources of information and GoP strategies). The dissemination of the PEFA results facilitated the dialogue between the Government and donors around a common framework.

18 The time frame for the submission of the Cuenta General de la República and the corresponding audit report issued by the CGR, from the President to the Congress, has been changed to August 15.

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Thus, following the PEFA’s dissemination, the formation of a working group led by MEF—including high-level government officials and representatives of donor agencies—is in place and as a result the GOP, with the support of donors’ resources, has been able to establish a PFM study group within the MEF to monitor and follow up on concrete reforms within the PFM agenda. The study group will initially provide strategic support in three areas: (i) implementation of the new SIAF; (ii) design and gradual implementation of a multiannual budget framework; and (iii) support to the recently restructured Budget Directorate in certain new units such as quality of expenditure. 102. The Integrated Financial Management System (Sistema Integrado de Administración Financiera, SIAF) is a cornerstone of the country’s reform process. Due to its importance, there is a need for constant adjustments to support changes in policies, processes and institutions. Thus, the design and implementation of the new system is critical for Peru to support the PFM reform agenda. The design of the new system and its platform began at the end of 2008, and the conceptual framework was approved in March 2010. On this basis, it is expected that the Budget Programming module will be launched in March 2011 on a pilot basis for the preparation of the 2012 budget. E. Disbursement and Audits 103. Disbursement arrangements will follow the procedures for DPL-DDOs and the deferred drawdown provisions as defined in OP 8.60. 104. According to the latest IMF Safeguards Assessment completed in 2007, there were no significant weaknesses in the Central Bank’s safeguards framework (IMF Country Report No. 07/241). The external audit report on the Central Bank’s 2009 financial statements does not reveal any significant issue related to the internal control environment. 105. Given that the Bank’s review of the Borrower’s current PFM system is satisfactory and that the fiduciary arrangements for this operation are adequate, the Bank will not require a dedicated account in the Central Bank for loan proceeds. However, the Bank reserves the right to request an audit of the deposit account in which loan proceeds are received if it is deemed necessary. F. Risks and Risk Mitigation

Macroeconomic Risks

106. Peru remains exposed to downside risks stemming from renewed uncertainty in international financial markets and doubts about the pace of the global economic recovery. Following developments in Europe in May 2010, volatility in global financial markets increased to levels last seen in March 2009 while asset markets worldwide posted substantial losses. So far, the spread of the sovereign stress in European countries to Peru and other emerging countries has been limited, due to stronger economic fundamentals in emerging countries and the EU/IMF intervention. However, global growth prospects may be affected by concerns about the recovery in Europe and how it may spill over to other regions of the world. Stock markets in emerging markets, as measured by the MSCI emerging market index, dropped 9 percent in May while the price of commodities such as copper decreased by

34

7 percent. Although global financial conditions have since improved, this episode shows the importance of the ultimate recovery of the global economy. 107. The exposure to commodities remains high as demand from fast-growing emerging economies is shifting the destination of Peruvian exports. Traditional exports still account for over three-quarters of Peru’s exports. In fact, the share of traditional exports rose slightly in 2009 on account of the increased terms of trade for Peru recorded for 2009 as a whole. The importance of emerging markets as a destination for Peruvian exports has grown sharply during the global economic crisis. Thus, while Peru’s total exports dropped by 13 percent in 2009, its exports to China grew by 14 percent. In 2009 China was the second largest destination for Peruvian exports, accounting for 15.3 percent of all exports (up from 11.6 percent in 2008). In contrast, the share of exports to the US dropped from 19.1 percent in 2008 to 17 percent in 2009. Similarly, there were large declines in excess of 30 percent in exports to large European trading partners such as Spain, Italy, the UK and the Netherlands. These developments suggest that while exposure to weaker EU growth may be more muted than in the past, exposure to commodities may have increased. In addition, the fast recovery of economic growth observed in Peru has also contributed to making the country a more attractive investment destination, adding to exchange rate appreciation pressures from already high portfolio capital inflows and affecting the prospects of the nontraditional sector to gain competitiveness and export shares. 108. Commitment to structural reforms and consensus on macroeconomic pillars has been and remains strong. The decision by the authorities to curb the expansionary stance of fiscal policy demonstrates their commitment to regain fiscal space and is particularly noteworthy in light of the upcoming presidential elections to take place in April 2011. In early June 2010, Fitch Ratings confirmed the investment grade rating for Peruvian foreign currency sovereign debt and upgraded the outlook from stable to positive on account of the resumption of fast growth in the country. The country’s solid fundamentals suggest that, in the absence of unexpected policy shifts, the macroeconomic situation is unlikely to become incompatible with continued budgetary support lending during the course of this proposed operation.

Political and Social Risks

109. The legal and institutional reform of the National Civil Defense System (SINADECI) promoted by the GoP may affect some of the activities included in the Policy Matrix. No major changes are expected to the agencies19 involved with the DPL with a CAT DDO operation as result of an institutional reform. Nevertheless, there is the possibility that a new coordinating agency for disaster risk management will be created and that this agency will participate in matters related to the outlined activities within the policy matrix, such as the PPE-RVAE implementation and health and education vulnerability reduction activities. The active participation of the MEF in the reform discussion is important to reduce political risks and coordinate agreements with other sectors. After the reform is approved, the MEF and the Bank will present the DPL with a CAT DDO operation to the new coordinating agency and committees. 110. The 2010 federal and local elections in Peru will change some of the political context by the time the elected officials take office in January 2011. The electoral outcomes may

19 Ministries: Economy and Finance, Health and Education.

35

influence agreements, institutional arrangements, and coordination in disasters. Additional efforts for institutional arrangements and coordination also need to involve the National Agreement (Acuerdo Nacional 2002) wherein the main political forces and representatives of civil society prioritized the reduction of poverty and inequality, and established 31 policies for sustainable development. The project aims to promote informative workshops with GoP officials as well as with members of the National Agreement. This will take place by assuring fluent dialogue between stakeholders, building synergy, and enhancing commitment for the implementation of the National Disaster Prevention and Response Plan (PNPAD).

36

Annexes

Annex 1: Letter of Development Policy (Unofficial/Informal Translation)

“DECADE OF HANDICAPPED PERSONS IN PERU” "YEAR OF PERU’S ECONOMIC AND SOCIAL CONSOLIDATION" 

 

Lima, OFFICIAL LETTER N° -2010-EF/10

POLICY LETTER Mr. Robert B. Zoellick

President World Bank Reference: CAT-DDO: Program to Reduce the State’s Vulnerability to Disasters

Dear Mr. Zoellick,

I herewith express to you the commitment of the Government of President Alan García Pérez to strengthen the Peruvian State’s risk management capacities in order to be able to respond adequately to a disaster situation.

Under this framework, the “Program to Reduce the State’s Vulnerability to Disasters” is being developed with the World Bank (WB). This program will include institutional reform efforts and specific measures for the implementation of: i) policies for disaster risk reduction in public investment, ii) activities to reduce vulnerability in the priority sectors of health and sanitation, and iii) financial protection mechanisms for disaster situations. Thus, we request your support through this first CAT DDO (Catastrophe Deferred Drawdown Option) operation, in the amount of US$100 million.

The following is a description of Peru’s economic context and of the reforms conducted and the proposals for the requested loan.

A. Economic Context

The world economy is coming out of its greatest recession since World War II. Global GDP fell 0.6% in 2009 and is expected to recover to a rate of 4.6% in 2010,[1] as a result of the fiscal and monetary stimulus plans that have been implemented.

[1]The situation is similar in global commerce, which showed a 10.7% decrease in 2009; an increase of 9.0% is expected in 2010.

 

 

PERU  Ministry  of Economy and Finance 

 Office of the Minister 

ISMAEL BENAVIDES FERREYROS MINISTER

37

With regard to the growth prospects of our key trade partners, the United States is recovering, supported mainly by temporary factors (inventory effect and stimulus plans). In turn, Europe’s fiscal problems may limit the region’s growth prospects in the medium term due to the implementation of austerity measures. In Asia, China is leading the economic growth, again reporting quarterly rates above 10% per year; this result is mainly explained by the dynamics of industrial production and bank credits. In Peru, the key path of the crisis’s transmission was commerce; the terms of trade experienced a major downturn of 15.5% in the 2008–2009 period. In this context, GDP grew only 0.9% in 2009. This low growth was mainly explained by the over-adjustment of private investment and the downturn in inventories. However, the launching of adequate monetary and fiscal policies avoided greater deterioration in economic activity. In the fiscal arena, a strong Economic Stimulus Plan (Plan de Estímulo Económico, PEE) was implemented for 2009–2010, 3.5% of the GDP, with significant emphasis on infrastructure works, making it possible for public expenditure to contribute 2.5 percentage points to the growth of the GDP. Likewise, the Central Reserve Bank of Peru (Banco Central de Reserva del Perú) reduced its benchmark rate, reaching historical minimums (1.25%), and focused on providing the necessary levels of liquidity that kept the payment chain from breaking. Currently, the signs of recovery are clear. The economy has been growing since the third quarter of 2009 in seasonally adjusted terms, driven by monetary and fiscal stimuli and inventory recovery in recent months. As proof of the PEE’s success, the construction sector has been growing since last October at rates above 10%. In turn, in December 2009 non-primary manufacturing, the sector hardest hit by the crisis, achieved its first positive growth rate of that year and in recent months is showing high growth rates. The downward trend in exports since the second quarter of 2009 began to slow and to present positive rates since the fourth quarter of 2009 in nominal terms. In the second quarter of 2010, the economy expanded by 10.1%, the highest rate since the third quarter of 2009. Consumption and private investment grew 5.8% and 24.6% per annum, respectively, indicating an accelerated recovery of private-sector demand. Along the same lines, the internal indicators of early activity indicate that this good economic performance will continue to consolidate in the coming months. In July, the GDP expanded by 9.05%, thanks mainly to the rebound in manufacturing (17.2%), commerce (8.9%), services (7.5%) and construction (12.3%). With respect to the month of August, electricity production grew by 9.2%, while local cement sales grew by 11% and imports of capital goods grew by 56.5%. Taking into consideration the recovery at international level and of the local economy, an economic growth of 6.8% is expected, with a risk of increasing in 2010. The key factors that may explain this growth are: i) favorable performance of the growth of the global economy and terms of trade, and ii) progress in private investment, as a result of the return of business confidence and better financing conditions.

B. Reforms Associated with the Program

1. Policies for reducing disaster risk in public investment

Prior actions

Since 2000, the National Public Investment System (Sistema Nacional de Inversión Pública, SNIP) has been in place. Under this system, the process for the design and implementation of public investment projects was regulated and a series of steps to be followed for project approval were defined. In 2007, the General Bureau of Multiannual Programming (Dirección General de Programación Multianual, DGPM), under the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF), was given the authority to reduce several of these steps in special cases, and the regulation was published, detailing the simplified procedure for the formulation of public investment projects in emergency situations. This shortened the time frames for the formulation and approval of projects whose purpose is to deal with an emergency situation.

38

The Ministry of Economy and Finance has also moved ahead with the preparation of methodological guidelines for the incorporation of disaster risk analysis in the formulation of public investment projects (proyectos de inversión pública, PIP). In parallel, for the purpose of strengthening the monitoring system for SNIP projects in order to reduce levels of vulnerability and understand the levels of exposure of public investment projects, plans are in place to reinforce the information system for the SNIP and to conduct an updating of studies of seismic threat and risk for Lima and of the national map of seismic threat.

In April of this year, the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response (Programa Presupuestal Estratégico de Reducción de la Vulnerabilidad y Atención de Emergencias por Desastres, PPE-RVAE) was created, under the framework of Results-based Budgeting. Its objective is to identify, adjust, strengthen and prioritize investments for disaster risk management in the sectors and regions.

Actions for the coming years

In the process of designing the conceptual model of the Strategic Budget Program for Disaster Vulnerability Reduction and Emergency Response, five sectors have been identified (agriculture, transport, housing, education and health) and over 50 interventions have been identified. Its implementation will be conducted gradually; the intervention in safe hospitals of the health sector has been selected for inclusion in the 2011 public budget and its implementation will begin in 2012. In parallel, in the coming years new courses of actions in priority sectors will be introduced. The design and consolidation of this Program constitute a priority for the State since they will contribute to increasing the effectiveness and efficiency of disaster risk reduction policies.

In addition, the Government of Peru will continue to strengthen the inclusion of disaster risk reduction measures in the National Public Investment System (Sistema Nacional de Inversión Pública, SNIP) and in planning and investment instruments at regional and local levels.

2. Vulnerability Reduction Activities in priority sectors

The most vulnerable sectors in the event of a disaster include health, education, and water and sanitation. The failure and interruption of any of these following a disaster have a profound impact on the population, especially on the most vulnerable, and increase the direct impact of the disaster. In this regard, these are critical sectors for emergency management and post-disaster recovery.

Prior actions

Consequently, the Peruvian Governmetn recognizes the need to strengthen these sectors and thus has taken concrete actions such as those mentioned below:

‐ Through a Supreme Decree published in May of this year, the National Policy for Safe Hospitals in the Event of Disasters (Política Nacional de Hospitales Seguros frente a los Desastres) was approved. This policy defines a comprehensive framework of intervention to reduce the sector’s vulnerability.

‐ At the end of last year, the education sector approved the regulation under which the subject of risk and environmental management is included in the national curriculum. It is also in the process of updating the technical specifications for the construction of schools that provide regular basic education.

39

‐ In the water and sanitation sector, the National Oversight Office for Sanitation Services (Superintendencia Nacional de Servicios de Saneamiento) established a set of special measures that are to be implemented by service providers (Empresas Prestadoras de Servicios, EPS) in emergency situations.

Actions for the coming years

As part of the process of implementing the National Policy for Safe Hospitals in the Event of Disasters, some of the planned actions include moving forward with the evaluation of hospitals through the use of the PAHO (Pan American Health Organization) Hospital Safety Index, studies of structural vulnerability to earthquakes in a significant percentage of health facilities, and strengthening the incorporation of risk reduction measures in the design and construction of new infrastructure. For the Peruvian Government, the implementation of structural and non-structural measures to reduce vulnerability is a priority.

As in the case of the health sector, in the coming years, the Peruvian Government is expected to move forward with the design of a comprehensive policy to reduce the vulnerability of the education sector, and its implementation involves an ongoing effort by governments to provide the safety required for children.

In the water and sanitation sector, in the coming years the Government will move forward with the implementation, in the EPS, of special measures for emergencies and of risk management. New measures to reduce the sector’s vulnerability will be identified and designed.

Through the MEF, personnel in the three levels of government will be trained in order to generate the necessary capacities so that public investment projects in these sectors include in their formulation an analysis of risk and vulnerability reduction. Thus, the formulation of investment projects for the construction, reinforcement and/or improvement of health and education centers and of water and sanitation infrastructure will include a risk analysis.

Finally, it should be noted that, besides what is described above for these two specific sectors, the Peruvian Government will also work to reduce the vulnerability of other sectors such as education, housing, agriculture, environment and transport, and thus it is its intention to maintain a dialogue to strengthen these policies in the medium and long term.

3. Financial Protection Mechanisms

Prior actions

Because Peru is a country whose natural dynamics have a strong potential to become hazards and generate disasters such as earthquakes, frost, etc., the Peruvian Government has a Contingency Fund that is defined each year by means of the complementary provisions of the Law for the Financial Balancing of the Public Sector Budget (Ley de Equilibrio Financiero del Presupuesto del Sector Público) for the fiscal year that is about to begin. Currently, this fund totals S/.50 million on behalf of the National Civil Defense Institute (Instituto Nacional de Defensa Civil, INDECI), in order to provide timely response to large-scale disasters and mitigate the harmful effects from imminent impact.

In addition, since 2008 the Law of the National Indebtedness System (Ley del Sistema Nacional de Endeudamiento), Law N° 28563, has included the option of negotiating and signing contingent financing (lines of credit, borrowing operations, etc.) in order to obtain resources for the possible occurrence of a natural or technological disaster. This is the case of the present CAT DDO and the recent approval of contingency financing between the Republic of Peru and CAF for a total amount of US$300 million.

40

Actions for the coming years

Although the country has already adopted various financial instruments, in the coming years it will be necessary to move forward in defining a comprehensive financial protection strategy that makes it possible to adjust and/or complement the measures already adopted. Likewise, the capacity to execute resources in post-disaster situations will be strengthened through the updating of the regulatory framework and the strengthening of institutional organization and of instruments for investment planning and execution.

Conclusion

As seen from what has been described above, the Peruvian Government is carrying out important efforts to strengthen risk management in the country through the implementation of policies for risk reduction in public investment, in the priority sectors of health, water and sanitation, and to strengthen mechanisms for financial protection from disasters.

The Government is committed to continuing to move forward in these matters, for which it requires the support of the World Bank in the areas indicated.

In light of the above, the Peruvian Government herewith requests the approval of the CAT DDO in the amount of US$100 million.

Sincerely yours,

41

Letter of Development Policy (Original in Spanish)

42

43

44

45

46

47

 

48

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49

Annex 3: The Process for Declaring a State of Emergency The Civil Defense Committees of the National Civil Defense System are responsible for channeling a request to INDECI to declare a state of emergency due to a disaster situation or a public calamity. To declare its veracity, INDECI confers with the Sector and/or National Environmental Council20 for a second opinion and, if approved, the request is presented to the Presidency of the Council of Ministries. This institution is in charge of formalizing this request through a Presidential Decree. In some situations, any Ministry or Decentralized Public Agencies (Organismos Públicos Descentralizados, OPD) could channel the request to INDECI in order to declare a state of emergency, following which the Presidency of the Council of Ministries would present an official request directly to the Council of Ministries. This process was defined in 1988 (Presidential Decree No. 005-88-SGMD) and then modified in 2001 due to the decentralization of Government offices and processes (Presidential Decree No. 058-2001-PCM) and again in 2005 (Presidential Decree No. 069-2005-PCM).

20 At present the National Environmental Council no longer exists, but its functions, role and responsibility have been absorbed by the Ministry of Environment.

50

Figure A.3.1: Flowchart of the Procedure to Declare a State of Emergency

Source: Regulation of the Civil Defense System (Presidential Decree No. 005-88-SGMD, No. 058-2001-PCM, and No. 069-2005-PCM).

Request to declare a state of

emergency

1 Evaluation of the request 2

Civil Defense Committees of

Local Governments

submit a request to Regional Civil

Defense Committees of the

Regional Government.

Regional Civil Defense Committees evaluate the request and submit it to

INDECI when considered viable.

Admissibility of the request 3

INDECI evaluates the request and defines its

admissibility.

Draft Presidential

Decree

4State of emergency

declared

5

INDECI prepares a draft Presidential Decree and sends it to the Presidency of

the Council of Ministers. The Presidential Decree considers the term, geographic scope and territorial

division.

Presidency of Council of Ministers publishes the decree declaring a

state of emergency.

Sector review 3.1

National Environ-mental Council review

3.2

Evaluation damage report

Evaluation damage report

Presidential decree

51

Table A3.1. List of State of Emergency Declarations (January 1 to June 12, 2010)

NºSupreme Decree 

Number Date of 

publicationArea Type of Disaster

1 003‐2010 09/01/2010 Lima Intense rains

2 011‐2010 19/01/2010 Junín y Lima Internal security *

3 012‐2010 21/01/2010 Huancavelica Intense rains

4 013‐2010 21/01/2010 Ancash Risk of flood of the Laguna Parón 

5 015‐2010 25/01/2010 Cusco and Apurímac Intense rains

6 017‐2010 28/01/2010 Puno, Cusco and Ayacucho Intense rains

7 042‐2010 31/03/2010 Ica, Madre de Dios and Arequipa Internal security *

8 043‐2010 01/04/2010 Ancash Risk of flood of the Laguna Parón 9 044‐2010 03/04/2010 Huánuco  Intense rains

10 055‐2010 15/05/2010 Huánuco, San Martín and Ucayali Internal security *

11 057‐2010 18/05/2010 Callao Internal security *

12 060‐2010 27/05/2010 Ica, Lima and Huancavelica Earthquake 2007 ** 13 065‐2010 10/06/2010 Cusco Intense rains **

*

** Another cause other than natural disaster to declare a State of Emergency.

DSE related to an extension of a previous DSE.

52

Annex 4: Peru-IMF Relations

53

Annex 5: Country Disaster Risk Profile Geological Hazards » Peru is vulnerable to high seismicity. Seismic activity in Peru and the surrounding Andean region is caused by the subduction zone between the Nazca and South American plates and the continental fault system in the Andes Mountains. In the last 400 years Peru has been hit by at least 30 major earthquakes. The most recent of these include: Lima (1940), Arequipa (1948), Ancash (1970), Nazca (1996), Arequipa (2001) and Pisco (2007). The high seismic hazard zones are concentrated along the coastal region, where the capital is located (see Figure A5.1).21 This is Peru’s disaster hotspot. » Peru’s coastal region has a history of devastating tsunamis. Most of the destructive tsunamis that have struck the west coast of South America in the last four centuries occurred in Callao harbor, on the coast of Lima. According to recent studies,22 at least ten Peruvian regions are at risk of tsunamis, notably Piura, Lambayeque, Lima, Ica, as well as Arequipa, which is a thriving port where the bulk of the coastal oil and gas infrastructure is located. » Volcanic hazards in Peru are localized in the southern part of the country. There are 15 active volcanoes in Peru that pose a threat to four regions: Tacna, Moquegua, Arequipa and Ayacucho (see Figure A5.2). Arequipa is the most exposed city because of its proximity to the Misti volcano; this area is home to over a million people and much of the city’s infrastructure development is near the volcano’s cone. The most recent volcanic activity was the Sabancaya eruption, located 70 kilometers northwest of Arequipa, where explosive activity was recorded between 1990 and 1992. The risk in this case is ash fall toward the Arequipa region and lahars into the Colca Valley. » Landslides are a recurring hazard for the mountain communities and have a negative impact on infrastructure in the country. The most landslide-prone zones are the steep mountainsides and flanks on the coast, and in the Amazonian and inter-Andean valleys of the Huallaga, Marañón, Apurímac and Urubamba Rivers, among others. Landslides take a heavy toll on infrastructure. Also included in this disaster category are flash floods, avalanches and torrential downslope flows of water saturated with earth and rock (“huaycos”). The Machu Picchu sanctuary region experiences complex events of this type.23 Such catastrophic slope failures have occurred primarily in the Andes Mountains due to seismic activity or heavy rains, which claim thousands of casualties in communities downstream from the Huaytapallana, Huayhuash, Urubamba and Vilcabamba cordilleras (1883, 1938 and 1970).24

21 From Zonificación Sísmica Preliminar para el Perú a Partir de la Frecuencia-Intensidad de los Sismos Ocurridos entre 1964–2000 (Tavera & Bernal, 2006) and Seismic Map of Peru 1980–2007 (Tavera, 2008). 22 Dirección Hidrográfica y de Navegación – Marina de Guerra del Perú, 2007. 23 See Vilcanota Valley Slope Monitoring for Flash Flood Prevention, Peru. Geophysical Flow Observatory, University of Maryland, Baltimore County. 24 See Atlas of Natural Hazards in Peru, 2004.

54

Hydrometeorological Hazards » Peru’s northern coast is especially vulnerable to the El Niño Southern Oscillation (ENSO), which is typically characterized by prolonged torrential rains, mainly in the regions of Tumbes, Piura, Lambayeque, La Libertad and Ancash (except the high Andean provinces). The 1982–83 and 1997–98 El Niño events were devastating for Peru’s economy and population, with losses totaling US$2.28 billion and US$3.57 billion, respectively, in destroyed and damaged homes, infrastructure and production equipment, cropland, and transportation stock, among others.25 Following the 1997–98 El Niño event, the World Bank approved a US$150 million loan for a project to assist the Peruvian Government’s reconstruction efforts.26 » At least 23 percent of Peru’s population lives in flood-prone areas.27 In Peru, flooding is more intense along the rivers that flow toward the coast—which are dry most of the year—when they receive freshets during the Sierra rainy season between November and April. Major Amazon Basin rivers also inundate floodplains, as Figure A5.3 illustrates. The regions of Puno (Titicaca watershed), Piura, Lambayeque and Ucayali have a history of recurrent flooding. An assessment by the Multisectoral Commission on Risk Reduction in Development (CMRRD) classifies 55 Peruvian provinces as high flood-risk areas.

25 See ECLAC Economic Evaluation. 26 See World Bank ICR PO54667. 27 UNDP, Reducing Disaster Risk: A Challenge for Development, 2004.

Figure A5.1. Seismic Hazard Map of Peru

Figure A5.2. Volcanic Hazard Map of Peru

Source: Tavera 2008 Source: Instituto Geofísico del Perú

55

Figure A5.3. Peru’s Flood Hazard Potential

Source: CMRRD, 2004. » Southern Peru is prone to droughts, frosts, severe cold snaps and other hydrometeorological events. The south Andean region (Puno, Cusco, Apurímac, Arequipa, Moquegua and Tacna) is the most recurrently drought-prone area. Its 1.3 million people living 3,500 meters above sea level are the hardest hit because farming and livestock-raising constitute their livelihoods. Frosts occur mainly from May to August and affect the Sierra regions (center and south) that lie 2,900 meters above sea level. The cumulative effect of these events is devastating for agriculture and has long-term impacts on the livelihood of local populations. Determinants of Vulnerability to Adverse Natural Events in Peru » Soil and water quality degradation are Peru’s main environmental factors that heighten vulnerability. Forty percent of the coastal region’s soils exhibit some degree of salinization resulting from over-irrigation and poor drainage. Water and wind erosion due to sparse or no plant cover, overgrazing and stubble burning affects 60 percent of Andean farmlands. Pollution caused mainly by the mining and metal industry, household wastes and farm chemicals has impaired water quality: 16 of the 53 rivers on the coast are partially polluted with lead, manganese and iron. Moreover, because water and sanitation system coverage (around 68 percent) and the quality of those services is limited, several million people have no access to safe drinking water and sewer systems. Informal management of potable and waste water is a structural driver of environmental degradation, primarily on mountainsides.

56

» Unplanned urban development and the population distribution have intensified Peru’s vulnerability. Close to 76 percent of Peruvians are urban dwellers, and cities are growing quickly and haphazardly. There has been a sharp shift in population distribution by natural regions; today the coastal area is home to 54.6 percent of the total population, the Andean regions to 32 percent, and the Amazon Basin to 13.4 percent—a lopsided land occupation pattern. One-third of the provinces (home to over 71 percent of Peru’s population) are at very high or high seismic risk. Informal and illegal settlements account for a large share of city growth, especially in Lima, with several consequences for sustainable development. More than 4,000 human settlements and 900,000 households countrywide have yet to see physical-legal title regularization problems resolved (50 percent of Lima settlements, for instance); therefore, residents of these communities are living without essential services such as water and sanitation or access to public housing programs.28 » Peruvians’ socioeconomic conditions increase the country’s vulnerability to socionatural hazards. More than one-third of Peru’s population (39.3 percent) lives below the poverty line and 13.7 percent subsists in extreme poverty (INEI29 2008), with a sharp disparity between urban and rural rates: 25.7 percent and 64.6 percent, respectively. According to National Information System for Disaster Prevention and Response (SINPAD) figures for 1995–2007, the regions hardest hit by disasters were Apurímac, Loreto, Lima, Cajamarca, Puno and Cusco, where poverty rates are highest. Compounding the problem are weak institutions and a dearth of planning instruments to deliver social policies more efficiently.

28 See Habitat International Coalition (2005). 29 Instituto Nacional de Estadísticas e Informática.

57

Annex 6: Flowchart of the Simplified Procedure to Implement Investment Projects in an Emergency

Source: Ministry of Economy and Finance (Ministerial Resolution No. 010-2010-EF/15 and Ministerial Resolution No. 251-2010-EF-15 dated May 28, 2010).

Declaration of a State of Emergency

1 Priorization of Projects2

Government declares the emergency

Sectors and Regional Governments evaluate and

prioritize the projects.

Local Governments present their projects to the Regional

Government.

Projects are presented to the

Ministry of Finance3

In addition to the investment project,the sector or Regional Government has to send the following information to the General Unit of Multiannual

Programming (DGPM) :1) Damage Evaluation Report

2) Sustenance Report3) Any other relevant information

Evaluation of projects4

Approval of projects5

DGPM evaluates the projects and the approved ones are

sent to the Secretariat of Decentralization (SD).

Report of projects approved6Eligibility of

projects7

DGPM declares eligibility ofprojects and informs thesectors and/or Regional

Governments about the eligibility of their projects.

Resource allocation8

The SD approves the projects.The SD informs the DGPMabout the approved projects.

Institutionalbudget

8.1

Emergency fund8.2

If resources come from the institutional budget, the sector or Regional Government asks the

National Public Budget Unit(DNPP) for thecodification number of the project.

If resources come from the emergency funds, INDECI transfers the resources to the sector or Regional Government and informs the DNPP

and DGPM about the details.

58

Annex 7: Seismic Risk Projects in Lima and Callao

Ongoing Donor or IFI-Supported Activities

Funding Agency/International Partners

Allocated Budget and Period (US$)

Disaster Risk Management in Urban Areas/Housing Sector

Inter-American Development Bank

$1 million (2010–2011)

Disaster Risk and Risk Management Indicators

Inter-American Development Bank

$750K (for 14 countries including Peru) 2009

Catastrophic Seismic Risk Profile Inter-American Development Bank

$400K (for 4 countries including Peru) 2008–2009

Disaster Preparedness and Early Recovery for Earthquake and Tsunami in Lima and Callao

European Commission/ECHO/ UNDP

$2.6 million (2009–2011)

Andean Program for Disaster Risk Prevention

PREDECAN €9.45 million for the Andean Countries (2005–2009)

Enhancement of Earthquake and Tsunami Disaster Mitigation Technology

Government of Japan/JICA

$5 million (2009–2014)

Integration of Disaster Risk Management Information in Peru’s Planning System

The World Bank US$300K (SFLAC Grant 2010–2011)

59

Annex 8: Peru at a Glance (includes country map)

 Peru at a glance 10/19/10

Latin UpperKey D evelo pment Indicato rs America middle

Peru & Carib. income(2009)

Population, mid-year (millions) 29.2 566 993Surface area (thousand sq. km) 1,285 20,422 48,659Population growth (%) 1.1 1.1 0.9Urban population (% of to tal population) 72 79 75

GNI (Atlas method, US$ billions) 122.3 3,865 7,352GNI per capita (Atlas method, US$) 4,200 6,826 7,405GNI per capita (PPP, international $) 8,140 10,496 12,763

GDP growth (%) 0.9 4.3 4.1GDP per capita growth (%) -0.3 3.1 3.2

(mo st recent est imate, 2003–2009)

Poverty headcount ratio at $1.25 a day (PPP, %) 8 8 ..Poverty headcount ratio at $2.00 a day (PPP, %) 18 17 ..Life expectancy at birth (years) 73 73 71Infant mortality (per 1,000 live births) 19 20 20Child malnutrition (% of children under 5) 5 4 ..

Adult literacy, male (% o f ages 15 and o lder) 95 92 95Adult literacy, female (% of ages 15 and o lder) 85 90 92Gross primary enro llment, male (% of age group) 109 118 111Gross primary enro llment, female (% of age group) 109 114 110

Access to an improved water source (% of population) 82 93 95Access to improved sanitation facilities (% o f population) 68 79 84

N et A id F lo ws 1980 1990 2000 2009 a

(US$ millions)Net ODA and official aid 201 397 397 466Top 3 donors (in 2008): Spain 0 6 19 131 United States 53 79 92 94 Germany 59 60 34 94

Aid (% o f GNI) 1.0 1.6 0.8 0.4Aid per capita (US$) 12 18 15 16

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) .. .. .. 5.5GDP implicit deflator (annual % change) 65.9 6,836.9 3.7 3.0

Exchange rate (annual average, local per US$) 0.0 0.2 3.5 3.0Terms o f trade index (2000 = 100) .. 126 100 129

1980–90 1990–2000 2000–09

Population, mid-year (millions) 17.3 21.8 26.0 29.2 2.3 1.8 1.3GDP (US$ millions) 20,661 26,294 53,290 130,325 -0.1 4.7 6.0

Agriculture 11.7 8.5 8.5 7.3 3.0 5.5 4.1Industry 42.8 27.4 29.9 34.1 0.1 5.4 6.5 M anufacturing 23.5 17.8 15.8 14.0 -0.2 3.8 6.2Services 45.5 64.1 61.6 58.6 -0.5 4.0 6.0

Household final consumption expenditure 57.5 73.7 71.4 63.7 0.7 4.0 5.2General gov't final consumption expenditure 10.5 7.9 10.6 10.0 -0.9 5.2 5.2Gross capital fo rmation 29.0 16.5 20.2 22.5 -3.8 7.4 10.5

Exports of goods and services 22.4 15.8 16.0 23.6 -0.9 8.5 7.8Imports of goods and services 19.4 13.8 18.2 19.7 -3.2 9.0 9.5Gross savings .. .. .. ..

Note: Figures in italics are for years o ther than those specified. 2009 data are preliminary. .. indicates data are not available.a. A id data are for 2008.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% o f GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0

20

40

60

80

100

1990 1995 2000 2007

Peru Latin America & the Caribbean

Under-5 mortality rate (per 1,000)

-10

-5

0

5

10

15

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

60

61

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)

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CaballocochaCaballococha

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SihuasSihuas

Ayar MancoAyar Manco

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CaillomaCailloma

DesaguaderoDesaguadero

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PuquioPuquio

LaLaOroyaOroya

GoyllarisquizgaGoyllarisquizga

HuarazHuaraz

ChiclayoChiclayo

PiuraPiura

HuancavelicaHuancavelica

HuancayoHuancayo

AyacuchoAyacucho

AbancayAbancayCuscoCusco

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PunoPuno

MoquegaMoquega

TacnaTacna

ArequipaArequipa

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Cerro deCerro de Pasco Pasco

Huánuco Huánuco

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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

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Chimbote

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NevadaYerupaja(6634 m)

NevadaSalcantay(6271 m)

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NudoAusandate(6384 m)

80°W 75°W 70°W

75°W

10°S

5°S

0°

15°S

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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