GLOBAL ENVIRONMENT FACILITY
1354 1IPC- Public Disclosure Authorized
Republicof Peru NationalTrust Fund for ProtectedAreas Public Disclosure Authorized Public Disclosure Authorized
ProjectDocument March 1995 Public Disclosure Authorized
THE WORLD BANK GEF Documentation
The Global Environment Facility (GEF) assistsdeveloping countries to protect the global environmentin four areas:global warming, pollutionof internationalwaters, destructionof biodiversity,and depletion of the ozonelayer. The GEF is jointly implemented bytheUnited Nations Development Programme. the United Nations Environment Programme. andthe World Bank.
GEF Project Documents - identifiedby a green band- provide extendedproject- specificinformation. The implementing agency responsible for eachproject is identifiedby its logo on the coverof the document.
GlobalEnvironment Division Enviroinient Department World Bank 1818 H Street,NW Washington,DC 20433 Telephone:(202) 473-1816 Fax:(202) 522-3256 ReportNo. 23540-PER
Republicof Peru NationalTrust Fund for ProtectedAreas
ProjectDocument March1995
CURRENCYEQUIVALENTS
Currency Unit=New Sol US$1.0 = 0.4576 New Soles US$1.0 - 1.6044 Deutsche Mark
WEIGHTSAND MEASURES
The metric system is used throughoutthe report
FISCALYEAR
January 1 - December 31
GLOSSARY
CIDA CanadianInternational Development Agency DGAPFS DirectorateGeneral of ProtectedAreas and Wildlife (DireccionGeneral de Areas Protegidasy Fauna Silvestre) FONANPE Trust Fund for the Conservationof Peru's Protected Areas (Fondo Nacionalpara Areas Naturales Protegidaspor el Estado) GEF Global EnvironmentFacility GET Global EnvironmentTrust GOP Governmentof Peru GTZ DeutscheGesellschaft fuir Technische Zusammenarbeit GmbH INRENA National Instituteof Natural Resources (InstitutoNacional de Recursos Naturales) NGO Non-GovernmentalOrganization PROFONANPE The entity created as a not-for-profitentity of public interest but under private law to administerthe assets of PROFONANPE(Pro Fondo Nacionalpara Areas Naturales Protegidaspor el Estado) SINANPE National Systemof Natural Areas Protectedby the State (Sistema Nacionalde Areas Naturales Protegidaspor el Estado) TC TechnicalCommnittee
This report is based on the findings of an appraisal mission which visited Peru in August, 1994. Mission members were Messrs./Mmes. Claudia L. Alderman (mission leader). Alberto Ninio (Envirornental Lawyer), Bemardita Zapata (consultant, financial issues), Mark Cymrot (consultatit, legal iss i). Ms. Michele de Nevers (LA2EU) was the peer reviewer. Other people who contributed to the project preparation wt . Messrs./Mmes. Christine Kimes, GEF coordinator, Kathleen Mikitin (ENVGC) and Jainison Suter (consultant). Mr. Rudl IfVan Puymbroeck (LEGLA) provided legal advice, and Mr. Francisco Tourreilles provided advice cn financial miatters.The GEF outside technical reviewers were Messrs./Mmes. Norman Myers, John Terborgh and Margaret Symington. Messrs. Yoshiaki Abe and Nicholas Krafft were Department Director (LA3DR) and Division Chief (LA3NR) respectively.
April 26, 1995 12:01pm
Part I: Project Summary
PERU
GLOBAL ENVIRONMENT FACILITY
NATIONAL TRUST FUND FOR PROTECTED AREAS
GRANT AND PROJECT SUMMARY
Source of Grant: Global Environment Trust (GET)
Grant Recipient: The Republic of Peru
Beneficiaries: Designated Peruvian National Parks and Reserves
Amount: SDR 3.5 million (US$5.0 million equivalent)
Total Project Cost: US$6.361 million (five-year pilot phase)
Terms: Grant
Financing Plan (five-year pilot phase):
GET Grant 3.5 SDR (US$5.0 million equivalent), for investment capital for the trust fund
FONANPE US$1.361 million, interest income from trust fund
Economic Rate of Return: Not applicable
Map: IBRD 2501OR
ESTIMATED GRANT DISBURSEMENTS BY YEAR
(US$ '000)
World Bank FY95 FY96 FY97 FY98 FY99 Fiscal Year Annual 5.0 0 0 0 0 Cwnumlative 5.0 5.0 5.0 5.0 5.0
PERU
NATIONAL TRUST FUND FOR PROTECTED AREAS
1. Country/SectorBackground. Peru ranks as one of the biologicallymost importantcountries in South America, and among the handful of megadiversitycountries in the world. It contains a higher proportion of the species-richforests of Western Amazoniaand the tropical Andes than any other country. Peru has an estimated 19 percent of the bird species, 9 percent of the mammals, and 9 percent of the amphibiansin the world. The Peruvian Amazoncontains an extraordinaryassemblage of species: in the Iquitos area in northern Peru, for example, a single hectare of tropical rain forest has been found to contain 300 species of trees, by far the highest heterogeneityon Earth, for such a small land sample. Two of Peru's large protected areas, Manu BiosphereReserve and Tambopata- Candamo Reserved Zone, contain the world's highest recorded diversitiesof birds, mammals, reptiles, amphibians, freshwaterfishes, vascular plants, trees, butterflies, and invertebrates.
2. Peru's unique biodiversity, however, faces threats. The most importantof these stem from the deforestationresulting from several decades of spontaneousand government-promoted colonizationof mountain slopes in the eastern Andes and in tropical and temperate inter-Andean valleys. Although over ninety percent of the Amazonianlowlands of the country are still forested, some large vertebrates and valuabletimber species are now confined to an estimated 30 to 40 percent of Peru's Amazon.
3. The governmentrecently eliminatedmany of the distortionaryeconomic incentivesthat made colonizationof its Amazonianlowlands attractive to Peruvian subsistencefarmers. In late 1990 the Peruvian Congress passed an environmentalcode that contains several conservationprovisions, includingthe positive step of abolishinglegislation which provided incentivesfor colonizing Amazonia. Furthermore, the code requires the preparationof an environmentalimpact statement for any developmentactivity in Amazonia-- whether public or private. Recently, legislationhas also been passed requiring environmentalimpact assessmentfor mining, fishing and industrialdevelopment investments. Despite these legislativeefforts, however, the governmentmay have difficulty slowing the colonizationof the Amazonianlowlands. After a decade of severe economic and political crisis, Peru is significantlyreformulating its policies, settingthe stage for economicrecovery. It has succeeded in drasticallyreducing the inflationand terrorist activity that crippled the nation until very recently. These changes can imply a large influx of tourists and, more importantly, increased investmentto exploit Peru's natural resources, both of which pose real threats to the country's biological wealth.
4. These problems, however, have not yet directly damagedthe integrity of Peru's vital sites of biodiversity. Peru has managedto set aside more than 6 million hectares of wet, moist, and dry tropical forest in national parks, reserves, and sanctuariesthroughout the country. Moreover, the legislationrelated to protected areas in Peru is comprehensiveand sound. In 1993, the government establishedthe NationalInstitute of Natural Resources(INRENA), bringing together the expertise of all Peruvian public agencies involvedwith the managementand conservationof Peru's natural resources. Peru's legislativeand institutionalefforts notwithstanding,the Governmentof Peru (GOP) has been unable to devote sufficientresources to its conservationareas. It cannot afford to develop or implementa coordinatednational managementplan for protected areas. Conservationefforts have thus been haphazard. Only four nationalparks receive any managementservices through INRENA; the other protected areas have no permanentmanagement personnel. The 1991 Tropical Forestry Action Plan reported that the park system employs 110 park guards for 5.5 million hectares, or one guard per 50,000 hectares. This index is only one among many that may be construed to indicate the severe deficiency of administrative and managerial inputs. Moreover, because of low salaries and lack of job security from budgetary fluctuations, the Peruvian park system has been unable to attract and retain qualified personnel.
5. Project Objectives. The project has four major objectives, to: (i) provide a long term and predictable source of funding for the protection of Peru's biodiversity through the establishment of a trust fund, the income of which would be used for financing the management of priority protected areas; (ii) improve INRENA's capacity to protect and manage Peru's protected areas; (iii) provide the country with a reliable institutional mechanism to channel debt donations for sustainable development and conservation through bilateral and commercial debt-for-nature swap agreements; and (iv) test the viability of trust funds as mechanisms for providing long term and sustainable funding for biodiversity conservation.
6. Project Description. Peru's government is committed to developing innovative mechanisms which would guarantee the appropriate management of Peru's protected areas and biodiversity. To this end, in December of 1992, the GOP created by Decree Law the Fondo Nacional para Areas Protegidas por el Estado (FONANPE), as part of a trust fund mechanism designed to provide long- term, sustained funding for Peru's protected areas. At the same time, the government created PROFONANPE as a not-for-profit institution under private law to manage the fund and to direct the use of its investment proceeds. In anticipation of the GEF grant, and on the bases established by the preparation of this project, PROFONANPE started operating in June 1993 under a grant from the German technical cooperation agency, the Deutsche Gesellschaft fur Technische Zusammenarbeit GmbH (GTZ). During its first year, PROFONANPE has strengthened itself as an organization by conducting an institutional strategic planning exercise involving a dozen NGOs, has developed criteria for managing its small grants program, has issued requests for proposals, and has negotiated Peru's first debt-for-nature swap.
7. To support PROFONANPE, the Global Environment Trust (GET) would provide SDR 3.5 million (US$5.0 million equivalent) as seed money for the Peruvian trust fund. In keeping with the GEF's goal of using its resources to leverage additional funds, the GET grant would be complemented by a parallel grant of US$1.5 million from GTZ. While the German grant does not form part of the capital of the trust fund per se, this contribution will help to consolidate and strengthen the GOP's capacity to coordinate all Peruvian conservation efforts and will lay the basis for the conservation activities supported by the trust fund. Moreover, GTZ's contribution will provide essential operational funds during the pilot phase of PROFONANPE until the trust fund reaches a sufficient size for the income to sustainably finance the project activities with its own income.
8. The by-laws governing the operation of FONANPE were drafted by a working group comprised of representatives from the GOP and from seven Peruvian conservation NGOs. This group also developed criteria for selecting the protected areas which would be initially supported by the project. These criteria include: (i) the global importance of the area for biodiversity conservation, in terms of species diversity and endemism; (ii) the relative feasibility of management; and (iii) the degree of environmental impact resulting from human activity. Although several protected areas meet these criteria, given resource constraints, three priority areas were selected for initial support by the trust fund: Manu National Park and Biosphere Reserve, Rio Abiseo National Park, and Noroeste Biosphere Reserve (composed of the Cerros de Amotape National Park, Coto de Caza el Angolo, Bosque Nacionalde Tumbes and Manglaresde Tumbes NationalSanctuary). As the trust fund's capital increases through additionalcontributions, other protected areas would be integrated into the program, based on the criteria described above and on the Master Plan for NationalProtected Areas currently being developedunder the auspices of GTZ.
9. The income generatedby the trust fund (estimatedconservatively at US$ 1.361 million for the first five years) will be used to finance a variety of conservationactivities in the selected areas and their buffer zones. ScheduleA provides a summary of the project costs, and Schedule B contains the procurement and disbursementarrangements for the project. The activities eligible for funding include:
* Financing the recurrent costs of protected area management(mainly staff salaries and operating expenses) * Drafting, revising and implementingmanagement plans * Establishingand managingbuffer zones * Training professionalsin park and wildlifemanagement * Institutingenvironmental education and public awarenessprograms for communitiesassociated with protected areas * Implementingprojects that integrate conservationand developmentto benefit the communities living in the protected areas and their buffer zones * Institutionalsupport for the strengtheningof the field work of INRENA's Directorate General of National Protected Areas and Wildlife * Administrativeexpenses of PROFONANPE
10. The complementaryactivities financed separately by GTZ include: (i) support to INRENA in the form of infrastructure, equipmentand training; (ii) developmentof a master plan for the managementof all protected areas in the country; (iii) hiring of consultantsto provide technical support to INRENA; (iv) institutionalbuilding and operationalcosts of PROFONANPE;and (v) a two-year program of small grants for NGOs to support sustainabledevelopment and conservation projects. This program will be managedjointly by PROFONANPEand GTZ.
11. Project Implementation. PROFONANPEis governed by a Board of Directors, composedof three representativesfrom the Peruvian government,three representativesfrom Peruvian conservation NGOs elected by the Peruvian EnvironmentalNetwork, and a representativefrom an international cooperationagency (initiallythe GTZ). One of the governmentrepresentatives will assume chairmanshipof the Board. PROFONANPE'sBoard will meet at least twice a year to review project progress and to decide policy issues. The Board will additionallymeet as needed to review the reports of the project coordinatorand of the managers of the protected areas and the auditors, as well as to approve the annual work programs and budgets proposed by each protected area, and to carry out other responsibilitiesas specified in PROFONANPE'sbylaws.
12. Day-to-dayproject managementand administrationwould be carried out by a professional Project Coordinator appointedby the Board. The Board will be advised by an independentTechnical Committee(TC) composed of scientistsand natural resource managementexperts experienced in park and wildlife managementand other disciplinesrelevant to program activities. A subset of this committeewill be comprised of financial experts and will advise PROFONANPEon its financial investments. The TC would also be responsiblefor developingcriteria for project monitoring and evaluation, and for conductingan annual evaluationon the performanceof the asset manager. The - 4 - TC is an additional forum in which relevant conservationNGOs can contribute substantivelyto the project.
13. The allocation of resourceswithin each protected area will be determined by PROFONANPE's Board of Directors on the basis of an annual work program prepared by the Project Coordinator. The work program will be based on an analysis of the requirementsand needs of each area, made jointly by INRENA and PROFONANPE'sCoordinator. Given the project's commitment to a community-based,participatory approach to conservation,the needs assessmentwill be made in consultationwith each protected area's administrativeofficer, local committees(where they exist), park officers, grassroots organizationsand local communities. Each work program will include a statementof specific objectivesfor the year and a descriptionof activitiesto be undertakenin order to achieve those objectives.
14. The fund's assets would be managed by a Peruvian investmentbank, accordingto investment objectivesand guidelines specifiedin section IV of the attached TechnicalReport and recorded in the Project Agreement. These guidelinesspecify the investmentrisk profile and the acceptable trade-offs between growth of the total value of the investmentcapital and the stability of annual incomeflows. Part of the investmentincome generated each year would be spent to financeconservation activities in Peru, while a predeterminedamount of the income would be reinvestedto maintain the real value of the principal.
15. The utilizationof the funds for the program during the five-year pilot phase will be reviewed during Bank supervision. Upon final evaluationof the performanceof PROFONANPE,the Bank would cease its formal involvementwith the project. However, if FONANPEis dissolvedfor whatever reason, or if it becomes evident, even after GEF's involvementin the project has ceased, that FONANPE's funds are being used for purposes other than biodiversityconservation, the Bank, as Trustee of the GET, would be entitled to obtain the repaymentof the amount so spent. Also, the Bank as Trustee of the GET would be entitled to seek repaymentfor any expendituresthat are not consistent with the terms of the Grant and Project Agreements.
16. Project Sustainability. The recurrent cost financingmechanism supported by this project provides built-in continuityof hard currency funding, under managementarrangements which depend little on the constrainedGovernment budget or adverse macroeconomicconditions. At the same time, PROFONANPEhas proven to be an attractive vehicle for raising additional funds internationally.
17. Lessons From PreviousBank Involvement. There has been no previous Bank involvement in sectors relevant to this project in Peru itself. Experience in other countries has shown, however, that failure to intervene would result in progressivedegradation of vulnerablehabitats. Under the Global EnvironmentFacility (GEF) there are several similar trust fund projects currently under preparation. These includethe Foundationfor Eastern CarpathianBiodiversity Conservation, the Bwindi ImpenetrableForest ConservationTrust in Uganda, and the Congo WildlandsProtection Project. The only other such project under implementationis the BhutanTrust Fund for EnvironmentalConservation, where few lessons can yet be drawn, as the project has been in operation only a short time. Additionally,independently from GEF support, countries such as the Philippinesand Bolivia have establishednational conservation-relatedfunds with initiallypositive results. 18. What all the above-mentionedtrust funds have in common is that they are designed to provide long-term, sustained funding for projects promotingconservation of biological diversity and sustainableuse of natural resources. Too often, donors have focusedon short term projects, providing funding for only 2 to 5 years. Yet, many conservationactivities may require 10, 20 or more years of sustained funding to have a real impact. Unless funding is sustained over a long period, the results obtained from a short term project may evaporate. Trust funds can be effective mechanismsfor guaranteeing a long term financialcommitment and for overcomingunpredictable governmentand donor agency budget fluctuations. This is particularly importantwhen funding recurrent costs. Reliable fundingimproves program stability, long-rangeplanning, training and recruitment of personnel, and the overall impact of a conservationprogram. While the future of national environmentfunds is promising, we still have much to learn about their design and management. Generally, the design phase is a long and arduous process. This is because in order to establish credibility at the national level, there must be a process of consensusbuilding particularly with regard to appropriategovernance structures and criteria for eligibilityof grants. Many technical questions need to be addressed as well, such as the appropriatefiduciary arrangements for the managementof fund assets and the legal character of the fund.
19. Rationalefor GEF Funding. Safeguardingbiodiversity worldwide depends, in the short term, as much on selectivityas on scale. Protectingspecific megadiversity parks such as those contemplatedin this project will secure a small but ecologicallyviable sample of biodiversityuntil more comprehensiveprotection efforts can be mounted. In the case of Peru, the governmentcannot currently place global environmentalinitiatives at the top of its list of priorities. Peru is in the early phase of economic restructuringand recapitalization. In light of this situation,this project will serve as a model for long-term financingof protectedareas in countries where political uncertainty and economic constraints currentlypreclude the governmentfrom allocatingadequate resources to conservationactivities.
20. The project's structure also provides an importantopportunity for testing the design and managementissues associatedwith financingthe recurrent costs of biodiversityconservation. The trust fund is an appropriatemechanism in the case of Peru for several reasons. First, by releasing funds slowly over an extended period, the absorptive capacity of the institutionsinvolved will not be exceeded. This will improve the likelihoodthat the funds will be used effectively. Second, the financial stability provided by the trust fund will alleviate the Peruvian park system's inabilityto retain qualifiedpersonnel because of low salaries and insecurejob tenure resulting from budgetary fluctuations. Third, the recurrent costs that will be financedby the incomeof the trust fund are the hardest to raise repeatedly from donors, who like to support projects with a definite beginning and end. The incomeof the trust fund would supplementthe limitedsupport that Peru's governmentcan allocate to these parks for the foreseeablefuture. If this financingis not provided, by the time Peru's economic situation improves to the point where the governmentcan provide sufficientresources to support its protected areas, many of these areas could be largely deforestedand their unique biological diversity lost or severely damaged. This GEF project could also be an important catalyzer of additional funding for conservationefforts in Peru. After nearly a decade of debt mismanagement, Peru is currently in the process of renegotiatingits debt. Through the Club of Paris agreements, Peru's official bilateral debt has been given a frameworkfor negotiationswhich includethe option for debt-for-natureswaps and other debt reductionmechanisms. Under this framework, Peru's first debt- for-nature swap with Canada was approved and negotiationsare under way with three additional countries. In this realm, PROFONANPEprovides a reliable window for debt donations for - 6 - environmentaland developmentpurposes, an option which Peru did not have availablebefore the GEF promoted the creation of the fund.
21. Actions Agreed.
During negotiationsthe Bank and the Governmentagreed that:
For twenty five years from the date of the Grant:
(a) Decree and Bylaws. FONANPEand PROFONANPE'simplementing legislation and by-laws will not be amended, abrogated, repealed or waived in a manner which, in the opinion of the Bank, would materiallyand adversely affect the implementationof the project or the attainmentof its objectives;
(b) Dissolution. If FONANPEis dissolvedfor whatever reason, or if it becomes evident, even after GEF's involvementin the project has ceased, that FONANPE's funds are being used for purposes other than biodiversityconservation, the Bank, as Trustee of the GET, would be entitled to obtain repaymentof the amount so spent;
(c) Repayment. The Bank as Trustee of the GET would be entitled to seek repayment for any expendituresthat are not consistentwith the terms of the Grant and Project Agreements.
The Bank and PROFONANPEagreed that:
(a) InvestmentArrangements. For 10 years after the date of the Grant, the Board of PROFONANPEwill not change the investmentarrangements and guidelineswithout prior written agreement by the Bank. These guidelinesare specified in Annex 2 of the attached TechnicalReport.
(b) Annual Work Programs. For the duration of project supervision,PROFONANPE will send to the Bank for commentits annual work programsprior to Board approval and no later than November 15 of each year;
(c) Procurement. In the context of the annual work program, PROFONANPEwill submit to the Bank a procurementprogram, which is in compliancewith the Bank's procurementguidelines;
(d) Annual ProgressReports. For the duration of project supervision,PROFONANPE will submit to the Bank annual progress reports (which include the monitoringindicators specified in Annex 6 of the attached TechnicalReport), by April 1 in a format satisfactoryto the Bank;
(e) TechnicalCommittee (TC). Within six months of effectivenessof the project, PROFONANPEwill have constitutedthe TC and sent to the Bank for review a surmnary of the qualificationsof each member. Within one year of project effectiveness,the TC will have prepared the project's Monitoringand Evaluationguidelines satisfactory to the Bank. - 7 -
(f) Administrative Costs. PROFONANPE's administrative costs for 1995 will not exceed US$150,000 per year, and will not grow by more than five percent per year, except as may otherwise be approved by the Bank on the basis of increases of the resources of the trust fund or other funds administered by PROFONANPE.
(g) Mid-term Project review. PROFONANPE will join the Bank on a mid-term project review at the end of 1997 to evaluate its implementation arrangements, its on-the-ground effectiveness in the protected areas themselves, and the performance of the asset manager. This review would serve to fine-tune the project and determine any needed modifications; evaluate investment performance; serve as the launching point for the concerted fund-raising effort to increase the trust fund's capital;
(h) Auditing. PROFONANPE will contract the services of an independent auditing firm to carry out an annual audit of the finances of the project and of the trust fund. The auditors will review the project's financial records to determine if the actual expenditures match the approved work program and if satisfactory procedures of record-keeping are being used. The auditor's report will be forwarded to the Bank no later than four months after the close of PROFONANPE's fiscal year.
(i) Implementation Completion Report. PROFONANPE will prepare an Implementation Completion Report within three months of the end of the Bank's supervision period. Sinhcethe project has no finite time frame, the Implementation Completion Report will relate to implementation performance during the length of the Bank's supervision period.
(j) Information Access. The Bank will retain the right to request any information, even beyond its formal involvement with the project, which would serve to evaluate the long- term effectiveness of the trust fund mechanism.
Prior to effectiveness:
(a) Legal Opinions. The Bank would require satisfactory legal opinions on the validity of the Grant and Project Agreements; and
(b) Contract Between PROFONANPE and the Asset Manager. The Bank would require a signed contract between PROFONANPE and the investment manager satisfactory to the Bank.
22. Enviromnental Aspects. The project is classified as "C," which means that no negative environmental impact is expected. The project's primary objectives focus on environmental protection and should result in stronger in-country capability to manage protected areas and biodiversity. No resettlement will take place under this project, nor does the list of eligible activities to be funded under the project include resettlement.
23. Participatory Approach. This project was prepared with the active participation of seven Peruvian NGO's, which were involved in the definition of all aspects of the project, including the drafting of FONANPE's by-laws. Local communities would be intrinsically involved in the project, as well. First, in light of the project's commitment to the principle of local participation in conservation, decisions about the allocation of resources within each protected area would be made in consultation with each protected area's administrative officer, local committees (where they exist), park officers, grassroots organizations and local communities. Second, among the activities eligible for financing under the project is the implementation of projects that integrate conservation and development to benefit the communities living in the protected areas and their buffer zones. To the degree that a local community is interested in pursuing funding for a given project, it would be in a position to propose the inclusion of that activity in the annual work program for the park. Similarly, NGO's would be eligible to propose projects for inclusion in the annual work program so they may continue carrying out their work on behalf of the park and the park's neighbors. Third, projects in the area of environmental education and public awareness would be eligible to be financed by the program. Such projects could help foster a common understanding of the goals of the park between the park managers and the local communities. Fourth, park guards and other workers hired under the project are likely to be recruited from the Lommunities adjacent to the parks, and so local people could benefit from the improved employment opportunities.
24. Benefits. A few carefully selected and properly managed conservation areas in Peru would guarantee the survival of a representative, ecologically viable sample of Peru's diverse flora and fauna. The project will provide a mechanism to: (i) secure improved and sustained management of these conservation areas, and (ii) promote long-term strategic planning for the protection of biodiversity in the country. If successful, the institutional arrangements of the project will catalyze other resources for biodiversity conservation. Once the trust fund reaches its target of US$40 million, it would provide sufficient resources to afford basic management to all of Peru's protected areas.
25. Risks. The project faces the following risks: first, annual fluctuations in the rate of return of the portfolio may result in a reduction of the income available for project funding from one year to the next. Like all investments, the return each year will depend on market conditions, which are hard to predict at any given point. If the returns fall below five percent over the first few years, however, the program will have to be scaled down accordingly. The risk will diminish over the years as a cushion is built-up based on a spending rule which would reserve "excess" profits from higher return years to be used in lower return years. This cushion will be built by using a spending rule which limits the expenditures of the trust to at most five percent of the value of the fund's assets for the first three years, and at a rate not to exceed five percent of the three-year moving average value of the account assets subsequently. A second risk is that PROFONANPE's Board may be ineffective in its oversight of the fund's expenditures. This risk is minimized given the mixed composition of the Board, which embodies a variety of interests and levels of commitment. The third risk is that given the overwhelming pressures on the natural resources of the country, it is possible that despite all efforts, the project will be unsuccessful in stopping outside encroachment and damage to the protected areas. This risk will be reduced to the degree that the project involves local populations in the judicious management of the park through economic incentives and increased awareness of the importance of sustainably using the park's resources. Finally, there is some risk that the trust fund will not be able to catalyze more funds, and hence the level of disbursements for conservation activities would be relatively low. This, however, is unlikely, as several contributionsfrom internationaldonors are already under negotiationsand it is highly probable that at least some of these will come to fruition. In any case, even if no additionaldonations are obtainedfor the trust fund, the level of resources going to protected areas via the GEF contributionalready doubles the annual amount the governmentis currently spendingin the protected areas.
Attachments Washington, D.C. March 20 1995 - 10 -
Schedule A
PERU
GLOBAL ENVIRONMENT FACILITY
NATIONAL TRUST FUND FOR PROTECTED AREAS
Estimated Project Costs by Component
(US$ '000) I/
For Years 1-5 of the Project
Project Component Local | Foreign | Total | As % of Expenditures Expenditures j _ Base Costs
Endowment of FONANPE 5,000 5,000 79
Management of Selected Protected 711 711 11 Areas
Project Coordinating Unit 650 650 10
TOTAL PROJECT COSTS 1,361 5,000 6,361 100
The costs presented above are based on a total amount available for the five-year pilot phase of the project amounting to US$1,361,000. This sum represents the expected net return from the investment of the US$5.0 million capital of the fund. The figures above were computed based on the spending rule described in Annex 2 of the attached Technical Report, and are limited to the resources which are pledged to date. As new resources are obtained, the program will be expanded accordingly, based on the priorities established by the Board of Directors and in accordance with the National Strategy for the Conservation and Management of Peru's Protected Areas.
1/ No physical or price contingencies are included as the investments will be limited to the amount of money available to the program each year. ScheduleB
PERU
GLOBAL ENVIRONMENT FACILITY
NATIONAL TRUST FUND FOR PROTECTED AREAS
Summaryof ProcurementArrangements
Given the unique nature of this project, the standardprocurement arrangementswould not be meaningful, since the exact project activitiescannot be predicted beforehand. Procurementconcerns would be minimal, however, since expendituresderiving from this grant are not expectedto exceed US$300,000per year. Expenditureswould involve mainly salaries, maintenancematerials for park infrastructure, and minor equipment. To ensure compliancewith Bank procedures, PROFONANPE will prepare for review by the Bank, a specificprocurement program in the context of its annual operating plan, based on the followingguidelines: Civil works under the project would be small and geographicallydispersed. They would include small civil works such as the constructionof park guard posts. Since the largest contract is not expectedto exceed US$300,000,it is unlikelythat foreign contractorswould be interested. Civil works contractsup to US$300,000would be procured using local shoppingprocedures (obtainingat least three quotationsfrom any eligible contractor). Contracts for goods are not expectedto exceed US$50,000per contract, and would be awarded through local or internationalshopping. Contracts for civil works above US$300,000and contracts for goods above US$50,000, would be awarded in consultationwith the Bank in accordancewith procedures to be agreed upon in each case. The selectionand appointmentof consultantswould be made in accordance with the August 1981 Guidelinesfor the Use of Consultantsby World Bank Borrowers and by the World Bank as ExecutingAgency. Contractswith consultingfirms valued at US$50,000 or more would be subject to prior Bank review (terms of reference, letter of invitation, recommendationfor award and proposed contract). For individualconsultants, prior Bank review (terms of reference, qualificationsand conditionsof employment)would be required for contracts valued at US$20,000or more. Belowthese limits, the Bank's prior review would apply only to terms of reference. The use of standard documentationfor the employmentof consultants(letters of invitationand forms of contract) would be agreed with PROFONANPE.
Summary of Disbursement Arrangements
Estimated Schedule of Disbursement of GET Grant (US$ '000)
World Bank FY95 FY96 FY97 FY98 FY99 FiscalYear Annual 5.0 0 0 0 0 Cumulative 5.0 5.0 5.0 5.0 5.0 - 12 - Schedule C
PERU
GLOBALENVIRONMENT FACILITY
NATIONALTRUST FUND FOR PROTECTEDAREAS
Timetable of key project processingevents
Time Taken to Prepare: 31 months (December1991 to June 1994)
Prepared By: Ministry of Agriculture,PROFONANPE, and the NGO Working Group in support of PROFONANPE
World Bank: Claudia Alderman(LA1RF), Rudolf Van Puymbroeck(LEGLA), Alberto Ninio (LEGEN).
First Bank Mission: December 1991 Appraisal Mission Departure: July 1994 Date of Negotiations: January 1995 Planned Date of Effectiveness: April 1995 Summary SupervisionPlan: Given the open-endednature of the proposed project, and the practical difficulty of continuingsupervision into the indefinite future, it is expectedthat supervisionwould take place for three to five years. The decision concerningthe termination or extensionof supervisionbeyond five years will be based on the Bank's examinationof project performance,specifically, by evaluatingwhether the project has met its objectives. The criteria which will be used to evaluate the success of the project can be found in Annex 6. The Bank and PROFONANPEwould jointly conduct a mid-term review to evaluate the project implementationarrangements and its effectivenessin the protected areas themselves. This review would serve to fine-tunethe project and serve as the launching point for the concerted fund-raisingeffort to increase the trust fund's capital. Technicalexpertise: institutionalspecialist, ecologist,social scientist, financial analyst. Part II: Technical Annexes
CURRENCY EQUIVALENTS
Currency Unit=New Sol US$1.0 = 0.4576 New Soles US$1.0 = 1.6044 Deutsche Mark
WEIGHTS AND MEASURES
The metric system is used throughout the report
FISCAL YEAR
January 1 - December 31
GLOSSARY
CIDA Canadian International Development Agency DGAPFS Directorate General of Protected Areas and Wildlife (Direccion General de Areas Protegidas y Fauna Silvestre) FONANPE Trust Fund for the Conservation of Peru's Protected Areas (Fondo Nacional para Areas Naturales Protegidas por el Estado) GEF Global Environment Facility GET Global Environment Trust GOP Government of Peru GTZ Deutsche Gesellschaft fir Technische Zusammenarbeit GmbH INRENA National Institute of Natural Resources (Instituto Nacional de Recursos Naturales) NGO Non-Governmental Organization PROFONANPE The entity created as a not-for-profit entity of public interest but under private law to administer the assets of PROFONANPE (Pro Fondo Nacional para Areas Naturales Protegidas por el Estado) SINANPE National System of Natural Areas Protected by the State (Sistema Nacional de Areas Naturales Protegidas por el Estado) TC Technical Committee
April 19, 1995 2:18pm
PERU GLOBAL ENVIRONMENT FACILITY
NATIONAL TRUST FUND FOR PROTECTED AREAS
PART II: TECHNICAL REPORT
Table of Contents
I. BACKGROUND AND COUNTRY SETTING ...... - Introduction ...... - Legislation, Policy, and Institutional Framework ...... 2. -
II. THE PROJECT ...... 4- Project Objectives ...... - Project Description ...... - Project Components ...... 5. -
III. PROJECT COSTS AND FINANCING ...... 6- Project Costs and Financing ...... 6.6 - Procurement ...... - Disbursement ...... 7 - Accounts and Auditing ...... 7.7 -
IV. PROJECT ORGANIZATION AND IMPLEMENTATION ...... 8. - Board of Directors ...... 8. - Project Coordinating Unit (PCU) ...... 8. - Technical Committee ...... 8.8 - Bylaws ...... - Annual Work Programs and Progress Reports ...... - Asset Management Arrangements and Investment Guidelines. .... 9...... 9 - Project Supervision ...... 10 - Program Monitoring ...... 10 - Reporting Requirements ...... - 10 - Mid-term Review ...... - 10 - Implementation Completion Report ...... - 10 -
Annex 1: Summary of Peru's Protected Areas ...... - 11 -
Annex 2: Financial Analysis and Management ...... - 13 -
Annex 3: Description of the GTZ-Financed Program ...... - 19 -
Annex 4: Description of the Protected Areas Supported Under the Trust Fund ...... - 20 -
Annex 5: Terms of Reference for the Technical Committee of PROFONANPE ...... - 24 -
Annex 6: Monitoring and Evaluation ...... 25 -
Annex 7: Project Eligibility and Selection Criteria ...... 28 -
Annex 8: PROFONANPE's Administrative Costs ...... - 31 -
Annex 9: Selected Documents Available in Project File ...... 32 -
PERU GLOBALENVIRONMENT FACILITY NATIONALTRUST FUND FOR PROTECTEDAREAS TECHNICALREPORT I. BACKGROUNDAND COUNTRYSEITING 1. Introduction. The Governmentof Peru (GOP) is committedto developinginnovative mechanismswhich would guaranteethe appropriate managementof the country's protected areas and biodiversity. To this end, in 1992, the GOP created the Fondo Nacional para Areas Protegidaspor el Estado (FONANPE),as a trust fund to provide long-term,sustained fundingfor Peru's protected areas. At the same time, the Governmentcreated PROFONANPEas a private, not-for-profit institutioncharged with managingthe trust fund. PROFONANPEis governed by a Board of Directors which includes representativesfrom the government,the NGO communityand international cooperationagencies. The Board compositionreflects a decision on the part of the GOP to forge a partnership between the public and private sectors for the managementof Peru's protected areas. 2. The Country Setting. With a surface area of 1.28 million square kilometers, Peru is the third largest country in South America, and the largest in the tropical Andeanregion. The country is divided into three geographicalzones -- coast, sierra and selva. Within the three zones there is a large array of habitat types which can be classifiedinto 11 eco-regions, 16 biogeographical provinces, and 101 life zones and transitions. This habitat diversity has resulted in one of the greatest varieties of flora and fauna on Earth.
3. Flora and Fauna. Peru ranks as one of the biologicallymost importantcountries in South America, and among the handful of megadiversitycountries in the world. It contains a higher proportion of the species-richforests of Western Amazoniaand the tropical Andes than any other country. Peru has an estimated 18 percent of the bird species, 9 percent of the mammals, and 7 percent of the amphibiansin the world (see Table 1). Two of its large protected areas, Manu BiosphereReserve and Tambopata-CandamoReserved Zone, contain the world's highest recorded diversities for birds, mammals, reptiles, amphibians,freshwater fishes, all vascular plants, trees, butterflies, and invertebrates. Endemism(i.e. species unique to Peru) for vertebrate species is also extremelyhigh. A study in 1987 by Brack recorded the followingnumber of endemic species: 50 fish species, 90 bird species, 35 mammalianspecies, 69 speciesof reptiles and 28 species of amphibians. There is little doubt that with additionalfield work this list would increase substantially. The richest concentrationsof species and endemismoccur in the eastern Andean slopes because of their high year-round rainfall and relativelyfertile soils. The Peruvian Amazon also contains an extraordinaryassemblage of species: in the Iquitos area in northern Peru, for example, a single hectare of tropical rain forest has been found to contain 300 species of trees, by far the highest heterogeneityon Earth. TABLE 1 Percent of Total Neotropicaland World SpeciesFound in Peru
Taxonomic No. % of % of World Group Species in Neotropics
______P er-u _ _ _ _ Mammals 359 29 9 Birds 1680 44 18 Reptiles 298 12 5 Amphibians 241 13 7 VascularPlants 30,000 20 8 4. Peru's Natural Resource Base. Peru has been and will continueto be dependentupon its natural resources for social and economicdevelopment. There are many potential timber and non- timber products which, if properly developedthrough sound and sustainablepractices, could serve significantlyto increasethe income and well-beingof rural and urban communitiesthroughout the Amazon region and other parts of the country. 5. The importance of Peru's biodiversityon a global scale cannot be overstated. Peruvian germplasmhas played a substantialrole in agriculturalinnovations in the past, and today is critical to plant production research around the world. Potatoes, tomatoes,beans, peanuts, guava, peppers, squash, varieties of corn and many other forest and animal products are native to and abundant in Peru and have figured prominently in the Peruvian diet for thousands of years. There is little if any current research, however, on the vast majority of Peru's native tropical plants and food crops, nor are there data on the demand and supplyof these products for national and internationalfood markets. 6. Approximately60 percent of Peru is covered by forest, with the Amazonianregion consisting mainly of tall, moist tropical forests. These species-richforests provide an untapped resource for the social and economicimprovement of communitiesin the Peruvian Amazon and in other rural and urban areas of Peru, as well as in other countries. For example, medicinalplants such as cinchona (for quinine) and curare (used in heart surgery) have assumed worldwide importance. New plants of medicinalimportance are continuallybeing discovered, with many coming from the traditionalknowledge held by indigenouspeoples in Peru's lowland selva. 7. Legislation, Policy, and Institutional Framework. In late 1990, the Peruvian Congress passed an environmentalcode that contains several important conservationprovisions. The code took the positive step of abolishinglegislation which provided incentivesfor colonizing Amazonia. Furthermore, the code requires the preparationof an environmentalimpact statementfor any activity in Amazonia-- whether public or private. From 1993 through 1994, additional legislationwas passed requiring environmentalimpact studies for investmentsin the developmentof mining, industry and fishing. 8. Despite these legislativeefforts, however, Peru may have difficultyeasing the pressures on its natural resources. After a decade of severe economicand political crisis, Peru is significantly reformulatingits policies, setting the stage for economicrecovery. It has already succeededin dramaticallyreducing the inflationand terrorist activity that crippled the nation until very recently. These changes have already resulted in a substantialincrease of tourists and will imply a large influx of tourists within the next few years and, more importantly,a substantialincrease in investmentsto exploit Peru's natural resources (in particular timber, petroleum, natural gas and gold reserves). If not managed, these activitiespose real threats to the conservationof the country's biological wealth. Additionally,in spite of probable improvementsin rural living conditions,the governmentmay be unable to slow the surge of settlementof the Amazonianlowlands as peasants try to escape the pervasive poverty in the highlands. 9. Despitethese problems, however, Peru has managedto set aside major parks covering a variety of ecosystems. Indeed, some of the parks, such as Manu, protect a contiguousrange of habitats -- from lowlandforests to cloud forests at 14,000 feet, and highland puna grasslands. Many of these parks, although potentially"islands," are sufficientlylarge to minimizethe risk of local species becomingextinct. Encouragingly,moreover, the legislationrelated to protected areas in Peru is comprehensiveand sound. In 1990, the NationalSystem of Natural Areas Protectedby the State (SINANPE)was created by PresidentialDecree. Totalling5.5 million hectares, the system encompasses7 national parks, 8 nationalreserves, 2 hunting reserves, 7 national sanctuariesand 3 historic sanctuaries. These protected areas, in combinationwith 5 national forests, 6 protected forests and I communal reserve, cover over six percent of the national territory. A list of all Peru's protected areas, including their location and size can be found in Annex 1. In 1993 the government created the National Institute of Natural Resources (INRENA), which brings together the expertise of all public agencies involved with the management and conservation of Peru's renewable natural resources.
10. Peru's legislative and institutional efforts notwithstanding, the GOP has been unable to devote sufficient resources to its conservation areas. Only four national parks receive any management services through INRENA. Even when some resources are devoted to an area, they are insufficient: Machu Picchu, for example, which benefits from the strongest management of any unit in the system, continues to experience management problems due to the large number of visitors as compared to availability of park guards and visitors' services. Park staff, from guards to office administrators, frequently are inadequately trained. The lack of adequate staff stifles the parks' potential for conservation, research, recreation and revenue generation. The 1991 Tropical Forestry Action Plan reports that the park system employs 110 park guards for 5.5 million hectares, or one guard per 50,000 hectares2/. This index is only one among many that may be construed to indicate the severe deficiency of administrative and managerial inputs. To make matters worse, in 1992 a significant portion of these guards left their jobs due to termination of contracts, low morale and lack of resources. With the Government absent from the parks, most of the limited management in a few protected areas is carried out by Peruvian NGOs. The level of management provided varies, however, from area to area and from time to time depending on the financial situation of the NGO(s) involved. Only recently has INRENA started to hire new personnel for the park system, though under very restricted conditions.
2/ IUCN recommendsas a general guidelinea figure of I park guard per 5,000 ha. for park and reserveswith dense forest systems. Accordingto the objectivesof the area, however, these figures may vary. Machu Picchu, a well visited tourist attraction, probablyneeds a higher number of guards than the IUCN recommendation. Other areas such as Manu and TambopataCandamo probably need less as access is difficult and can be better controlled than areas with well-developedroad systems. - 4 -
11. THE PROJECT
11. Project Objectives. The project has four major objectives, to: (i) provide a long term and predictablesource of funding for the protectionof Peru's biodiversitythrough the establishment of a trust fund for the benefit of Peru's protected areas, the income of which would be used for financingthe managementof priority protected areas; (ii) improve INRENA's capacity to protect and manage Peru's protected areas; (iii) provide the country with a reliable institutionalmechanism to channel debt donationsfor sustainabledevelopment and conservationthrough bilateral and commercial debt-for-natureswap agreements;and (iv) test the viabilityof trust funds as mechanismsfor providing long term and sustainablefunding for biodiversityconservation. 12. ProjectDescription. The Fondo Nacionalpara Areas Protegidaspor el Estado (FONANPE), was created by the GOP as a trust fund with the goal of providing long-term, sustained funding for Peru's protected areas. At the same time, PROFONANPEwas establishedunder private law as a not-for-profitinstitution to manageFONANPE and to direct the use of the investment proceeds. In anticipationof the GEF grant, and on the bases establishedby the preparationof this project, PROFONANPEstarted operating in June 1993under a grant from the German technical cooperationagency, the "Deutsche GesellschaftfllrTechnische Zusammenarbeit GmbH (GTZ)." During its first year, PROFONANPEhas strengtheneditself as an organizationby conductingan institutionalstrategic planning exercise involvinga dozen NGO's, developedcriteria for managingits small grants program and issued requestsfor proposals, and negotiatedPeru's first debt-for-nature swap. 13. To support PROFONANPE,the Global EnvironmentTrust (GET) would provide US$5.0 million as seed money for the Peruviantrust fund. In keeping with the GEF's goal of using its resources to leverage additionalfunds, the GET grant is being complementedby a separate parallel grant of US$1.5 million from the GTZ. While the German grant does not form part of the capital of the trust fund per se, this contributionwill help to consolidateand strengthenthe GOP's capacityto coordinate all Peruvian conservationefforts and will lay the basis for the conservationactivities supportedby the trust fund. Moreover, GTZ's contributionwill provide essentialoperational funds during the pilot phase of PROFONANPEuntil the trust fund reaches a sufficientsize to sustainably finance the project activitieswith its income. 14. The GET grant would be placed in FONANPE,a trust fund legislativelyestablished in Peru. The fund's assets would be managedby a Peruvian investmentBank, accordingto investment objectives and guidelinesspecified in the Project Agreement. These guidelineswould specify the investmentrisk profile and the acceptabletrade-offs between growth of the total value of the investmentcapital and the stabilityof annual income flows. Part of the investmentincome generated each year would be spent to finance conservationactivities in Peru, while a predeterminedamount of the incomewould be reinvestedto maintainthe real value of the principal. A discussionon the Peruvian capital markets, the process used to select the asset manager, investmentguidelines and expectedreturns can be found in Annex 2.
15. The by-laws governingthe operation of FONANPEwere drafted by a working group comprised of representativesfrom the GOP and from seven Peruvian conservationNGOs 3/. This
3/ The Peruvian NGOS participating in the project preparation working group were the following: Asociacion para la Conservacion de la Selva Sur, Amazonia, Asociacion Peruana de Conservacion, Centro de Datos para la Conservacion, Fundacion Peruana para la Conservacion de la Naturaleza, Sociedad Pachamama, Sociedad Peruana de Derecho Ambiental. In addition, representatives from The Nature Conservancy and Conservation International also contributed to the preparation of the project. group also developedcriteria for selectingthe protected areas which would be initially supportedby the project. These criteria include: (i) the global importanceof the area for biodiversity conservation,in terms of species diversity and endemism;(ii) the relative feasibilityof management; and (iii) the degree of environmentalimpact resulting from human activity. Althoughseveral protected areas meet these criteria, given resource constraints,three priority areas were selectedfor initial support by the trust fund: Manu NationalPark and BiosphereReserve, Rio Abiseo National Park, and Noroeste Biosphere Reserve (composedof the Cerros the Amotape National Park, Coto de Caza el Angolo, Tumbes National Forest and Manglaresde Tumbes National Sanctuary). A descriptionof each area, includingplanned interventionsand results, can be found in Annex 4. As FONANPE's capital increases through additional contributions,other protected areas will be integrated into the program, based on the criteria described above as well as the guidelinesof the National Systemof Protected Areas Master Plan, and the NationalStrategy for the Conservationand Managementof Peru's Protected Areas, currently under development. 16. Project Components. The proceeds of the GET grant during the five-year pilot phase of the project would be used to finance a variety of conservationactivities in the selected areas and their buffer zones. Annex 7 summarizesproject eligibilityand selection criteria. The activities eligiblefor funding include:
* Financing the recurrent costs of protected area management(mainly staff salaries and operating expenses) * Drafting, revising and implementingmanagement plans * Establishingand managingbuffer zones * Training professionalsin park and wildlifemanagement * Institutingenvironmental education and public awarenessprograms for communitiesassociated with protected areas * Implementingprojects that integrateconservation and developmentto benefit the communities living in the protected areas and their buffer zones * Institutionalsupport for the strengtheningof the field work of INRENA's Directorate General of NationalProtected Areas and Wildlife * Administrativeexpenses of PROFONANPE.
17. GTZ Funded Activities: The complementaryactivities financed separately by the GTZ include: (i) support to INRENA in the form of infrastructure,equipment and training; (ii) developmentof a master plan for the managementof all protected areas in the country; (iii) hiring of consultantsto provide technical support to INRENA; (iv) institutionbuilding and operational costs of PROFONANPE;and (v) a two-year program of small grants for NGOs to support sustainable developmentand conservationprojects. A detailed descriptionof the GTZ project activitiescan be found in Annex 3. - 6 -
III. PROJECT COSTS AND FINANCING
18. Project Costs and Financing. Expected expenditures over the five years of Bank involvement amount to US$1,361,000 equivalent, which represents the projected net income of the trust fund for that period of time. The GET initial contribution of US$5.0 million will serve to capitalize the fund, while the separate GTZ contribution amounting to US$1.5 million would provide funds for operating costs in the first year of the program. Although the GTZ contribution will not form part of the investment capital of the trust fund per se, this donation serves the key function of providing the up-front financing needed to lay the basis for the conservation activities supported by PROFONANPE in ensuing years.
19. Initial donations by the Canadian International Development Agency provided PROFONANPE with office space and fully equipped offices in Lima. The operating costs of PROFONANPE, which approximate US$150,000 per year, are being covered in their totality by the GTZ grant for the first year of the project. After this time, administrative costs would be covered out of the trust fund's income, or by other donors. Consistent with the experience of other small trust funds, such as the ones in Bhutan and Uganda, the administrative costs for the first few years of the project constitute a relatively high percentage of the total income of the fund. As the trust fund grows, however, the ratio of administrative costs to income available for program activities would decline. In this particular case, as the trust reaches its expected level of capitalization of at least US$40 million, the administrative costs will represent under 10 percent of net income. Assuming that PROFONANPE reaches its capitalization goal by raising an additional US$5 million the first year, US$7 million the second year, US$8 million the third year, and US$7.5 million each in years 4 and 5, the respective administrative cost ratios would be 0%, 29%, 17%, 11 % and 9% for years one through five of the project. Regardless of the level of capitalization of the fund, however, the Project Agreement specifies that PROFONANPE's administrative costs for 1995 will not exceed US$150,000 per year, and will not grow by more than five percent per year thereafter, without explicit consent of the Bank (see Annex 7 for a detailed table of PROFONANPE's expenses).
20. Expenditure amounts are based on the assumption that the trust fund does not receive any additional contributions. To put this "worst case" scenario in perspective, however, it is useful to realize that even this limited level of funding would result in a threefold increase to the resources currently allocated by the government to protected areas. As new resources are obtained, PROFONANPE's program will be expanded accordingly, based on the priorities established by the Board of Directors and in accordance with the National Strategy for the Conservation and Management of Peru's Protected Areas. Specific details on PROFONANPE's spending rule, financial arrangements and projections are described in Annex 2.
21. The specific allocation of funds generated by the trust's investments will be determined by PROFONANPE's Board of Directors, based on work programs submitted by the selected protected areas. For the duration of the project supervision period, the Bank will have the opportunity to comment on the work programs, prior to PROFONANPE's Board approval.
22. PROFONANPE has set a target of US$40 million of principal for the trust fund. It has already begun efforts to raise these funds both from direct contributions and as debt-for-nature-swaps. As its first fund-raising success, PROFONANPE has negotiated the first ever debt-for-nature transaction in Peru through a bilateral debt donation from Canada for Can$ 500,000. Germany and Finland have committed additional bilateral debt donations to be channelled through PROFONANPE. Formal commitments to channel additional funds for park conservation projects have been recently made by the Amazon Cooperation Treaty, and the Dutch Technical Aid agency. Also, negotiations are under way for a second tranche of support from Germany for an additional US$1.5 million. To tap local resources, PROFONANPEwill invite carefully selected, influentialindividuals interested in Peruvian environmentalaffairs to join an informalboard or patronato. While the group will have no effective power, it is expected that the group will help mobilize local and internationalresources particularly in the private sector. Finally, after the project's mid-term evaluation, PROFONANPE and the governmentwill organize a round table of donors to help reach the target amount of US$40 million for the trust fund.
23. Procurement. Given the unique nature of this project, the standardprocurement arrangementswould not be meaningful,since the exact project activitiescannot be predicted beforehand. Procurementconcerns would be minimal,however, since expendituresderiving from this grant are not expected to exceed US$300,000per year. Expenditureswould involve mainly salaries, maintenancematerials for park infrastructure,and minor equipment. To ensure compliance with Bank procedures, PROFONANPEwill prepare for review by the Bank, a specificprocurement program in the context of its annual operatingplan, based on the guidelinesfollowing guidelines: Civil works under the project would be small and geographicallydispersed. They would include small civil works such as the constructionof park guard posts. Since the largest contract is not expectedto exceed US$300,000,it is unlikely that foreign contractorswould be interested. Civil works contractsup to US$300,000would be procured using local shoppingprocedures (obtainingat least three quotationsfrom any eligible contractor). Contracts for goods are not expectedto exceed US$50,000 per contract, and would be awarded through local or internationalshopping. Contracts for civil works above US$300,000and contractsfor goods above US$50,000, would be awarded in consultationwith the Bank in accordancewith proceduresto be agreed upon in each case. The selection and appointmentof consultantswould be made in accordancewith the August 1981 Guidelinesfor the Use of Consultantsby World Bank Borrowers and by the World Bankas Executing Agency. Contracts with consultingfirms valued at US$50,000or more would be subject to prior Bank review (terms of reference, letter of invitation,recommendation for award and proposed contract). For individualconsultants, prior Bank review (terms of reference, qualificationsand conditionsof employment)would be required for contracts valued at US$20,000or more. Below these limits, the Bank's prior review would apply only to terms of reference. The use of standard documentationfor the employmentof consultants(letters of invitationand forms of contract)would be agreed with PROFONANPE. 24. Disbursement. The total grant amount would be disbursed in one lump sum to the trust fund establishedin Peru as specifiedin the Grant Agreement. The asset manager would make quarterly wire transfers of the trust's income(within the limits establishedby the spendingrule) to PROFONANPE'sdollar-denominated account in Peru. PROFONANPE'scoordinator would be authorized to make payments to suppliersor consultantsin accordancewith requests submittedby the managers of the selected protected areas, based on the expendituresspecified in the annual work program approvedby PROFONANPE'sBoard of Directors, and reviewed by the Bank. In accordancewith PROFONANPE'soperating proceduresthe funds received from each donor will be maintainedin separate accounts. 25. Accountsand Auditing. PROFONANPE'sBoard would contract the services of an independentauditing firm to carry out an annual audit of the finances of the project and of the trust fund. The auditors will review the project's financial records to determine if the expendituresmatch the approved work program and if satisfactoryprocedures of record-keepingare being used. The auditor's report will be forwarded by PROFONANPEto the Bank no later than four months after the close of PROFONANPE'sfiscal year. To ensure adequaterecord-keeping procedures, a management services consultingfirm developedwritten procedures and guidelinesfor financial accounting specificallysuited to the project. (Refer to the Manual of Norms and Procedures for - 8 - PROFONANPE,January 1994, and the Manualof Organization,Functions and Policies for PROFONANPE,January 1994, in the project files). As part of the assignment, this firm also provided training to the project coordinatorto ensure that the guidelineswere clearly understood and correctly implemented. This preparatory work should facilitate the subsequentwork of the auditors, and ensure transparency, comprehensivenessand accuracy in record keeping. IV. PROJECTORGANIZATION AND IMPLEMENTATION 26. Board of Directors. PROFONANPEis governed by a Board of Directors, composedas follows: three representativesfrom the Peruvian government,three representativesfrom Peruvian conservationNGOs elected by the Peruvian EnvironmentalNetwork, (initially,the Sociedad Pachamama, Sociedad Peruanade DerechoAmbiental, and Desarrollo Comunitario)and a representativefrom an internationalcooperation agency (initially,the GTZ). One of the government representativeswill assume chairmanshipof the Board. The Board responsibilitieswill include: (i) approving the annual work programs and budgets; (ii) reviewingthe reports of the project coordinator, protected area managers, and auditors; (iii) dealing with policy issues; (iv) carrying out other responsibilitiesas specifiedin PROFONANPE'sbylaws. 27. Project CoordinatingUnit (PCU). Project managementand administrationwill be carried out by a PCU under the leadershipof the Project Coordinator, who is appointedby the Board. The project coordinatorwill be responsiblefor: (i) day-to-daymanagement and administrationof PROFONANPE's activities4/; (ii) ensuringthat all accountingand records are kept accordingto establishedprocedures; (iii) preparing the annual analysisof needs and requirementsfor each protected area and the correspondingwork program, in coordinationwith INRENA; (iv) oversightof implementation,reporting and evaluation;(v) reporting to the Board regarding the status of project activities; (vi) liaison and coordinationbetween the Board of Directors, the GOP, donors, and the technical committee; and (vii) fundraisingto increasethe capital of the trust. 28. TechnicalCommittee. The Board will be advised by a TechnicalCommittee composed of specialists in technical areas pertaining to the operationsof PROFONANPEand program beneficiaries. It shall have in particular scientistsand natural resource managementexperts experiencedin park and wildlife management,and rural development. A sub-set of the committee will be comprised of financial experts, so as to advise PROFONANPEon financial matters. This committee will also be responsiblefor developingthe guidelinesfor monitoringand evaluationof the project, and for providing an annual evaluationof the performanceof the asset manager. The Tecnical Committee is an additional forum in which relevant conservationNGOs may contribute substantivelyto the project. Annex 5 contains the committee'sterms of reference. 29. Bylaws. The by-laws that govern the operation of PROFONANPEwere approved by its Board on December 1993. These bylaws can be found in the project files.
30. Annual Work Programs and Progress Reports. Decisionsabout the allocationof resources within each protected area will be based on an annual work program developedby the Project Coordinator, in coordinationwith INRENA. The work program will reflect an analysisof the requirements and needs of each area, and will be based on the Master Plan for the National Systemof Natural Areas Protectedby the State (SINANPE)and the managementplan and/or operatingplan of
4/ The actual day-to-dayimplementation of project activitieswould be handled by the personnel of the protected areas themselves, INRENA, NGOs, universities, etc. as specified in the annual work plan of each protected area. - 9 - each conservationunit. Given the project's commitmentto the principlesof local participation in conservationdecisions, the work program will be developedin consultationwith each protected area's administrativeofficer, local committees(where they exist), park officers, grassroots organizationsand local communities. The annual work program will includea statement of specific objectivesto be pursued during the year and the activitiesto be undertaken in order to achieve those objectives. Where appropriate, work programs will designatethose activitiesto be carried out by the Directorate General of Protected Areas and Wildlife (DGAPFS) and those componentswhich could be implementedby NGOs, universitiesor consultingfirms. The Board of PROFONANPEwill send the annual work programs to the Bank for comment no later than November 15 of each year. (See Annex 7 for a detailed summary of project eligibilityand selectioncriteria.)
31. PROFONANPE'scoordinator will prepare for presentationto INRENA and the Board a report of the preceding year's activities and accomplishments.This report will assist the Board and the TC in their evaluationof the performanceof each protected area. Moreover, the report would serve as the basis for the preparationof the progress report which the Board will present to the Bank by April 1 of each year for the length of project supervision. 32. Asset Management Arrangements and Investment Guidelines. The fund's assets would be managed by a Peruvian investmentbank, accordingto investmentobjectives and guidelines specified below. These guidelinesdefine the investmentrisk profile and the acceptabletrade-offs between growth of the total value of the investmentcapital and the stability of annual incomeflows. Part of the investmentincome generated each year would be spent to finance conservationactivities in Peru, while a predeterminedamount of the incomewould be reinvestedto maintain the real value of the principal. Given the project's objectives,PROFONANPE's investment strategy will seek to maximizetotal return, includinginterest, dividendsand capital appreciation,while safeguardinga minimum level of annual incometo maintainthe real value of the capital and cover operating expenses and grant commitments. PROFONANPE'sinitial investmentguidelines are detailed in Annex 2.
33. Reporting Requirements for Asset Manager The investmentmanager will prepare quarterly reports for PROFONANPEincluding a full accountingon changes in market value, total returns and cash distributions.
34. Performance Evaluation. For purposesof evaluatingthe investmentmanager's performancerelative to this objective, an initial benchmarkof 10 percent (dollarized, nominal return) will be used. For reference purposes, this level approximatesa 500 basis point spread over the current "tipmex"(the deposit rate on foreign exchangecertificates of deposit, and a local benchmark used for evaluatingfixed incomeinvestments), and the year-to-date 1994 gain on the Lima Stock Exchange. Following a review of the investmentmanager's performancein the initial two years, another type of benchmark could be considered such as a weighted average index of the tipmex plus a spread for the fixed income componentand the official Lima Stock Exchangeindex for the equity portion of the portfolio. 35. PROFONANPE'sfinancial experts appointedto its technicalcommittee will conduct an annual evaluationof the investmentperformance. While the Peruvian market is anticipatedto yield satisfactoryresults over the next few years, these high returns may not be sustainableover the long term. The Board of Directors will therefore reserve the right to reconsider alternativeinvestment managementoptions, includingoffshore markets, and if necessarywill make adjustmentsunder terms of reference satisfactoryto the World Bank. - 10 -
36. Project Supervision. Given the open-endednature of the proposed project, and the practical difficulty of continuingsupervision into the indefinitefuture, it is expectedthat supervision would take place for three to five years. The decision concerningthe terminationor extension of supervisionbeyond five years will be based on the Bank's examinationof project performance, specifically,by evaluatingwhether the project has met its objectives. The impact of the project on the protected areas will be evaluated against the baseline informationcollected during project preparation and summarized in the backgroundpaper on each of the selected areas titled: "Informe sobre las Areas Protegidas Seleccionadaspara Apoyo por el GEF." The criteria which will be used to evaluate the success of the project as a whole can be found in Annex 6. 37. Program Monitoring. The goals of monitoringand evaluationfor the project are: (i) to evaluate the long-term effectivenessof the private trust fund mechanismfor biodiversity conservation;(ii) to determinethe optimal institutional,legal and financial arrangementsfor such a mechanism; and (iii) to evaluate what can be "bought"in terms of biodiversityconservation (and institutionalcapacity-building) by the trust fund. The success of the project is measured ultimatelyin biodiversityprotection, while satisfactoryinstitutional and legal arrangementsand asset performance are only means to this end. A descriptionof the proposed monitoringand evaluation arrangements and indicatorsis found in Annex 6.
38. ReportingRequirements. Prior to the Board's approval of the annual work programs, PROFONANPEwill provide the Bank with the opportunityfor review and comment. In addition, PROFONANPEwill submit an annual project progress report by April 1 each year. This report will includethe reports prepared by each protected area manager summarizingthe preceding year's activities and accomplishments,as well as an overall evaluationof the operation of the program. 39. Mid-term Review. PROFONANPEand the Bank would conduct a mid-term review at the end of 1997 to evaluate its implementationarrangements, its on-the-groundeffectiveness in the protected areas themselves, and the performanceof the asset manager. This review would serve three functions: (i) fine-tunethe project and determine any needed modifications;(ii) evaluate investment performance; and (iii) serve as the launchingpoint for the concerted fund-raisingeffort to increase the trust fund's capital. Furthermore, if the mid-term review shows a clear accomplishmentof the project objectives, it would provide interestedbut presently cautiousdonors with specific evidence of the merits of environmentaltrust funds.
40. ImplementationCompletion Report. Given that the Bank will make a one time disbursement,the project closing date (the latest date in which the GOP may withdrawthe proceeds of the grant) will be defined as one year from the date of effectiveness. The Grant and Project Agreementswill have a duration of twenty five years. PROFONANPEwill prepare an ImplementationCompletion Report within three months of the end of the Bank's supervisionperiod. Since the trust fund has no finite time frame, the ImplementationCompletion Report will relate to implementationperformance during the length of the Bank's supervisionperiod. -11- ANNEX 1
Annex 1: Summary of Peru's Protected Areas
by Category, Location, Year Established, Surface Area and IUCN Category
Category Location Year Area (Ha.) 91UCN Category
National Parks
P.N. CUTERVO Cjamurca 1961 2,500.0 D National Park P.N. CERROS DE AMOTAPE Tumbes. Piura 1975 91,300.0 H National Park P.N. HUASCARAN Ancash 1975 340,000.0 U National Park P.N. MANU Madre de Dioa, Cuzco 1973 1,532,806.0 U National Park P.N. RIO ABISEO San Martin 1983 274,520.0 U National Park P.N. IINGO MARIA Huanuco 1965 18,000.0 U National Park P.N. YANACHAGA Pasco 1986 122,000.0 D National Park
National Reserves
RN. JUNIN Junin 1974 53,000.0 I Strict Nature Rearve RN. LACHAY lima 1977 5,070.0 IV Managed Nature Reaerve RN. PARACAS Iea 1975 335,000.0 IV Managed Nature Reaerve RN. PAMPA GALERAS Ayacucho 1967 6,500.0 IV Managed Nature Reserve RN. TITICACA Pino 1978 36,180.0 1 StrictNatureReerne R.N. SAIUNAS-AGUADABLANCA Arequipa 1979 366,936.0 IV Managed Nature Resere RN. PACAYA-SAMIRIA Loreto 1972 ,800,000.0 I Strict Nature Reserve R.N. CALIPUY La Lbertad 1981 64,000.0 IV Managed Nature Resere
National Sanctuaries
RN. IHUAYLLAY Pasco 1974 6,815.0 mINatural Monument S.N. CAIIPUY La LAbertad 1981 4,500.0 III Natural Monument S.N. PAMPAS DEL HEATH Madrede DioB 1983 102,109.0 HI Natural Monument S.N. LAGUNAS DE MEJIA Arequipa 1984 690.6 [V Wildlife Sanctuairy S.N. TABACONAS-NAMBALLE Cajamarca 1988 29,500.0 III Natual Monument S.N. AMPAY Apurimac 1987 3,635.5 Im Natu-l Monument S.N. MANGLARES DE TUMBES Tumbes 1988 2,972.0 IV Wildlife Sanctuary
Historic Sanctuaries
S.H. PAMPAS DE AYACUCHO Ayacucho 1980 300.0 V Protected Landacape S.H. CHACAMARCA Junin 1974 2,500.0 V Protected Landacape S.H. MACHUPICCHU Cuzco 1981 32,592.0 mINatural Monument
National Forests
B.N. BIABO-CORDILLERA AZUL San Martin. Loreto, Ucayali 1963 2,068,308.5 VI] Managed Resources Area B.N. MARISCAL CACERES San Martin 1963 137,448.0 VD Managed Resources Area B.M. PASTAZA-MORONA-MARANON Loreto 1963 375,000.0 VL Managed Resources Area B.N. DE TUMBES Tumbes 1957 75,102.0 VD Managed Resources Area B.N. A. VON HUMBOLDT Huanuco, Ucayali 1965 570,800.0 VL3 Managed Reource Area -12- ANNEX 1
Category LAcation Year Area (Ha.) 91UCN Calebory
ProtectodFore
B.P. ALTOMAYO San Maitin 1987 182,000.0 VIl ManagedReourca Arca B.P. DE CANEf limna 1980 18.1 VIII Manged ReaowureAre B.P. DE PAGAIBAMBA Cajamarca 1987 2,078.4 Vm3Maaged Reaourea Area B.P. PUI-PUI Junin 1985 60,000.0 VImManaed Raurces Area B.P. PUQUOSANTA ROSA Ia Libertad 1982 72.5 Vm Mawged RmourcesArea B.P. SAN MAIIAS-SANCARLOS Paco 1987 145.818.0 Vm ManagedRaourcn Area
Hunfin Pracrvea
C.C. EL ANGOLO Piun 1975 65,000.0 Vm MultipleUa ManagemmtAreS C.C. SUNCHUBAMBA Cajamarca 1977 59,735.0 VII MuhipkeUse Mangeaaet Ana
ComunalReserves
RC. YANESHA Pasco 1988 34,744.7 VllI Mnged Rerour Area 9 IUCN: InternationalUnion for the Conservationof Natr -13 - ANNEX 2
Annex 2: Financial Analysis and Management
Backgiround During the preparation of this project, several options for the investmentof the trust fund assets were considered. These included establishinga trust account in the United States for the benefit of Peru's National System of Protected Areas, or alternatively,establishing a trust fund in an offshore jurisdiction such as the Bahamas Islands. These options were deemedunsuitable due to a number of reasons, includingthe risk of attachmentof the funds by creditors of the Peruvian government. Following extensiveanalysis of these issues, it was determinedthat the optimal option from a legal perspective was to establish the fund in Peru where FONANPEenjoys express legislativefreedom from attachment,as well as other privilegessuch as tax exemption,due to its not-for-profitstatus. At the request of PROFONANPE'sBoard, a consultantundertook a thorough analysis of local investmentoptions in Peru, and on the basis of proposals solicitedfrom five leading financial institutions,prepared a recommendationfor the selectionof a local investmentmanager. The analysis was completedon August 17, 1994 and recommendeda local investmentmanager for PROFONANPE. This recommendationwas subsequentlyratified by PROFONANPE'sBoard in a meeting on August 23, 1994. The report, titled "Informepara el consejo directivo del PROFONANPEsobre la seleccionde un banco nacionalpara la administracionde los fondos del PROFONANPEen el Peru," can be found in the project's files. Analysis of the Peruvian Capital Markets Compared with the markets of the U.S., Europe and Japan, emergingmarkets are by definition less developedand characterizedby a higher degree of volatility. Due to the fact that the Peruvian stock market has only been in full operation for a period of less than three years, a meaningfulanalysis of historical results is not availableat this time. Hence, the superior returns obtained to date from emerging market instrumentsare based on a substantialrisk premium correspondingto the high level of volatility associatedwith anticipatedresults. The Peruvian financial market has experienceddynamic growth over the past few years, based on sound macroeconomicchanges undertaken by the Fujimori administrationand the corresponding confidenceof the internationalinvestment community. The recent enactmentof a new General Law on Banking, Financial and Insurance Institutions(Legal Decree 770) has substantiallyexpanded and liberalized the operationsperformed by the financial sector. Under this law, a national private pension system was established,which is expectedto capitalizethe domesticfinancial markets further. While traditional endowmentsand trust funds are not prevalent in Peru given the historic scarcity of long-term capital in this market, there are several experiencedlocal financial institutionsin Peru capable of managingthe PROFONANPEtrust account. The fact that the Peruvian market is largely dollarized facilitatesfree monetaryexchange and enhancesthe attractivenessof a local investment managementoption. The Lima Stock Exchangeset new price, volume and market capitalizationrecords for the third consecutiveyear in 1993. During 1993, the general market index rose 91% in dollars, comparedto 124% in 1992. Trading volume in stocks reached US$1.63 billion, a near four-fold increasefrom the US$409 million shares traded in 1992 and significantlygreater than the volume in 1991 (US$122.5 million). Market capitalizationnearly doubledfrom US$2.6 billion at the beginning of 1993 to US$4.9 billion by year-end 1993. Behind the market's three-year bull run were extensivemarket- -14 - ANNEX2 oriented structural reforms implementedsince 1990, increasingthe economicstability created by an IMF-monitoredstructural adjustmentprogram, and with a significantlyimproved investmentclimate for growth. Peru's GDP rose 7% in 1993, the highest level recorded in Latin America for that year. All of these factors have greatly improved the economicand financial outlook for Peruvian companies, and hence their share values. Average daily trading value levels settled at US$8 million towards the end of 1993, and are expected to approximateUS$12 million for 1994. This would take total trading to over US$3 billion in 1994, nearly double the record pace of US$1.6 billion set in 1993. Substantialincreases in trading volume and market capitalizationshould continueto result from the privatizationprocess, as it will lead to the listing of a number of new and importantcompanies on the exchange, includingEntel (telecommunications)and Electrolima(power utility). Two years ago, shares traded on the Lima Exchangewere substantiallyundervalued, accounting for the significant share appreciationnoted above. While spectacular gains are not anticipated,growth is expected to remain strong for several years, with average dollarized annual returns (nominal)in the 15-30% range, provided political stabilizationand economicreform continue. By the end of 1994, the Lima Stock Exchangecontinued to set new price, volume and market capitalizationrecords for the fourth consecutiveyear. While this market did experiencea lower trading volume in the month of December, precipitatedby the sharp devaluationof the Mexican peso and subsequentcapital flight from that market, weekly trading volumes appear to be stabilizing. The fixed income market in Peru, while relativelysmall, is growing at a rapid pace. Traditional money market instruments,such as commercialbank deposits, repurchase agreements, bankers' acceptances,Central Bank Certificatesof Deposit, treasury bonds and corporatebonds are currently yielding average annual returns of 7.5-11.5% on a dollarizedbasis. Financial Risks and MitigatingFactors
The financial risks to the GET grant to PROFONANPE,resulting from a concentrationof investmentsin Peru, have been mitigatedto the fullest extent possible in the proposed investment managementarrangement, as follows: PoliticalRisk. Due to the legal nature of the FONANPEtrust in Peru, the funds are not subject to attachmentrisk, as might be the case if the funds were investedoffshore or in a market where Peru's internationalcreditors could attempt to make a claim against these assets. In addition to attachment risk, political risk could also arise from political uncertaintiesthat would destabilizefinancial market conditions. In the case of Peru, however, it is widely believed that regardlessof the outcome of the April elections, current economicpolicies will be continued. Nonetheless,to safeguard against unanticipatedrisks in this capital market, the investmentmanagement agreement has been structured such that an average of 20% of the fund's assets will be invested offshore. In the event of a political emergency, all of the fund's assets could be transferred to this offshore account. InvestmentRisk. To the extent that investmentsare concentratedin a single emerging market, they may run the risk of high return fluctuationsand potential loss of value. For this reason, the investmentmanagement strategy for this account has been conservativelystructured to provide for a majority of the portfolio's assets (approximately70%) to be invested in domestic and international fixed incomereturns. As noted above, the internationalcomponent of this portfolio management arrangementprovides for additional diversificationinto developedmarket securities to further reduce the risk of single marketvolatility to this fund. -15 - ANNEX 2
DevaluationRisk. Emerging market investmentsthat are denominatedin local currency may run the risk of loss of value, due to currency devaluation. However, in the case of Peru, where the capital markets are largely dollarized, this risk is significantlymitigated. The FONANPEtrust account will be maintainedin U.S. dollars and all fixed incomeinvestments will be made in local currency. Sophisticatedcurrency hedging techniquesare not currently availablein emerging markets such as Peru. For dollar-denominatedportfolios, local equity investmentsare denominatedin local currency and U.S. dollar equivalent market values for this componentare determinedusing the exchangerate in effect on the reporting or trade date (in the case of a sale transaction). Short-termcurrency hedging instruments(commercial bank foreign exchangecontracts) are availableto protect the value of investmentsfrom the date the trade is negotiatedto the settlementdate (usually a 2-3 day interval). This technique will be used by InterBanc/Interlnvestfor the FONANPEtrust (associatedfees are includedin the transaction cost assumptionsfor net return expectations). While this presents some devaluation risk to the FONANPEaccount, this risk is largely mitigatedby the investmentstructure (majority of the portfolio is invested in short-termfixed income, dollar denominatedinvestments) and the solid market fundamentalsof the Peruvian economy. Inflation Risk. In a highly inflationarymarket, financial investmentsmay run the risk of loss of real capital value due to inflationerosion. In order for PROFONANPEto achieve its long-termobjective of maintainingthe real value of the trust's assets, approximately4% of the net asset value (in U.S. dollars) from the total annual return will be reinvestedannually in the fund to safeguard its real value. This annual reinvestmentprovision is specified in a spendingrule which is incorporatedin the documentationgoverning this project. With respect to local currency-denominatedequity investmentsof this trust, Peru has experienced favorable inflation trends that are expectedto continue. Basedon the local outlook for the Lima Stock Exchange, growth is expectedto remain strong for several years with average annual returns (nominal)in the 15-30% range, provided political stabilizationand macro-economicreforms continue as planned. Analysis of Proposals Investmentmanagement proposals were received from five top Peruvian financial institutions. In the Request for Proposal, these institutionswere asked to present a global investmentstrategy for the investmentof PROFONANPE'sfunds, based on a conservativerisk profile. The principal criteria used to evaluate local banks as prospectiveinvestment managers were institutionalcapacity, investmentbanking experience,substance of investmentstrategy proposals for PROFONANPE,international capability (to invest a portion of the funds offshore) and administrative costs. Based on these criteria, three banks were qualified as acceptable investmentmanagers for PROFONANPE'sfunds. In separate meetingswith high-levelrepresentatives from the Ministryof Economy and Finance, these three institutionswere confirmedas the most experiencedbanks in the country. In the absence of an official bank rating system in Peru, these official endorsementswere deemed essential. Copies of the proposals submittedby these banks can be found in the project files. Investment Manaeement Parameters Given the project's objectives, PROFONANPE'sinvestment strategy will seek to maximizetotal return, including interest, dividends and capital appreciation,while safeguardinga minimumlevel of annual income to maintain the real value of the capital and cover operatingexpenses and grant commitments. -16 - ANNEX 2
Since Peru's capital markets are expected to continueto develop at a rapid pace, the investment managementcontract will include fairly broad investmentparameters with a significantdegree of discretion for the asset manager, within the followingspecified investment guidelines: 1. The objective of the GEF grant investmentaccount will be to maintain a conservative allocationof capital between fixed and variable income securitiesthat will safeguard a minimum level of annual incometo: a) cover program needs, which are set at a minimumof 5 percent; b) generate a capital reserve to offset potential investmentlosses in future years; and c) provide for an annual reinvestmentin the amount of the projected long-term inflation rate (as estimated by the World Bank) to maintainthe real value of the seed capital. 2. The starting asset allocationwill be 70% in a variety of fixed income instrumentsand 30% in equities. The investmentmanager will then have the option to alter this allocationin fixed income assets from a high of 80% to a low of 60%, based on previous market performance and on their professionalperception of market conditions. The equity componentwill conversely be adjusted between a low of 20% to a high of 40%. These asset allocation parameters will be reviewed, and possiblyrevised, on an annual basis to account for changes in market conditions. As the Peruvian market matures, a higher allocationin equitiesmay be prudent given the potential for higher returns from this asset class. At the same time, once Peru concludes its external debt negotiations,an alternativeoffshore investmentarrangement could be considered. 3. For domestic equity investments,the asset manager will select Peruvian companieswith the strongest market fundamentalsfor this portfolio. Since Peru is an emerging market, the manager will diversify portfolio risk in complementaryand countercyclicaleconomic sectors. PROFONANPEwill maintain some portfolio liquidity (throughfixed income instrumentswith relatively short maturities)to take advantageof new issues, as they emerge. It is anticipated that the asset allocationof this portfolio can be adjusted in future years, by continually increasingthe allocationof stocks, in order to maximizereturns to PROFONANPE. The investmentmanager will be responsiblefor selecting investmentswhose underlying activities do not have adverse environmentalimpacts.
4. The manager will have the option to invest a small percentage of the total portfolio in internationalsecurities that qualify as high-grade investmentsin developedmarkets. The manager will use their professionaldiscretion in determiningthe compositionof the internationalcomponent of this portfolio, between fixed incomeand variable securities. 5. The portfolio will be administeredon a dollarizedbasis.
ReportinigRequirements The investmentmanager will prepare quarterly reports for PROFONANPEincluding a full accounting on changes in market value, total returns and cash distributions. PerformanceEvaluation For purposes of evaluatingthe investmentmanager's performancerelative to this objective, an initial benchmark of 10 percent (dollarized, nominalreturn) will be used. For reference purposes, this level approximatesa 500 basis point spread over the current "tipmex" (the deposit rate on foreign exchange certificatesof deposit, and a local benchmarkused for evaluatingfixed income investments),and the -17 - ANNEX 2 year-to-date 1994 gain on the Lima Stock Exchange. Followinga review of the investmentmanager's performance in the initial two years, another type of benchmarkcould be consideredsuch as a weighted average index of the tipmex plus a spread for the fixed income componentand the official Lima Stock Exchange index for the equity portion of the portfolio. PROFONANPE's financial experts appointedto its technicalcommittee will conduct an annual evaluationof the investmentperformance. While the Peruvian market is anticipatedto yield satisfactoryresults over the next few years, these high returns may not be sustainableover the long term. The Board of Directors will therefore reserve the right to reconsider alternative investment managementoptions, includingoffshore markets, and if necessary will make adjustmentsunder terms of reference satisfactoryto the World Bank. Proiected Cash Flows
Regardless of the size of the trust fund's capital, the amount actually spent on project funding each year will be determinedby a "spendingrule" designedto provide a sustainableand predictablestream of income over time. A conservativespending rule, tied to a moving average of the value of the fund, will smooth out variationsin total return caused by market volatility, and ensure a steady level of available income for program activities. The proposed spendingrule specifies that only five percent of the three-year moving average of the value of the portfolio will be availablefor program spendingin any given year. Given that a moving average is based on the lagged values of actual portfolio size, expendituresfor the first three years will be set at a conservativerate of five percent of the current value of the portfolio. Subsequently,the spendingrule will be used to determine allowed annual expenditures. Given that the project activitiesfinanced by the trust fund have no ending date, the purpose of the figures presented below is to illustrate likely patterns of income and expenditureduring the first five years of the project. These figures show how accordingto the spending rule and based on a minimum annual return of 10%, the annual spendingincome for PROFONANPEwould be equal to five percent of the average asset value. Of the balance remaining, the annual reinvestmentrate to maintain the real value of the fund's assets would approximate3.7 percent, and investment managementfees and the contributionto the capital reserve would be 1.3 percent. Two models are presented: Table 1 shows anticipatedrevenues and expendituresfor project years 1 to 5, under the assumptionthat the PROFONANPEdoes not receive any additional contributions. To put this "worst case" scenario in perspective,this limitedlevel of fundingwould result in resources devoted to protected areas which are three times those allocatedby the governmentat present. Table 2, on the other hand, provides a projectionunder the assumptionthat the US$ 40 million target is reached progressivelyover a five year period. -18 - ANNEX 2
TABLE 1 Trust Fund AnticipatedRevenue Flow for Years 1 to 5 Assuming no AdditionalCapital Contributions(US$ '000)
YEAR Year I Year 2 Year 3 Year 4 Year 5 1995 1996 1997 1998 1999 TOTAL
Capital (nominal), BOY 5,000 5,213 5,434 5,665 5,906
Capital (real), EOYI' 5,000 5,027 5,053 5,080 5,107
Investment Income (nominal)9 500 521 543 566 591 2,721
Annual Reinvestment 185 193 201 210 219 1,008
Contribution to Capital Reserve2' 28 29 30 31 32 150
Investment Management Fees 38 39 41 42 44 204
Amount Available for Programsr 250 261 272 283 295 1,361
BOY: Beginng of Year TABLE 2 Trust Fund Revenue Flow for Years 1 to 5 AssumingProgressive Total Capitalizationto US$ 40 million (US$ '000)
YEAR Year I Year 2 Year 3 Year 4 Year 5
. ______1995 1996 1997 1998 1999 TOTAL
Capital (nominal), BOY 5,000 10,213 17,647 26,397 35,018
Capital (real), EOY5' 9,822 16,963 25,361 33,629 42,251 l
Additional Capital Contributions 5,000 7,000 8,000 7,500 7,500 35,000
Investment Income (nominal) 500 1,021 1,765 2,640 3,502 9,428
Annual Reinvestment 185 378 653 977 1,296 3,489
Contribution to Capital Reserve 28 56 97 145 193 519
Investment Management Fees 38 77 132 198 263 708
Amount Available for Program 250 511 882 1,320 1,751 4,714
BOY: BeginBg of Year: EOY: End of Year
1/ Assumes a long-term inflation rate and annual re-investment rate of 3.7% per year.
2/ Assumes a 10% minimum nominal return based on a portfolio of 70% fixed income and 30% equities.
3/ Balance available.
4/ On average, a minimum of 5 % of the capital will be available to the program, although actual expenditures would be based on the "spending rule" described in the text.
S/ Illustrated in 1994 dollars. -19 - ANNEX 3
Annex 3: Description of the GTZ-Financed Program The following is a descriptionof the complementaryproject activitiesfinanced by the GTZ. 1. Institutional Strengthening, Equipment and Training (US$627,000). To date, INRENA and its predecessorshave been unable to adequatelycarry out their mandate of managing Peru's protected areas due to lack of personnel, equipment, operatingfunds and a united, thoughtfully structured administration. To alleviatethe lack of technicalstaff, the project will provide INRENA, for a period of two years, the services of a full time expert who will provide support in park management,planning and policy development. The project will also provide short-term consultants to carry out specific research and planning tasks. After the initial GTZ contributionends, FONANPE would continue providing support to INRENAas needed, at the discretion of the Board of Directors. In additionto human resources, the project would provide INRENA with facilitiesand equipment. PROFONANPEhas already transferred to INRENApart of the computers and one of the vehicles received from the CanadianInternational Development Agency (CIDA). This support should facilitate the integrationof project activitieswith the ongoing work of INRENA, resulting in a mutuallybeneficial association. To improve communicationswith the remote protected areas, the project has also equipped INRENA with short wave radio communicationequipment to link headquarterswith the field stations. Also, the project is providingfunding for the purchase of additionaloffice equipment,furniture, supplies and some basic operational costs. 2. Training, however, will be the main vehicle for buildingPeru's long-term institutional capacity. Accordingly,GTZ is currentlyfinancing training for INRENA staff both at headquarters and in the field. The training programs range from short-termworkshops and field courses to participation in training programs abroad. To coordinatethis work, the project would provide a consultantto assist with the design and implementationof the training program. 3. Development of a National Strategy for the Conservationand Managementof Peru's Protected Areas (US$360,000). INRENA does not currently have an integratedstrategy for the managementof its protected areas. Without such a plan, managementof Peru's protected areas is haphazardand ineffective. Consequently,the project is financingthe formulationof a master plan for the integrated and comprehensivemanagement of all protected areas in the country. This master plan will also provide recommendationsas to structural changes in Peru's protected area administration. 4. Grants to NGOs: Integrated Conservation and Development Projects (US$450,000). The project would finance a program of small grants to be awardedthrough open competitionto NGOs, local grassrootsorganizations, or universitiesbased on proposals submittedto FONANPEto be approved accordingto establishedprocedures. The grants would financethe implementationof projects geared to advancethe complementaryobjectives of natural areas conservationand income generation for rural inhabitants,such as agroforestrydevelopment, marketing of non-timberforest products and small-scale, ecotourismand commercialwildlife breeding of caimansor other species. Project selectionmechanisms and criteria have alreadybeen developedby PROFONANPE,and the first round of proposal review will take place by mid-October1994. 5. OperationalSupport for PROFONANPE(US$173,000). Initial donations by the CanadianInternational Development Agency provided PROFONANPEwith office space and fully equippedoffices in Lima. For the initial two years of the project, the expensesof the project coordinatingunit would be borne by the GTZ grant with a possibleextension of up to four years. Thereafter, and on a increasinglydiminishing rate, these costs will be financed using a portion of the incomeof FONANPE. - 20 - ANNEX4
Annex 4: Descriptionof the ProtectedAreas SupportedUnder the Trust Fund
Manu NationalPark and BiosphereReserve 1. The Manu Biosphere Reserve encompassesover 1.5 million hectares, divided into three managementcategories: Manu NationalPark, a core area preserved in its most natural state; the Experimentalor Reserved Zone, a buffer zone set aside for controlled experimentalresearch and tourism; and the Cultural Zone, a transitionarea of permanenthuman settlementswhere sustainable uses of land and forest are promoted. The Reserve contains the world's highest recorded diversities for birds, mammals, reptiles, amphibians,freshwater fishes, all vascular plants, trees, butterflies, and invertebrates. In only a few square kilometers, at the Cocha Cashu BiologicalStation in the park's lowland rain forest, over 560 species of birds have been recorded. It is estimatedthat a comprehensiveinventory would reveal close to 1,000 bird species in Manu. Current bird counts in Manu represent 25 percent of all bird species known in Latin Americaand nearly 10 percent of the earth's birds. Despite the botanical interest in Manu, relativelyfew plant collectionshave been made there. At least 1,200 species of vascular plants are reported from limited samples of the lowlands. This estimate is likely to increase substantiallywhen plant inventoriesare completedfor all altitudinal levels. The more than 200 species of trees reported from a 1-hectareplot of forest in Cocha Cashu alone makes this one of the world's most diverse forests. The appearanceof the mature forests at Manu is impressive, with emergenttrees reachingheights above 55 meters on well-drainedsites. Manu is one of the last South Americanwilderness areas with extensivepure stands of large cedro (Cedrelaspp.) trees. Elsewhere in the Neotropicsthis valuabletimber species has been virtually eliminated. 2. The Manu National Park and Biosphere Reserve has been subject to mild stresses but is threatened by a dramatic escalationof both the number and intensityof its problems. The difficulties the Reserve faces originate from its managementas well as from outside forces. No coherent managementexists: Manu's administrationis the responsibilityof the regional government,whereas given that it is also a national park and biospherereserve INRENA is responsible for technical support. Despite the existence of biannualmanagement plans, and an "anthropologicalplan" addressingindigenous populations inside park boundaries, insufficientfunds have precludedtheir implementation. In 1992, Manu's staff droppedfrom 33 to 8 people due to low salaries and morale. That year only one fifth of the already inadequate,allotted annual budget was actually distributed. The park suffers also from inadequatelytrained staff. The lack of infrastructuresuch as guard posts, docks and roads, as well as insufficientnumbers of boats, trucks and radios, make policing the park extremelydifficult. 3. Managing and protectingthe park coherentlyand efficientlyis increasinglyimportant in the light of mountingoutside threats. Immigrantsfrom the highlands are encroachingon park territory, practicing destructive forms of shifting agriculture. Wood extraction from park lands is also reportedly increasing. Peasants have cleared and burned areas along the westernhighland and south western borders for pasture and cropping. The Camisea natural gas depositsnear the western border will start being developedin 1995. This could cause an influx of populationand subsequentpressure on the resources of the surrounding area. Park boundariesare at best poorly marked, and much of the Reserve frontier is totally unmarked. No planning or control accompaniesthe chaotic tourist industry operating in the reserve. Intrusions by outsiders, as well as the park's failure to establish good relations with indigenouspopulations, has meant that frictions between colonists or park staff and indigenouspopulations are mounting. Many volatile land tenure issues remain unresolved. - 21- ANNEX 4
4. Through time, as funds permit, incomefrom the trust fund will help implementthe biannual managementplans, and fit them into the NationalPark Strategy. The park's administrationand planning will be consolidatedand streamlinedto allow for both more coherent and efficient managementof the park as well as a strong, united public front to defend the park from threats like energy, logging or agriculturalinterests. Park facilitiesand equipmentfor transportationand communicationwill be provided specificallyto patrol the park, while at the same time making these resources availableto researchers to the degree possible. The park's boundarieswill be marked. With a regular, adequatebudget, sufficientpersonnel may be (re)hired and provided with training if needed. A public relations/educationcampaign to make known the objectivesand importanceof the park will be undertaken in and around the area. Tourism to the area will be managedaccording to a coherent plan that assures its adherenceto the park's objectives. Through local governments, NGOs and Universities, sustainabledevelopment efforts will be supported in areas inside and around the park accordingto the park's guidelines and Peruvian law. Scientificstudies will be supported,both to study the ecosystemsand species of Manu and to monitorthe impacts of various interventions inside and outside the park.
NoroesteBiosphere Reserve 5. Three contiguousprotected areas in northwesternPeru--Cerros de Amotape NationalPark, the Tumbes National Forest and the El Angolo HuntingReserve comprisethe Noroeste Biosphere Reserve. Totaling over 233,000 hectares, the Reserve contains the best remnants of the once- extensiveareas of western South Americandry tropical forests, and harbors many endangeredwildlife species. Additionally,a coastal mangroveforest is also part--albeitnot contiguous--ofthe Reserve. The Manglaresde Tumbes National Sanctuaryprotects a sample of the southernmostboundary of mangrove distribution in western South America. Like all mangrove ecosystems,the Tumbes MangroveSanctuary provides an importantbasis for the area's artisanal fisheries. In general, the tropical dry forests and coastal mangrovesare two of the most threatened and rare natural ecosystems left in Latin America. This set of protected areas in Peru offers a unique opportunityto preserve representativeexamples of those communitiesand ecosystems,as well as to learn how to manage portions of them for direct harvesting of natural resources for the benefit of the local population. 6. The natural resources of Noroeste Reserve are subject to a number of pressures which have been notably increasingover the past few decades, particularlythe last ten years. Those include: poaching and firewood extractionby the Peruvian Army and local artisans; extensivelogging in one area of the park by parquet production companies;cattle grazing in several areas of the park during the dry season; illegal hunting of wildlifefor the internationalpet trade; and fires that invade from surrounding agriculturalzones. The Reserve's infrastructureand protectioncapacity are woefully inadequate in the face of these pressures. Additionally,an irrigation dam on the Rio Tumbes has been proposed and enjoys popular support. It would affect the Park and the NationalForest and jeopardize several endangeredspecies like the Americancrocodile and the river otter. The mangroves are particularly threatened by over 200 shrimp breeding farms, depletionof natural populationsof shrimp larvae, over-exploitationof black scallops, and tree felling for fuelwood. In general, the habitat degradationis caused and exacerbatedby outside special interestgroups, not local people. Local communitiesare using the resources, in some cases only on a subsistencebasis, at levels that could be withstoodby the resources if properly managed. A lack of governmentinvolvement in the past has aggravatedthe pressures on the natural resource base in this region. 7. The trust's income would allow the Reserve to stabilize and strengthen its administrativeand protection capacitiesthrough hiring more staff, providingtraining for all employees,constructing new guard posts and infrastructure, and equippingstaff with adequateoffices, supplies and means of - 22 - ANNEX 4
transportationand communication. The Reserve plans an intensiveeducation and public relations campaignbecause the Reserve has been degraded by people who poorly understandits objectivesand value. At the same time, sustainabledevelopment efforts have been promoted by environmental NGOs in the region since 1990. FONANPEwould support efforts by these NGOs to take the lead in developingthe region with environmentallysensitive activities. It would also try to generate local support for the Reserve to help discourage incompatibleactivities like dam-building. It will promote tourism and scientific inquiry.
Rio Abiseo National Park 8. The Rio Abiseo NationalPark is one of the newest and most diverse protected areas in Peru. The park was establishedby the Peruvian governmentin 1983, primarily to protect a representative sample of cloud forest habitats. Hidden in the clouds much of the year, these forests harbor many unique species of plants and animals, includingthe endangeredyellow-tailed woolly monkey. Found only in these forests, this animal has been chosen as the park's symbol. Rio Abiseo encompasses 274,000 hectares, enclosingthe entire Abiseo River watershed. Within its boundariesthe rivers descend abruptly from 14,000 feet above sea level to 1,000 feet. Ecologicallythis park contains at least five distinct life zones, ranging from the premontanetropical forests to the treeless paramo or frostland, and harbors exceptionalbiological diversity. In additionto its natural riches, it contains spectacular archaeologicalremains with great research and tourism potential. Maintenanceof this area in its pristine state is essentialin the protectionof the Huallaga River Basin Watershed. 9. The Rio Abiseo NationalPark and buffer zones are relatively intact, but are at risk on several fronts. Peasant villages along the western border threaten the integrityof the highland ecosystems, especially in areas where park land has been burned for pasture. Seven families reportedly live within Park boundaries, and property rights are poorly defined along its western border. Luckily, however, relations between local populationsand the park have been relativelygood. Gold mines to the west have attracted settlers, many of whom wish to prospect inside the park. A road was proposed, cutting straight through the Park, which would inevitablybring in a wave of migratory farmers. Were tourism developed,peasants from the neighboringareas would be apt to relocate at the border of or inside the park to capture some of the wealth. Plundering of archaeologicalsites is increasing. No humans are known to live in the eastern portion of the Park, but the area has been considered for small-holderagriculture, loggingand access roads to other areas. 10. Administrativeand budgetaryproblems have plagued the park since its creation. At present, the governmentcontributes almost nothingto its support. All resources come sporadicallyfrom private sources, and planning is difficult when the park must survive based on such scarce and unpredictablefunding. Over half its guards quit in 1992, perhaps due to low morale and the higher salaries offered in the neighboringgold mines. This lack of on-the-groundsupervision has resulted in a much higher incursion rate than in previous years. Neighboringcommunities perceive the park administrationto have abandoned its protection efforts. A lack of infrastructureand equipmentmeans that protection, transportation,access and communicationare extremely difficult. 11. The trust fund annuity would support efforts to hire and train personnel, paying locally competitivesalaries. It would support guard posts, infrastructure,means of transportation,radio communicationsand other equipmentnecessary to protect the Park, thereby dispellingthe perception that the area is one of open access. As funding permits, it would construct educationcenters and promulgatethe objectivesof the park to neighboringcommunities. It would help maintain or establish open and friendly relationswith neighboringpopulations. It would help develop a planned, controlledtourist industry, emphasizingpreservation and study of the magnificentnatural and cultural - 23 - ANNEX 4 resources of the park. It would support the sustainabledevelopment efforts of NGOs working in the area like the Asociaci6nPeruana para la Conservaci6nde la Naturaleza. This continuedsupport would establish a consolidated,unified administrationthat will be effective not only in protecting and managingthe park within its boundaries, but also in defending the park at a national level from threats such as mining, logging and road-buildingconcessions. - 24 - ANNEX 5
Annex 5: Terms of Referencefor the TechnicalCommittee of PROFONANPE
1. Objectives: The TechnicalCommittee of PROFONANPE(TC) will: (i) Provide technical assistance and advice on the allocationof funds to the Board of PROFONANPEas needed concerningthe field and office operations of the program. Whereas it will have no voting power concerninghow to allocate funds, Bank supervisionmissions will evaluatewhether its suggestionshave been adequately incorporatedinto programming. (ii) Develop guidelinesfor monitoringand evaluationfor the program, and as needed, carry out specific monitoringand evaluationtasks. (iii) Conduct an annual evaluationof the performanceof the asset manager. 2. Composition: The TC will be composedof specialistsin various technical areas pertaining to the operations of PROFONANPEand program beneficiaries. Such specialistsincludes those with experience in the program's field work, such as ecologists, biologists (plant, marine, animal), wildlife specialists(ornithologists, primatologists, entomologists), foresters, park managers, anthropologists/ruralsociologists, geographers, epidemiologistsor doctors, pharmacologistsand experts in rural development, educationand gender issues. It should also contain advisors on office operations, such as specialistsin business, finance, investments,accounting, organization/management,law, policy and institution-building.It should draw most of its membershipdomestically, but some members may be drawn internationallyto benefit from new experience and thinkingelsewhere in the world and to promote the program abroad. 3. Structureand Responsibilities:The TC will have an in-country core unit and a mixed domestic-internationalroster. The core unit will be responsiblefor advising on small issues as needed, as well as for the writing of reports and the monitoringand evaluationguidelines. Both the domestic unit and the internationalroster will review annual work plans, as well as conservationunit managementplans and the monitoringand evaluationguidelines. The core unit may write reports (which the entire TC shouldreview) if either it desires or if requested by the Board. The core units would meet once or twice a year to discuss annual work plans, and whenever a meeting is needed. For practical reasons, non-core members will not be required to attend meetings, but may do so at their own expense. The Board will devise procedures for the regular supervisionof the program by the TC, and for TC approval of the reports and guidelinesthe TC generates. 4. Nominationand Selection: The core unit will be composedof 12 to 18 members selected for their expertise in areas of direct relevance to FONANPE's activities. The number of members would not be fixed, because experts with new skills may be required after its formation, whereas other specialistsmay not be needed subsequently. Based upon nominationsreceived from the Board of PROFONANPE,INRENA, concernedNGOs, the World Bank/GEFand the GTZ, the Project Coordinator will present a proposal to the Board with a list of nomineesto be invited to serve on the TC. 5. Financing: Members of the TC will assist PROFONANPEfree of charge since members' responsibilitiesare small and FONANPE's funds are scarce and should be directed instead towards the conservationunits themselves. If specifictasks arise requiring significantwork, however, the Board and Project Coordinator may commissionmembers of the TC to perform them at rates to be determined for each individualtask. - 25 - ANNEX 6
Annex 6: Monitoringand Evaluation
Introduction. 1. In keeping with the pilot nature of the first tranche of GEF projects, the Peru Trust Fund for Protected Areas will serve as a test of the effectivenessof trust funds as mechanismsfor long term financingof biodiversityconservation. The project will provide an opportunityto address the design and managementissues associatedwith financingthe recurrent costs of biodiversityconservation. The ultimate goal of the trust fund itself, however, will be the preservationof biodiversityin Peru by providing a stable source of funding for conservationprograms and activities.
2. Given the dual objectivesof the project, the monitoringstrategy will consist of two types of evaluation: (i) the monitoringand evaluationof the implementationof the GEF project per se; and (ii) the evaluation of how trust funds contributeto biodiversityconservation. The lessons learned in this second form of evaluationwould contribute to the global body of knowledgeof biodiversity conservationstrategies. The sectionsbelow delineatethe specificbenchmarks for both project implementationsuccess and the criteria for success of the trust fund as a mechanismfor financing biodiversityconservation. Evaluation of Project Implementation 3. The following benchmarkswill be used to evaluate the effectivenessof project implementation. Success in meeting the implementationbenchmarks will also serve to determine at what point the Bank ceases supervisionof the project. The benchmarksfall under three broad categories: institutionalcapacity, financial effectiveness,and the adequacyof the legal framework.
INSTITUTIONAL CAPACITY
* The Board of Directors has met at least twice each year and has carried out its responsibilities as establishedin PROFONANPEby-laws for three years in a row.
O The project coordinatingunit is functioningand staffed with qualifiedprofessionals. * The Technical Committeeis functioningand has provided relevant technical input to the Board of Directors, includingconducting an annual evaluationof the asset managerof the fund for 3 years in a row. * The selection of activitiesand projects is made in accordancewith the Board's project eligibility and selection criteria, and followingthe agreed-uponparticipative and consultative process for three years in a row. * Satisfactoryannual work programs are submittedto the Bank for review in a timely manner for three years in a row. A satisfactorywork program would contain a clear statementof objectives and the proposed activitieswould be consistentwith these objectives. * The disbursementof funds for the various activitiesand projects is made in a timely and efficient manner for three years in a row. * Satisfactoryannual progress reports are submittedby the Board to the Bank in a timely basis for 3 years in a row. - 26 - ANNEX 6
* The fund has a clear written strategy for raising additional funds and is actively pursuing further donations. * Administrativecosts are kept within agreed-uponlimits, not exceeding a 5% increase per year. * Annual audits show satisfactoryperformance in funding approvedwork programs and competent record-keepingfor three years in a row. * Procurementis made in accordanceto Bank-approvedprocedures for three years in a row.
FINANCIAL EFFECTIVENESS
* Adherence to investmentguidelines for three years in a row. * Adherenceto disbursementguidelines, based on the "spendingrule" for three years in a row.
LEGAL FRAMEWORK ADEQUACY * All necessarylegislation and other arrangementsare in place to assure effective functioningof the fund, includingprotection from attachmentand taxation.
Evaluation of the Trust Fund as a Mechanismfor FinancingBiodiversity Conservation. 4. The impact of the trust fund will ultimatelybe measuredby what is "bought' in terms of biodiversityprotection. Such an evaluation, however, would not be feasible within the time frame of the GEF project; the evaluationof changes in natural systemstakes decades and requires the extensive inventory of key species to obtain data on populationsizes and distribution. The collectionof such data is technically difficult, time consuming, and expensive. Moreover, what can be measured is often hard to interpret both due to inherentnatural fluctuationin ecologicalprocesses as well as the difficultyof determiningthe counterfactualcase, that is, what might have occurred in the absence of the project. For these reasons, project design and implementationare used as proxies for impact. 5. The success of the trust fund will depend on a series of factors, some of which are under the control of the project implementorsand some of which are not. For example, the trust fund will require favorable market conditionsto generate adequateinvestment returns, as well as successful fund raising yet both will depend largely on outside forces. Similarly, the effectivenessof conservationmeasures adopted will depend on the quality of their design as well as on national policies and socio-economiccircumstances. 6. Taking these factors into consideration,the achievementof the benchmarksbelow will indicate the success of the trust fund as a mechanismfor financingbiodiversity conservation. * FUND RAISING SUCCESS: The fund has reached a minimumcapital level of $40 million dollars (the goal is to reach this capitalizationlevel within five years from the date of the grant). * FINANCIAL EFFECTIVENESS: The investmentsare providing reliable and adequate returns. This entails a minimumof 10% annual return of the investmentso as to cover program needs (5%); provide annual reinvestmentto maintain real value of seed capital; and afford a capital reserve to offset low-yieldyears. - 27 - ANNEX 6
* GOVERNMENT COMMITMENT: The governmentis committedto providing long-term financingfor protected areas, as evidencedby their active participationin the activities of the Board of Directors of PROFONANPEand by supportingits fund raising efforts by facilitating debt-for-naturetransactions and other contributions. Commitmentis also reflected by the government's continuedfunding for the protected areas at the current level of budget allocation (in real terms), thus ensuring that the GEF fundingis truly additional. * BIODIVERSITY IMPACT: The stable financingprovided by the trust fund ensures that the protected areas receive adequate management,which in the long run results in decreased park encroachment,deforestation, poaching and biodiversityloss. The impact of the project on the protected areas will be evaluatedagainst the baseline informationcollected during project preparation and summarizedin the backgroundpaper on each of the selected areas titled: "Informe sobre las Areas Protegidas Seleccionadaspara Apoyo por el GEF." Moreover, the impact of the project will also be evaluated as a function of how it has contributedtowards the goals establishedin the managementplan or operatingplan of each protected area. * SOCIAL IMPACT: The trust fund's decision-makingprocesses have fostered local and NGO participationin the managementof the protected areas, as evidencedby their active involvementin decisions about the allocationof resources in each protected area and their understandingand commitmentto the goals of park management. - 28 - ANNEX 7
Annex 7: Project Eligibility and Selection Criteria
Project Eli2ibilityCriteria The income generatedby PROFONANPE'strust fund will be used to finance a variety of conservationactivities in the selected areas and their buffer zones. The activitieseligible for funding include: 1. Financing the recurrent costs of protected area management(such as facilities and infrastructure for park personnel, operationalexpenses of park administration,etc.). This funding should not replace regular governmentallocations. 2. Drafting, revising and implementingmanagement plans 3. Establishingand managingbuffer zones 4. Training professionalsin park and wildlife management 5. Institutingenvironmental education and public awarenessprograms for communitiesassociated with protected areas 6. Implementingprojects that integrate conservationand developmentto benefit the communities living in the protected areas and buffer zones 7. Institutionalsupport the strengtheningof INRENA's General Directorate of Protected Areas and Wildlife (DGAPFS)
8. Administrativeexpenses of PROFONANPE The protected areas initiallyselected for financial support are: a) Northwest BiosphereReserve (includesParque NacionalCerros de Amotape, Bosque Nacionalde Tumbes, Coto de Caza El Angoloand their areas of influence). b) Parque NacionalRio Abiseo and buffer zones. c) Manu BiosphereReserve (includesParque Nacionaland Zona Reservada del Manu, as well as their areas of influence). As the trust fund grows, additional areas may be added to this list by the Board of Directors of PROFONANPE,based on the Master Plan for the NationalSystem of Natural Areas Protected by the State (SINANPE), currently under development. Initially, grants are not expectedto exceed $50,000 per year per grant, although this level may be revised by PROFONANPE'sBoard of Directors at a later date. The specific allocationof funds generatedby the trust's investmentswill be determined by PROFONANPE'sBoard of Directors, based on a draft work program prepared by the project Coordinator. This draft work program will be based on an analysisof the requirementsand needs for each area, made jointly by INRENA and PROFONANPE'sCoordinator. This analysis of needs will - 29 - ANNEX 7 be based on the Master Plan for SINANPE,and the managementplan and/or operating plan of each conservationunit. Given the project's commitmentto fostering a participatoryapproach to conservation,this analysisof needs will be made in close coordinationwith each protected area's administrativeofficer, local committees,(where they exist), park officers, local grassroots organizationsand local communities. After this participatoryand consultativeprocess has taken place, PROFONANPE's Coordinator will present to the Board a proposaloutlining the prioritized actions in each area, and a recommendationon which activitiesare suitablefor being carried out directly by the DGAPFS and which are appropriatefor allocationon the basis of an open contest process. The draft work program will include a statement of specificobjectives to be pursued during the year and a descriptionof the activitiesto be undertaken in order to achievethose objectives. PROFONANPE'scoordinator will send this draft work program to the Technical Committeefor written comments,and will prepare a memo to the Board summarizingthe commentsreceived and how these were taken into account in revising the work plan. The Board will send this program to the Bank for comment no later than November 15 of each year.
Once the Work Program has been approved, PROFONANPEwill issue the appropriate "Request for Proposals" for the prioritized activitiesto be awarded on the basis of an open contest. Eligibility Criteria for Participatingin the Open Contest Proposals submittedon an annual open contest basis will be eligible under the following conditions: i. Proposals may be presented by each protected area administrativeauthority as well as by private institutions,universities and community-basedorganizations, or associationscomprised of more than one of these entities. In the case of private institutionsthey should: a) Have at least two years of experiencein natural resource conservationprojects. An exceptioncan be made in the case of cooperatives, agriculturalcredit unions and small producers associations,as long as the group can satisfactorilydemonstrate experience in other communalprojects. b) Have updated accountingprocedures in accordancewith accepted accountingpractices.
c) Have been legally establishedfor at least one year prior to the date of launchingof the public contest process. Organizationswhich have not been legally constituted,but whose activities relate to a specific protected area or represent the local populations,may apply for funds through sponsoringorganizations which fulfill the above requirements. 2. Proposals must: a) Adhere to the priorities establishedby PROFONANPEin coordinationwith the DGAPFS, following the guidelinesof the Master Plan for SINANPE. b) Be in keeping with other on-going efforts to further the appropriate managementof the protected area. c) Be based on one-year work plans. - 30 - ANNEX 7
Proceduresfor Project Selection To evaluate the proposals presented, PROFONANPEwill establish an evaluationscommittee. This committeewill be comprised of: 1. One representativeappointed by the Board of PROFONANPE. 2. One representativeappointed by INRENA. 2. One representativeof PROFONANPE'sTechnical Committeeappointed by PROFONANPE's Coordinator, with the relevant professionalqualification in keeping with the subject matter of the proposal. Announcementof the open contest process will be made in a nationalpaper and through other suitable media in localitiesnear the protected areas two monthsprior to the applicationsdeadline. Announcementswill be made as well through the managers of each protected area. It will be the responsibilityof the Coordinatorof PROFONANPEto ensure that the informationregarding the request for proposals reach the local and grass-rootslevels. Evaluation Criteria
Proposals will be selected for funding accordingto the following criteria: 1. Relevance and adherenceof the proposal to the Master Plan for SINANPEand to the Master Plan of the specific area under consideration(if available). 2. Clear definitionof methodologyand reasonablecosts. 3. Likelihoodthat the activitiesare socially, environmentallyand financiallysustainable. 4. Relevanceof the proposal to the priorities defined for the funding period. 5. Innovativenessand replicabilityof activitiesat the local level and at other natural protected areas. 6. Participationof local grassroots organizationsand the affectedpopulation in identificationof needs, as well as in the planning, implementationand evaluationof the results of the project. 7. Social viabilityinsofar as the proposed activitiesaddress the needs identifiedby the affected populations. 8. Technical and administrativecapacity of the sponsoringinstitution to execute the proposed project, based on the qualificationsof its staff and its record with other projects. 9. Degree of commitmentto the project, as demonstratedby the provisionof financial or in-kind counterpartresources. - 31- ANNEX 8
Annex 8: PROFONANPE's Administrative Costs
TABLE I PROFONANPE Administrative Costs (US$ '000) YEAR Year I Year 2 Year 3 Year 4 Year 5 TOTAL 1995 1996 1997 1998 1999 l PROFONANPE's 0 150 159 166 175 650 AdministrativeCosts l
TABLE 2 PROFONANPEAnnual OperatingCosts (in 1995 US$) Personnel Costs 92,894 Coordinator 42,910 Administrator/Accountant 16,016 Secretary 11,550 Messenger, Office Assistant 7,084 Health Insurance 550 Social Security 14,784 Office Costs 29,560 Office Rent 10,560 Electricity and Office Maintenance 4,000 Fax, Telephone 6,000 Postage and Courier Service 1,000 Equipment Maintenance and Repair 2,000 Office Supplies/Photocopying 6,000 Financial Audit 5,000 Travel and Per diems 6,500 Transportation 8,700 Fuel, Repair and Maintenance 6,000 Parking, Local Transportation 1,500 Insurance 1,200 SUBTOTAL 142,654 Price Contingencies (5%) 7,133 TOTAL 149,787 - 32 - ANNEX9
Annex 9: SelectedDocuments Available in Project File
* The initial proposal from the Governmentof Peru to the GEF for the establishmentof a Trust Fund for Parks and Protected Areas, March 1992.
* A report of the investmentopportunities in the United Statestitled: "Informesobre la Eleccion de una firma financiera para la administracionde activos del fondo fideicomiso,"by Mr. Francisco Tourreilles, May, 1992.
* A report of the investmentopportunities in Peru titled: "Informe para el consejo directivo del PROFONANPEsobre la seleccionde un banco nacional para la administracionde los fondos del FONANPE en el Peru," by Ms. BernarditaZapata, August, 1994.
* A report on the future perspectivesof the PeruvianEconomy, Businessand the Lima Stock Market titled "Peru: Looking Ahead," by Intervalores,Peruvian Equity Research, May, 1994.
* A backgroundpaper on the protectedareas selectedfor support under this projecttitled: "Informe sobre las Areas ProtegidasSeleccionadas para Apoyo por el GEF."
* Copies of the followinglegal decrees: Decree Law No. 26154, establishingFONANPE and PROFONANPE Supreme Decree No. 024-93-AG,ratifying PROFONANPE'sbylaws Supreme Decree No. 43-94-AG, modifyingthe compositionof PROFONANPE'sBoard LegislativeDecree No. 769, establishingthe general law of banking institutions.
* A paper on the conservationstrategy for Peru titled: "EstrategiaNacional para la Conservacion," by the NacionalCommission to Develop a NationalConservation Strategy, 1991.
* 1993 Annual progress report of PROFONANPE,titled: "Memoria 1993."
* 4AManual of Norms and Procedures for PROFONANPE,January 1994.
* A Manual of Organization,Functions and Policiesfor PROFONANPE.
* A legal opinion on the risk of attachmentof the trust fund in the U.S.A, issued by the firm of Baker and Hostetler, dated May 19, 1993.
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