Republic of Peru - World Bank...1995/04/26 · trust fund: Manu National Park and Biosphere...

GLOBALENVIRONMENT

FACILITY

1 354 1IPC-

Republic of PeruNational Trust Fund for Protected Areas

Project DocumentMarch 1995

THE WORLD BANK

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GEF Documentation

The Global Environment Facility (GEF) assists developing countries to protectthe global environment in four areas: global warming, pollution of international waters,destruction of biodiversity, and depletion of the ozone layer. The GEF is jointly implementedbythe United Nations Development Programme. the United Nations Environment Programme.and the World Bank.

GEF Project Documents - identified by a green band - provide extended project-specific information. The implementing agency responsible for each project is identified byits logo on the cover of the document.

Global Environment DivisionEnviroinient DepartmentWorld Bank1818 H Street, NWWashington, DC 20433Telephone: (202) 473-1816Fax: (202) 522-3256

Report No. 23540-PER

Republic of PeruNational Trust Fund for Protected Areas

Project DocumentMarch 1995

CURRENCY EQUIVALENTS

Currency Unit=New SolUS$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 AgencyDGAPFS 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 FacilityGET Global Environment TrustGOP Government of PeruGTZ Deutsche Gesellschaft fuir Technische Zusammenarbeit GmbHINRENA National Institute of Natural Resources

(Instituto Nacional de Recursos Naturales)NGO Non-Governmental OrganizationPROFONANPE 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 paraAreas Naturales Protegidas por el Estado)

SINANPE National System of Natural Areas Protected by the State (Sistema Nacional deAreas Naturales Protegidas por el Estado)

TC Technical Commnittee

This report is based on the findings of an appraisal mission which visited Peru in August, 1994. Mission members wereMessrs./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. Otherpeople 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. FranciscoTourreilles 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) andDivision 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 capitalfor 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 FY99Fiscal Year

Annual 5.0 0 0 0 0

Cwnumlative 5.0 5.0 5.0 5.0 5.0

PERU


1. Country/Sector Background. Peru ranks as one of the biologically most important countriesin South America, and among the handful of megadiversity countries in the world. It contains ahigher proportion of the species-rich forests of Western Amazonia and the tropical Andes than anyother country. Peru has an estimated 19 percent of the bird species, 9 percent of the mammals, and 9percent of the amphibians in the world. The Peruvian Amazon contains an extraordinary assemblageof species: in the Iquitos area in northern Peru, for example, a single hectare of tropical rain foresthas been found to contain 300 species of trees, by far the highest heterogeneity on Earth, for such asmall land sample. Two of Peru's large protected areas, Manu Biosphere Reserve and Tambopata-Candamo Reserved Zone, contain the world's highest recorded diversities of birds, mammals,reptiles, amphibians, freshwater fishes, vascular plants, trees, butterflies, and invertebrates.

2. Peru's unique biodiversity, however, faces threats. The most important of these stem fromthe deforestation resulting from several decades of spontaneous and government-promotedcolonization of mountain slopes in the eastern Andes and in tropical and temperate inter-Andeanvalleys. Although over ninety percent of the Amazonian lowlands of the country are still forested,some large vertebrates and valuable timber species are now confined to an estimated 30 to 40 percentof Peru's Amazon.

3. The government recently eliminated many of the distortionary economic incentives that madecolonization of its Amazonian lowlands attractive to Peruvian subsistence farmers. In late 1990 thePeruvian Congress passed an environmental code that contains several conservation provisions,including the positive step of abolishing legislation which provided incentives for colonizingAmazonia. Furthermore, the code requires the preparation of an environmental impact statement forany development activity in Amazonia -- whether public or private. Recently, legislation has alsobeen passed requiring environmental impact assessment for mining, fishing and industrial developmentinvestments. Despite these legislative efforts, however, the government may have difficulty slowingthe colonization of the Amazonian lowlands. After a decade of severe economic and political crisis,Peru is significantly reformulating its policies, setting the stage for economic recovery. It hassucceeded in drastically reducing the inflation and terrorist activity that crippled the nation until veryrecently. These changes can imply a large influx of tourists and, more importantly, increasedinvestment to exploit Peru's natural resources, both of which pose real threats to the country'sbiological wealth.

4. These problems, however, have not yet directly damaged the integrity of Peru's vital sites ofbiodiversity. Peru has managed to set aside more than 6 million hectares of wet, moist, and drytropical forest in national parks, reserves, and sanctuaries throughout the country. Moreover, thelegislation related to protected areas in Peru is comprehensive and sound. In 1993, the governmentestablished the National Institute of Natural Resources (INRENA), bringing together the expertise ofall Peruvian public agencies involved with the management and conservation of Peru's naturalresources. Peru's legislative and institutional efforts notwithstanding, the Government of Peru (GOP)has been unable to devote sufficient resources to its conservation areas. It cannot afford to develop orimplement a coordinated national management plan for protected areas. Conservation efforts havethus been haphazard. Only four national parks receive any management services through INRENA;the other protected areas have no permanent management personnel. The 1991 Tropical ForestryAction 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 thesevere deficiency of administrative and managerial inputs. Moreover, because of low salaries andlack of job security from budgetary fluctuations, the Peruvian park system has been unable to attractand retain qualified personnel.

5. Project Objectives. The project has four major objectives, to: (i) provide a long term andpredictable source of funding for the protection of Peru's biodiversity through the establishment of atrust fund, the income of which would be used for financing the management of priority protectedareas; (ii) improve INRENA's capacity to protect and manage Peru's protected areas; (iii) provide thecountry with a reliable institutional mechanism to channel debt donations for sustainable developmentand conservation through bilateral and commercial debt-for-nature swap agreements; and (iv) test theviability of trust funds as mechanisms for providing long term and sustainable funding for biodiversityconservation.

6. Project Description. Peru's government is committed to developing innovative mechanismswhich would guarantee the appropriate management of Peru's protected areas and biodiversity. Tothis end, in December of 1992, the GOP created by Decree Law the Fondo Nacional para AreasProtegidas 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 createdPROFONANPE as a not-for-profit institution under private law to manage the fund and to direct theuse of its investment proceeds. In anticipation of the GEF grant, and on the bases established by thepreparation of this project, PROFONANPE started operating in June 1993 under a grant from theGerman technical cooperation agency, the Deutsche Gesellschaft fur Technische ZusammenarbeitGmbH (GTZ). During its first year, PROFONANPE has strengthened itself as an organization byconducting an institutional strategic planning exercise involving a dozen NGOs, has developed criteriafor managing its small grants program, has issued requests for proposals, and has negotiated Peru'sfirst debt-for-nature swap.

7. To support PROFONANPE, the Global Environment Trust (GET) would provide SDR 3.5million (US$5.0 million equivalent) as seed money for the Peruvian trust fund. In keeping with theGEF's goal of using its resources to leverage additional funds, the GET grant would becomplemented by a parallel grant of US$1.5 million from GTZ. While the German grant does notform part of the capital of the trust fund per se, this contribution will help to consolidate andstrengthen the GOP's capacity to coordinate all Peruvian conservation efforts and will lay the basisfor the conservation activities supported by the trust fund. Moreover, GTZ's contribution willprovide essential operational funds during the pilot phase of PROFONANPE until the trust fundreaches a sufficient size for the income to sustainably finance the project activities with its ownincome.

8. The by-laws governing the operation of FONANPE were drafted by a working groupcomprised of representatives from the GOP and from seven Peruvian conservation NGOs. This groupalso developed criteria for selecting the protected areas which would be initially supported by theproject. These criteria include: (i) the global importance of the area for biodiversity conservation, interms of species diversity and endemism; (ii) the relative feasibility of management; and (iii) thedegree of environmental impact resulting from human activity. Although several protected areas meetthese criteria, given resource constraints, three priority areas were selected for initial support by thetrust fund: Manu National Park and Biosphere Reserve, Rio Abiseo National Park, and NoroesteBiosphere Reserve (composed of the Cerros de Amotape National Park, Coto de Caza el Angolo,

Bosque Nacional de Tumbes and Manglares de Tumbes National Sanctuary). As the trust fund'scapital increases through additional contributions, other protected areas would be integrated into theprogram, based on the criteria described above and on the Master Plan for National Protected Areascurrently being developed under the auspices of GTZ.

9. The income generated by the trust fund (estimated conservatively at US$ 1.361 million for thefirst five years) will be used to finance a variety of conservation activities in the selected areas andtheir buffer zones. Schedule A provides a summary of the project costs, and Schedule B contains theprocurement and disbursement arrangements for the project. The activities eligible for fundinginclude:

* Financing the recurrent costs of protected area management (mainly staff salaries andoperating expenses)

* Drafting, revising and implementing management plans* Establishing and managing buffer zones* Training professionals in park and wildlife management* Instituting environmental education and public awareness programs for communities associated

with protected areas* Implementing projects that integrate conservation and development to benefit the communities

living in the protected areas and their buffer zones* Institutional support for the strengthening of the field work of INRENA's Directorate General

of National Protected Areas and Wildlife* Administrative expenses of PROFONANPE

10. The complementary activities financed separately by GTZ include: (i) support to INRENA inthe form of infrastructure, equipment and training; (ii) development of a master plan for themanagement of all protected areas in the country; (iii) hiring of consultants to provide technicalsupport to INRENA; (iv) institutional building and operational costs of PROFONANPE; and (v) atwo-year program of small grants for NGOs to support sustainable development and conservationprojects. This program will be managed jointly by PROFONANPE and GTZ.

11. Project Implementation. PROFONANPE is governed by a Board of Directors, composed ofthree representatives from the Peruvian government, three representatives from Peruvian conservationNGOs elected by the Peruvian Environmental Network, and a representative from an internationalcooperation agency (initially the GTZ). One of the government representatives will assumechairmanship of the Board. PROFONANPE's Board will meet at least twice a year to review projectprogress and to decide policy issues. The Board will additionally meet as needed to review thereports of the project coordinator and of the managers of the protected areas and the auditors, as wellas to approve the annual work programs and budgets proposed by each protected area, and to carryout other responsibilities as specified in PROFONANPE's bylaws.

12. Day-to-day project management and administration would be carried out by a professionalProject Coordinator appointed by the Board. The Board will be advised by an independent TechnicalCommittee (TC) composed of scientists and natural resource management experts experienced in parkand wildlife management and other disciplines relevant to program activities. A subset of thiscommittee will be comprised of financial experts and will advise PROFONANPE on its financialinvestments. The TC would also be responsible for developing criteria for project monitoring andevaluation, and for conducting an annual evaluation on the performance of the asset manager. The

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TC is an additional forum in which relevant conservation NGOs can contribute substantively to theproject.

13. The allocation of resources within each protected area will be determined byPROFONANPE's Board of Directors on the basis of an annual work program prepared by the ProjectCoordinator. The work program will be based on an analysis of the requirements and needs of eacharea, made jointly by INRENA and PROFONANPE's Coordinator. Given the project's commitmentto a community-based, participatory approach to conservation, the needs assessment will be made inconsultation with each protected area's administrative officer, local committees (where they exist),park officers, grassroots organizations and local communities. Each work program will include astatement of specific objectives for the year and a description of activities to be undertaken in order toachieve those objectives.

14. The fund's assets would be managed by a Peruvian investment bank, according to investmentobjectives and guidelines specified in section IV of the attached Technical Report and recorded in theProject Agreement. These guidelines specify the investment risk profile and the acceptable trade-offsbetween growth of the total value of the investment capital and the stability of annual income flows.Part of the investment income generated each year would be spent to finance conservation activities inPeru, while a predetermined amount of the income would be reinvested to maintain the real value ofthe principal.

15. The utilization of the funds for the program during the five-year pilot phase will be reviewedduring Bank supervision. Upon final evaluation of the performance of PROFONANPE, the Bankwould cease its formal involvement with the project. However, if FONANPE is dissolved forwhatever reason, or if it becomes evident, even after GEF's involvement in the project has ceased,that FONANPE's funds are being used for purposes other than biodiversity conservation, the Bank, asTrustee of the GET, would be entitled to obtain the repayment of the amount so spent. Also, theBank as Trustee of the GET would be entitled to seek repayment for any expenditures that are notconsistent with the terms of the Grant and Project Agreements.

16. Project Sustainability. The recurrent cost financing mechanism supported by this projectprovides built-in continuity of hard currency funding, under management arrangements which dependlittle on the constrained Government budget or adverse macroeconomic conditions. At the same time,PROFONANPE has proven to be an attractive vehicle for raising additional funds internationally.

17. Lessons From Previous Bank Involvement. There has been no previous Bank involvementin sectors relevant to this project in Peru itself. Experience in other countries has shown, however,that failure to intervene would result in progressive degradation of vulnerable habitats. Under theGlobal Environment Facility (GEF) there are several similar trust fund projects currently underpreparation. These include the Foundation for Eastern Carpathian Biodiversity Conservation, theBwindi Impenetrable Forest Conservation Trust in Uganda, and the Congo Wildlands ProtectionProject. The only other such project under implementation is the Bhutan Trust Fund forEnvironmental Conservation, where few lessons can yet be drawn, as the project has been inoperation only a short time. Additionally, independently from GEF support, countries such as thePhilippines and Bolivia have established national conservation-related funds with initially positiveresults.

18. What all the above-mentioned trust funds have in common is that they are designed to providelong-term, sustained funding for projects promoting conservation of biological diversity andsustainable use of natural resources. Too often, donors have focused on short term projects,providing funding for only 2 to 5 years. Yet, many conservation activities may require 10, 20 ormore years of sustained funding to have a real impact. Unless funding is sustained over a longperiod, the results obtained from a short term project may evaporate. Trust funds can be effectivemechanisms for guaranteeing a long term financial commitment and for overcoming unpredictablegovernment and donor agency budget fluctuations. This is particularly important when fundingrecurrent costs. Reliable funding improves program stability, long-range planning, training andrecruitment of personnel, and the overall impact of a conservation program. While the future ofnational environment funds is promising, we still have much to learn about their design andmanagement. Generally, the design phase is a long and arduous process. This is because in order toestablish credibility at the national level, there must be a process of consensus building particularlywith regard to appropriate governance structures and criteria for eligibility of grants. Many technicalquestions need to be addressed as well, such as the appropriate fiduciary arrangements for themanagement of fund assets and the legal character of the fund.

19. Rationale for GEF Funding. Safeguarding biodiversity worldwide depends, in the shortterm, as much on selectivity as on scale. Protecting specific megadiversity parks such as thosecontemplated in this project will secure a small but ecologically viable sample of biodiversity untilmore comprehensive protection efforts can be mounted. In the case of Peru, the government cannotcurrently place global environmental initiatives at the top of its list of priorities. Peru is in the earlyphase of economic restructuring and recapitalization. In light of this situation, this project will serveas a model for long-term financing of protected areas in countries where political uncertainty andeconomic constraints currently preclude the government from allocating adequate resources toconservation activities.

20. The project's structure also provides an important opportunity for testing the design andmanagement issues associated with financing the recurrent costs of biodiversity conservation. Thetrust fund is an appropriate mechanism in the case of Peru for several reasons. First, by releasingfunds slowly over an extended period, the absorptive capacity of the institutions involved will not beexceeded. This will improve the likelihood that the funds will be used effectively. Second, thefinancial stability provided by the trust fund will alleviate the Peruvian park system's inability toretain qualified personnel because of low salaries and insecure job tenure resulting from budgetaryfluctuations. Third, the recurrent costs that will be financed by the income of the trust fund are thehardest to raise repeatedly from donors, who like to support projects with a definite beginning andend. The income of the trust fund would supplement the limited support that Peru's government canallocate to these parks for the foreseeable future. If this financing is not provided, by the time Peru'seconomic situation improves to the point where the government can provide sufficient resources tosupport its protected areas, many of these areas could be largely deforested and their uniquebiological diversity lost or severely damaged. This GEF project could also be an important catalyzerof additional funding for conservation efforts in Peru. After nearly a decade of debt mismanagement,Peru is currently in the process of renegotiating its debt. Through the Club of Paris agreements,Peru's official bilateral debt has been given a framework for negotiations which include the option fordebt-for-nature swaps and other debt reduction mechanisms. Under this framework, Peru's first debt-for-nature swap with Canada was approved and negotiations are under way with three additionalcountries. In this realm, PROFONANPE provides a reliable window for debt donations for

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environmental and development purposes, an option which Peru did not have available before theGEF promoted the creation of the fund.

21. Actions Agreed.

During negotiations the Bank and the Government agreed that:

For twenty five years from the date of the Grant:

(a) Decree and Bylaws. FONANPE and PROFONANPE's implementing legislation andby-laws will not be amended, abrogated, repealed or waived in a manner which, in theopinion of the Bank, would materially and adversely affect the implementation of theproject or the attainment of its objectives;

(b) Dissolution. If FONANPE is dissolved for whatever reason, or if it becomes evident,even after GEF's involvement in the project has ceased, that FONANPE's funds arebeing used for purposes other than biodiversity conservation, the Bank, as Trustee of theGET, would be entitled to obtain repayment of the amount so spent;

(c) Repayment. The Bank as Trustee of the GET would be entitled to seek repayment forany expenditures that are not consistent with the terms of the Grant and ProjectAgreements.

The Bank and PROFONANPE agreed that:

(a) Investment Arrangements. For 10 years after the date of the Grant, the Board ofPROFONANPE will not change the investment arrangements and guidelines withoutprior written agreement by the Bank. These guidelines are specified in Annex 2 of theattached Technical Report.

(b) Annual Work Programs. For the duration of project supervision, PROFONANPE willsend to the Bank for comment its annual work programs prior to Board approval and nolater than November 15 of each year;

(c) Procurement. In the context of the annual work program, PROFONANPE will submitto the Bank a procurement program, which is in compliance with the Bank'sprocurement guidelines;

(d) Annual Progress Reports. For the duration of project supervision, PROFONANPEwill submit to the Bank annual progress reports (which include the monitoring indicatorsspecified in Annex 6 of the attached Technical Report), by April 1 in a formatsatisfactory to the Bank;

(e) Technical Committee (TC). Within six months of effectiveness of the project,PROFONANPE will have constituted the TC and sent to the Bank for review a surmnaryof the qualifications of each member. Within one year of project effectiveness, the TCwill have prepared the project's Monitoring and Evaluation guidelines satisfactory to theBank.

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(f) Administrative Costs. PROFONANPE's administrative costs for 1995 will not exceedUS$150,000 per year, and will not grow by more than five percent per year, except asmay otherwise be approved by the Bank on the basis of increases of the resources of thetrust fund or other funds administered by PROFONANPE.

(g) Mid-term Project review. PROFONANPE will join the Bank on a mid-term projectreview at the end of 1997 to evaluate its implementation arrangements, its on-the-groundeffectiveness in the protected areas themselves, and the performance of the assetmanager. This review would serve to fine-tune the project and determine any neededmodifications; evaluate investment performance; serve as the launching point for theconcerted fund-raising effort to increase the trust fund's capital;

(h) Auditing. PROFONANPE will contract the services of an independent auditing firm tocarry out an annual audit of the finances of the project and of the trust fund. Theauditors will review the project's financial records to determine if the actual expendituresmatch the approved work program and if satisfactory procedures of record-keeping arebeing used. The auditor's report will be forwarded to the Bank no later than fourmonths after the close of PROFONANPE's fiscal year.

(i) Implementation Completion Report. PROFONANPE will prepare an ImplementationCompletion Report within three months of the end of the Bank's supervision period.Sinhce the project has no finite time frame, the Implementation Completion Report willrelate 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, evenbeyond 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 ofthe Grant and Project Agreements; and

(b) Contract Between PROFONANPE and the Asset Manager. The Bank would requirea signed contract between PROFONANPE and the investment manager satisfactory tothe Bank.

22. Enviromnental Aspects. The project is classified as "C," which means that no negativeenvironmental impact is expected. The project's primary objectives focus on environmentalprotection and should result in stronger in-country capability to manage protected areas andbiodiversity. No resettlement will take place under this project, nor does the list of eligible activitiesto be funded under the project include resettlement.

23. Participatory Approach. This project was prepared with the active participation of sevenPeruvian NGO's, which were involved in the definition of all aspects of the project, including thedrafting 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 inconservation, 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 eligiblefor financing under the project is the implementation of projects that integrate conservation anddevelopment to benefit the communities living in the protected areas and their buffer zones. To thedegree that a local community is interested in pursuing funding for a given project, it would be in aposition 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 maycontinue carrying out their work on behalf of the park and the park's neighbors. Third, projects inthe area of environmental education and public awareness would be eligible to be financed by theprogram. Such projects could help foster a common understanding of the goals of the park betweenthe park managers and the local communities. Fourth, park guards and other workers hired under theproject are likely to be recruited from the Lommunities adjacent to the parks, and so local peoplecould benefit from the improved employment opportunities.

24. Benefits. A few carefully selected and properly managed conservation areas in Peru wouldguarantee the survival of a representative, ecologically viable sample of Peru's diverse flora andfauna. The project will provide a mechanism to: (i) secure improved and sustained management ofthese conservation areas, and (ii) promote long-term strategic planning for the protection ofbiodiversity in the country. If successful, the institutional arrangements of the project will catalyzeother resources for biodiversity conservation. Once the trust fund reaches its target of US$40million, it would provide sufficient resources to afford basic management to all of Peru's protectedareas.

25. Risks. The project faces the following risks: first, annual fluctuations in the rate of return ofthe portfolio may result in a reduction of the income available for project funding from one year tothe next. Like all investments, the return each year will depend on market conditions, which are hardto 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 acushion is built-up based on a spending rule which would reserve "excess" profits from higher returnyears to be used in lower return years. This cushion will be built by using a spending rule whichlimits the expenditures of the trust to at most five percent of the value of the fund's assets for the firstthree years, and at a rate not to exceed five percent of the three-year moving average value of theaccount assets subsequently. A second risk is that PROFONANPE's Board may be ineffective in itsoversight of the fund's expenditures. This risk is minimized given the mixed composition of theBoard, which embodies a variety of interests and levels of commitment. The third risk is that giventhe overwhelming pressures on the natural resources of the country, it is possible that despite allefforts, the project will be unsuccessful in stopping outside encroachment and damage to the protectedareas. This risk will be reduced to the degree that the project involves local populations in thejudicious management of the park through economic incentives and increased awareness of theimportance of sustainably using the park's resources. Finally, there is some risk that the trust fundwill 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 contributions frominternational donors are already under negotiations and it is highly probable that at least some of thesewill come to fruition. In any case, even if no additional donations are obtained for the trust fund, thelevel of resources going to protected areas via the GEF contribution already doubles the annualamount the government is currently spending in the protected areas.

AttachmentsWashington, D.C.March 20 1995

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Schedule A

PERU



Estimated Project Costs by Component

(US$ '000) I/

For Years 1-5 of the Project

Project Component Local | Foreign | Total | As % ofExpenditures Expenditures j _ Base Costs

Endowment of FONANPE 5,000 5,000 79

Management of Selected Protected 711 711 11Areas

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 ofthe project amounting to US$1,361,000. This sum represents the expected net return from theinvestment of the US$5.0 million capital of the fund. The figures above were computed based on thespending rule described in Annex 2 of the attached Technical Report, and are limited to the resourceswhich are pledged to date. As new resources are obtained, the program will be expandedaccordingly, based on the priorities established by the Board of Directors and in accordance with theNational 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 ofmoney available to the program each year.

Schedule B

PERU



Summary of Procurement Arrangements

Given the unique nature of this project, the standard procurement arrangements would not bemeaningful, since the exact project activities cannot be predicted beforehand. Procurement concernswould be minimal, however, since expenditures deriving from this grant are not expected to exceedUS$300,000 per year. Expenditures would involve mainly salaries, maintenance materials for parkinfrastructure, and minor equipment. To ensure compliance with Bank procedures, PROFONANPEwill prepare for review by the Bank, a specific procurement program in the context of its annualoperating plan, based on the following guidelines: Civil works under the project would be small andgeographically dispersed. They would include small civil works such as the construction of parkguard posts. Since the largest contract is not expected to exceed US$300,000, it is unlikely thatforeign contractors would be interested. Civil works contracts up to US$300,000 would be procuredusing local shopping procedures (obtaining at least three quotations from any eligible contractor).Contracts for goods are not expected to exceed US$50,000 per contract, and would be awardedthrough local or international shopping. Contracts for civil works above US$300,000 and contractsfor goods above US$50,000, would be awarded in consultation with the Bank in accordance withprocedures to be agreed upon in each case. The selection and appointment of consultants would bemade in accordance with the August 1981 Guidelines for the Use of Consultants by World BankBorrowers and by the World Bank as Executing Agency. Contracts with consulting firms valued atUS$50,000 or more would be subject to prior Bank review (terms of reference, letter of invitation,recommendation for award and proposed contract). For individual consultants, prior Bank review(terms of reference, qualifications and conditions of employment) would be required for contractsvalued at US$20,000 or more. Below these limits, the Bank's prior review would apply only to termsof reference. The use of standard documentation for the employment of consultants (letters ofinvitation and 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 FY99Fiscal Year

Annual 5.0 0 0 0 0

Cumulative 5.0 5.0 5.0 5.0 5.0

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Schedule C

PERU



Timetable of key project processing events

Time Taken to Prepare: 31 months (December 1991 to June 1994)

Prepared By: Ministry of Agriculture, PROFONANPE, and the NGOWorking Group in support of PROFONANPE

World Bank: Claudia Alderman (LA1RF), Rudolf VanPuymbroeck (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 Supervision Plan: Given the open-ended nature of the proposed project, and thepractical difficulty of continuing supervision into the indefinitefuture, it is expected that supervision would take place forthree to five years. The decision concerning the terminationor extension of supervision beyond five years will be based onthe Bank's examination of project performance, specifically,by evaluating whether the project has met its objectives. Thecriteria which will be used to evaluate the success of theproject can be found in Annex 6. The Bank andPROFONANPE would jointly conduct a mid-term review toevaluate the project implementation arrangements and itseffectiveness in the protected areas themselves. This reviewwould serve to fine-tune the project and serve as the launchingpoint for the concerted fund-raising effort to increase the trustfund's capital. Technical expertise: institutional specialist,ecologist, social scientist, financial analyst.

Part II: Technical Annexes

CURRENCY EQUIVALENTS

Currency Unit=New SolUS$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 AgencyDGAPFS 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 FacilityGET Global Environment TrustGOP Government of PeruGTZ Deutsche Gesellschaft fir Technische Zusammenarbeit GmbHINRENA National Institute of Natural Resources

(Instituto Nacional de Recursos Naturales)NGO Non-Governmental OrganizationPROFONANPE 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 paraAreas Naturales Protegidas por el Estado)

SINANPE National System of Natural Areas Protected by the State (Sistema Nacional deAreas Naturales Protegidas por el Estado)

TC Technical Committee

April 19, 1995 2:18pm

PERUGLOBAL ENVIRONMENT FACILITY


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 -

PERUGLOBAL ENVIRONMENT FACILITY

NATIONAL TRUST FUND FOR PROTECTED AREASTECHNICAL REPORT

I. BACKGROUND AND COUNTRY SEITING

1. Introduction. The Government of Peru (GOP) is committed to developing innovativemechanisms which would guarantee the appropriate management of the country's protected areas andbiodiversity. To this end, in 1992, the GOP created the Fondo Nacional para Areas Protegidas por elEstado (FONANPE), as a trust fund to provide long-term, sustained funding for Peru's protectedareas. At the same time, the Government created PROFONANPE as a private, not-for-profitinstitution charged with managing the trust fund. PROFONANPE is governed by a Board ofDirectors which includes representatives from the government, the NGO community and internationalcooperation agencies. The Board composition reflects a decision on the part of the GOP to forge apartnership between the public and private sectors for the management of Peru's protected areas.

2. The Country Setting. With a surface area of 1.28 million square kilometers, Peru isthe third largest country in South America, and the largest in the tropical Andean region. Thecountry is divided into three geographical zones -- coast, sierra and selva. Within the three zonesthere is a large array of habitat types which can be classified into 11 eco-regions, 16 biogeographicalprovinces, and 101 life zones and transitions. This habitat diversity has resulted in one of the greatestvarieties of flora and fauna on Earth.

3. Flora and Fauna. Peru ranks as one of the biologically most important countries inSouth America, and among the handful of megadiversity countries in the world. It contains a higherproportion of the species-rich forests of Western Amazonia and the tropical Andes than any othercountry. Peru has an estimated 18 percent of the bird species, 9 percent of the mammals, and 7percent of the amphibians in the world (see Table 1). Two of its large protected areas, ManuBiosphere Reserve and Tambopata-Candamo Reserved Zone, contain the world's highest recordeddiversities 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 alsoextremely high. A study in 1987 by Brack recorded the following number of endemic species: 50fish species, 90 bird species, 35 mammalian species, 69 species of reptiles and 28 species ofamphibians. There is little doubt that with additional field work this list would increase substantially.The richest concentrations of species and endemism occur in the eastern Andean slopes because oftheir high year-round rainfall and relatively fertile soils. The Peruvian Amazon also contains anextraordinary assemblage of species: in the Iquitos area in northern Peru, for example, a singlehectare of tropical rain forest has been found to contain 300 species of trees, by far the highestheterogeneity on Earth.

TABLE 1

Percent of Total Neotropical and WorldSpecies Found in Peru

Taxonomic No. % of % of WorldGroup Species in Neotropics_ _ _ _ _ _ _ _ _ _ _ _ _ P er-u _ _ _ _

Mammals 359 29 9

Birds 1680 44 18

Reptiles 298 12 5

Amphibians 241 13 7

Vascular Plants 30,000 20 8

4. Peru's Natural Resource Base. Peru has been and will continue to be dependent upon itsnatural resources for social and economic development. There are many potential timber and non-timber products which, if properly developed through sound and sustainable practices, could servesignificantly to increase the income and well-being of rural and urban communities throughout theAmazon region and other parts of the country.

5. The importance of Peru's biodiversity on a global scale cannot be overstated. Peruviangermplasm has played a substantial role in agricultural innovations in the past, and today is critical toplant 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 inPeru and have figured prominently in the Peruvian diet for thousands of years. There is little if anycurrent research, however, on the vast majority of Peru's native tropical plants and food crops, norare there data on the demand and supply of these products for national and international food markets.

6. Approximately 60 percent of Peru is covered by forest, with the Amazonian regionconsisting mainly of tall, moist tropical forests. These species-rich forests provide an untappedresource for the social and economic improvement of communities in the Peruvian Amazon and inother rural and urban areas of Peru, as well as in other countries. For example, medicinal plantssuch as cinchona (for quinine) and curare (used in heart surgery) have assumed worldwideimportance. New plants of medicinal importance are continually being discovered, with many comingfrom the traditional knowledge held by indigenous peoples in Peru's lowland selva.

7. Legislation, Policy, and Institutional Framework. In late 1990, the PeruvianCongress passed an environmental code that contains several important conservation provisions. Thecode took the positive step of abolishing legislation which provided incentives for colonizingAmazonia. Furthermore, the code requires the preparation of an environmental impact statement forany activity in Amazonia -- whether public or private. From 1993 through 1994, additionallegislation was passed requiring environmental impact studies for investments in the development ofmining, industry and fishing.

8. Despite these legislative efforts, however, Peru may have difficulty easing the pressureson its natural resources. After a decade of severe economic and political crisis, Peru is significantlyreformulating its policies, setting the stage for economic recovery. It has already succeeded indramatically reducing the inflation and terrorist activity that crippled the nation until very recently.These changes have already resulted in a substantial increase of tourists and will imply a large influxof tourists within the next few years and, more importantly, a substantial increase in investments toexploit Peru's natural resources (in particular timber, petroleum, natural gas and gold reserves). Ifnot managed, these activities pose real threats to the conservation of the country's biological wealth.Additionally, in spite of probable improvements in rural living conditions, the government may beunable to slow the surge of settlement of the Amazonian lowlands as peasants try to escape thepervasive poverty in the highlands.

9. Despite these problems, however, Peru has managed to set aside major parks covering avariety of ecosystems. Indeed, some of the parks, such as Manu, protect a contiguous range ofhabitats -- from lowland forests to cloud forests at 14,000 feet, and highland puna grasslands. Manyof these parks, although potentially "islands," are sufficiently large to minimize the risk of localspecies becoming extinct. Encouragingly, moreover, the legislation related to protected areas in Peruis comprehensive and sound. In 1990, the National System of Natural Areas Protected by the State(SINANPE) was created by Presidential Decree. Totalling 5.5 million hectares, the systemencompasses 7 national parks, 8 national reserves, 2 hunting reserves, 7 national sanctuaries and 3historic sanctuaries. These protected areas, in combination with 5 national forests, 6 protected forests

and I communal reserve, cover over six percent of the national territory. A list of all Peru'sprotected areas, including their location and size can be found in Annex 1. In 1993 the governmentcreated the National Institute of Natural Resources (INRENA), which brings together the expertise ofall public agencies involved with the management and conservation of Peru's renewable naturalresources.

10. Peru's legislative and institutional efforts notwithstanding, the GOP has been unable todevote sufficient resources to its conservation areas. Only four national parks receive anymanagement services through INRENA. Even when some resources are devoted to an area, they areinsufficient: Machu Picchu, for example, which benefits from the strongest management of any unitin the system, continues to experience management problems due to the large number of visitors ascompared to availability of park guards and visitors' services. Park staff, from guards to officeadministrators, frequently are inadequately trained. The lack of adequate staff stifles the parks'potential for conservation, research, recreation and revenue generation. The 1991 Tropical ForestryAction Plan reports that the park system employs 110 park guards for 5.5 million hectares, or oneguard per 50,000 hectares2/. This index is only one among many that may be construed to indicatethe severe deficiency of administrative and managerial inputs. To make matters worse, in 1992 asignificant portion of these guards left their jobs due to termination of contracts, low morale and lackof resources. With the Government absent from the parks, most of the limited management in a fewprotected 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, thoughunder very restricted conditions.

2/ IUCN recommends as a general guideline a figure of I park guard per 5,000 ha. for park and reserves withdense forest systems. According to the objectives of the area, however, these figures may vary. MachuPicchu, a well visited tourist attraction, probably needs a higher number of guards than the IUCNrecommendation. Other areas such as Manu and Tambopata Candamo probably need less as access is difficultand can be better controlled than areas with well-developed road systems.

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11. THE PROJECT

11. Project Objectives. The project has four major objectives, to: (i) provide a long termand predictable source of funding for the protection of Peru's biodiversity through the establishmentof a trust fund for the benefit of Peru's protected areas, the income of which would be used forfinancing the management of priority protected areas; (ii) improve INRENA's capacity to protect andmanage Peru's protected areas; (iii) provide the country with a reliable institutional mechanism tochannel debt donations for sustainable development and conservation through bilateral and commercialdebt-for-nature swap agreements; and (iv) test the viability of trust funds as mechanisms for providinglong term and sustainable funding for biodiversity conservation.

12. Project Description. The Fondo Nacional para Areas Protegidas por el Estado(FONANPE), was created by the GOP as a trust fund with the goal of providing long-term, sustainedfunding for Peru's protected areas. At the same time, PROFONANPE was established under privatelaw as a not-for-profit institution to manage FONANPE and to direct the use of the investmentproceeds. In anticipation of the GEF grant, and on the bases established by the preparation of thisproject, PROFONANPE started operating in June 1993 under a grant from the German technicalcooperation agency, the "Deutsche Gesellschaftfllr Technische Zusammenarbeit GmbH (GTZ)."During its first year, PROFONANPE has strengthened itself as an organization by conducting aninstitutional strategic planning exercise involving a dozen NGO's, developed criteria for managing itssmall grants program and issued requests for proposals, and negotiated Peru's first debt-for-natureswap.

13. To support PROFONANPE, the Global Environment Trust (GET) would provideUS$5.0 million as seed money for the Peruvian trust fund. In keeping with the GEF's goal of usingits resources to leverage additional funds, the GET grant is being complemented by a separate parallelgrant of US$1.5 million from the GTZ. While the German grant does not form part of the capital ofthe trust fund per se, this contribution will help to consolidate and strengthen the GOP's capacity tocoordinate all Peruvian conservation efforts and will lay the basis for the conservation activitiessupported by the trust fund. Moreover, GTZ's contribution will provide essential operational fundsduring the pilot phase of PROFONANPE until the trust fund reaches a sufficient size to sustainablyfinance the project activities with its income.

14. The GET grant would be placed in FONANPE, a trust fund legislatively established inPeru. The fund's assets would be managed by a Peruvian investment Bank, according to investmentobjectives and guidelines specified in the Project Agreement. These guidelines would specify theinvestment risk profile and the acceptable trade-offs between growth of the total value of theinvestment capital and the stability of annual income flows. Part of the investment income generatedeach year would be spent to finance conservation activities in Peru, while a predetermined amount ofthe income would be reinvested to maintain the real value of the principal. A discussion on thePeruvian capital markets, the process used to select the asset manager, investment guidelines andexpected returns can be found in Annex 2.

15. The by-laws governing the operation of FONANPE were drafted by a working groupcomprised of representatives from the GOP and from seven Peruvian conservation NGOs 3/. This

3/ The Peruvian NGOS participating in the project preparation working group were the following: Asociacion para la Conservacion dela Selva Sur, Amazonia, Asociacion Peruana de Conservacion, Centro de Datos para la Conservacion, Fundacion Peruana para laConservacion de la Naturaleza, Sociedad Pachamama, Sociedad Peruana de Derecho Ambiental. In addition, representatives from TheNature Conservancy and Conservation International also contributed to the preparation of the project.

group also developed criteria for selecting the protected areas which would be initially supported bythe project. These criteria include: (i) the global importance of the area for biodiversityconservation, 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 severalprotected areas meet these criteria, given resource constraints, three priority areas were selected forinitial support by the trust fund: Manu National Park and Biosphere Reserve, Rio Abiseo NationalPark, and Noroeste Biosphere Reserve (composed of the Cerros the Amotape National Park, Coto deCaza el Angolo, Tumbes National Forest and Manglares de Tumbes National Sanctuary). Adescription of each area, including planned interventions and results, can be found in Annex 4. AsFONANPE's capital increases through additional contributions, other protected areas will beintegrated into the program, based on the criteria described above as well as the guidelines of theNational System of Protected Areas Master Plan, and the National Strategy for the Conservation andManagement of Peru's Protected Areas, currently under development.

16. Project Components. The proceeds of the GET grant during the five-year pilot phaseof the project would be used to finance a variety of conservation activities in the selected areas andtheir buffer zones. Annex 7 summarizes project eligibility and selection criteria. The activitieseligible for funding include:

* Financing the recurrent costs of protected area management (mainly staff salaries and operatingexpenses)

* Drafting, revising and implementing management plans* Establishing and managing buffer zones* Training professionals in park and wildlife management* Instituting environmental education and public awareness programs for communities associated

with protected areas* Implementing projects that integrate conservation and development to benefit the communities

living in the protected areas and their buffer zones* Institutional support for the strengthening of the field work of INRENA's Directorate General

of National Protected Areas and Wildlife* Administrative expenses of PROFONANPE.

17. GTZ Funded Activities: The complementary activities financed separately by the GTZinclude: (i) support to INRENA in the form of infrastructure, equipment and training; (ii)development of a master plan for the management of all protected areas in the country; (iii) hiring ofconsultants to provide technical support to INRENA; (iv) institution building and operational costs ofPROFONANPE; and (v) a two-year program of small grants for NGOs to support sustainabledevelopment and conservation projects. A detailed description of the GTZ project activities can befound in Annex 3.

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III. PROJECT COSTS AND FINANCING

18. Project Costs and Financing. Expected expenditures over the five years of Bankinvolvement amount to US$1,361,000 equivalent, which represents the projected net income of thetrust fund for that period of time. The GET initial contribution of US$5.0 million will serve tocapitalize the fund, while the separate GTZ contribution amounting to US$1.5 million would providefunds for operating costs in the first year of the program. Although the GTZ contribution will notform part of the investment capital of the trust fund per se, this donation serves the key function ofproviding the up-front financing needed to lay the basis for the conservation activities supported byPROFONANPE in ensuing years.

19. Initial donations by the Canadian International Development Agency providedPROFONANPE with office space and fully equipped offices in Lima. The operating costs ofPROFONANPE, which approximate US$150,000 per year, are being covered in their totality by theGTZ grant for the first year of the project. After this time, administrative costs would be covered outof the trust fund's income, or by other donors. Consistent with the experience of other small trustfunds, such as the ones in Bhutan and Uganda, the administrative costs for the first few years of theproject constitute a relatively high percentage of the total income of the fund. As the trust fundgrows, however, the ratio of administrative costs to income available for program activities woulddecline. In this particular case, as the trust reaches its expected level of capitalization of at leastUS$40 million, the administrative costs will represent under 10 percent of net income. Assuming thatPROFONANPE 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 and5, the respective administrative cost ratios would be 0%, 29%, 17%, 11 % and 9% for years onethrough five of the project. Regardless of the level of capitalization of the fund, however, the ProjectAgreement specifies that PROFONANPE's administrative costs for 1995 will not exceed US$150,000per year, and will not grow by more than five percent per year thereafter, without explicit consent ofthe 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 receiveany additional contributions. To put this "worst case" scenario in perspective, however, it is useful torealize that even this limited level of funding would result in a threefold increase to the resourcescurrently 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 theBoard of Directors and in accordance with the National Strategy for the Conservation andManagement of Peru's Protected Areas. Specific details on PROFONANPE's spending rule, financialarrangements and projections are described in Annex 2.

21. The specific allocation of funds generated by the trust's investments will be determinedby PROFONANPE's Board of Directors, based on work programs submitted by the selected protectedareas. For the duration of the project supervision period, the Bank will have the opportunity tocomment on the work programs, prior to PROFONANPE's Board approval.

22. PROFONANPE has set a target of US$40 million of principal for the trust fund. It hasalready begun efforts to raise these funds both from direct contributions and as debt-for-nature-swaps.As its first fund-raising success, PROFONANPE has negotiated the first ever debt-for-naturetransaction in Peru through a bilateral debt donation from Canada for Can$ 500,000. Germany andFinland have committed additional bilateral debt donations to be channelled through PROFONANPE.Formal commitments to channel additional funds for park conservation projects have been recentlymade 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. Totap local resources, PROFONANPE will invite carefully selected, influential individuals interested inPeruvian environmental affairs to join an informal board or patronato. While the group will have noeffective power, it is expected that the group will help mobilize local and international resourcesparticularly in the private sector. Finally, after the project's mid-term evaluation, PROFONANPEand the government will organize a round table of donors to help reach the target amount of US$40million for the trust fund.

23. Procurement. Given the unique nature of this project, the standard procurementarrangements would not be meaningful, since the exact project activities cannot be predictedbeforehand. Procurement concerns would be minimal, however, since expenditures deriving fromthis grant are not expected to exceed US$300,000 per year. Expenditures would involve mainlysalaries, maintenance materials for park infrastructure, and minor equipment. To ensure compliancewith Bank procedures, PROFONANPE will prepare for review by the Bank, a specific procurementprogram in the context of its annual operating plan, based on the guidelines following guidelines:Civil works under the project would be small and geographically dispersed. They would includesmall civil works such as the construction of park guard posts. Since the largest contract is notexpected to exceed US$300,000, it is unlikely that foreign contractors would be interested. Civilworks contracts up to US$300,000 would be procured using local shopping procedures (obtaining atleast three quotations from any eligible contractor). Contracts for goods are not expected to exceedUS$50,000 per contract, and would be awarded through local or international shopping. Contractsfor civil works above US$300,000 and contracts for goods above US$50,000, would be awarded inconsultation with the Bank in accordance with procedures to be agreed upon in each case. Theselection and appointment of consultants would be made in accordance with the August 1981Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as ExecutingAgency. Contracts with consulting firms valued at US$50,000 or more would be subject to priorBank review (terms of reference, letter of invitation, recommendation for award and proposedcontract). For individual consultants, prior Bank review (terms of reference, qualifications andconditions of employment) would be required for contracts valued at US$20,000 or more. Belowthese limits, the Bank's prior review would apply only to terms of reference. The use of standarddocumentation for the employment of consultants (letters of invitation and forms of contract) wouldbe agreed with PROFONANPE.

24. Disbursement. The total grant amount would be disbursed in one lump sum to the trustfund established in Peru as specified in the Grant Agreement. The asset manager would makequarterly wire transfers of the trust's income (within the limits established by the spending rule) toPROFONANPE's dollar-denominated account in Peru. PROFONANPE's coordinator would beauthorized to make payments to suppliers or consultants in accordance with requests submitted by themanagers of the selected protected areas, based on the expenditures specified in the annual workprogram approved by PROFONANPE's Board of Directors, and reviewed by the Bank. Inaccordance with PROFONANPE's operating procedures the funds received from each donor will bemaintained in separate accounts.

25. Accounts and Auditing. PROFONANPE's Board would contract the services of anindependent auditing firm to carry out an annual audit of the finances of the project and of the trustfund. The auditors will review the project's financial records to determine if the expenditures matchthe approved work program and if satisfactory procedures of record-keeping are being used. Theauditor's report will be forwarded by PROFONANPE to the Bank no later than four months after theclose of PROFONANPE's fiscal year. To ensure adequate record-keeping procedures, a managementservices consulting firm developed written procedures and guidelines for financial accountingspecifically suited to the project. (Refer to the Manual of Norms and Procedures for

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PROFONANPE, January 1994, and the Manual of Organization, Functions and Policies forPROFONANPE, January 1994, in the project files). As part of the assignment, this firm alsoprovided training to the project coordinator to ensure that the guidelines were clearly understood andcorrectly implemented. This preparatory work should facilitate the subsequent work of the auditors,and ensure transparency, comprehensiveness and accuracy in record keeping.

IV. PROJECT ORGANIZATION AND IMPLEMENTATION

26. Board of Directors. PROFONANPE is governed by a Board of Directors, composed asfollows: three representatives from the Peruvian government, three representatives from Peruvianconservation NGOs elected by the Peruvian Environmental Network, (initially, the SociedadPachamama, Sociedad Peruana de Derecho Ambiental, and Desarrollo Comunitario) and arepresentative from an international cooperation agency (initially, the GTZ). One of the governmentrepresentatives will assume chairmanship of the Board. The Board responsibilities will include: (i)approving the annual work programs and budgets; (ii) reviewing the reports of the projectcoordinator, protected area managers, and auditors; (iii) dealing with policy issues; (iv) carrying outother responsibilities as specified in PROFONANPE's bylaws.

27. Project Coordinating Unit (PCU). Project management and administration will becarried out by a PCU under the leadership of the Project Coordinator, who is appointed by the Board.The project coordinator will be responsible for: (i) day-to-day management and administration ofPROFONANPE's activities 4/; (ii) ensuring that all accounting and records are kept according toestablished procedures; (iii) preparing the annual analysis of needs and requirements for eachprotected area and the corresponding work program, in coordination with INRENA; (iv) oversight ofimplementation, reporting and evaluation; (v) reporting to the Board regarding the status of projectactivities; (vi) liaison and coordination between the Board of Directors, the GOP, donors, and thetechnical committee; and (vii) fundraising to increase the capital of the trust.

28. Technical Committee. The Board will be advised by a Technical Committee composedof specialists in technical areas pertaining to the operations of PROFONANPE and programbeneficiaries. It shall have in particular scientists and natural resource management expertsexperienced in park and wildlife management, and rural development. A sub-set of the committeewill be comprised of financial experts, so as to advise PROFONANPE on financial matters. Thiscommittee will also be responsible for developing the guidelines for monitoring and evaluation of theproject, and for providing an annual evaluation of the performance of the asset manager. TheTecnical Committee is an additional forum in which relevant conservation NGOs may contributesubstantively to the project. Annex 5 contains the committee's terms of reference.

29. Bylaws. The by-laws that govern the operation of PROFONANPE were approved by itsBoard on December 1993. These bylaws can be found in the project files.

30. Annual Work Programs and Progress Reports. Decisions about the allocation ofresources within each protected area will be based on an annual work program developed by theProject Coordinator, in coordination with INRENA. The work program will reflect an analysis of therequirements and needs of each area, and will be based on the Master Plan for the National System ofNatural Areas Protected by the State (SINANPE) and the management plan and/or operating plan of

4/ The actual day-to-day implementation of project activities would be handled by the personnel of theprotected areas themselves, INRENA, NGOs, universities, etc. as specified in the annual work plan ofeach protected area.

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each conservation unit. Given the project's commitment to the principles of local participation inconservation decisions, the work program will be developed in consultation with each protected area'sadministrative officer, local committees (where they exist), park officers, grassroots organizations andlocal communities. The annual work program will include a statement of specific objectives to bepursued during the year and the activities to be undertaken in order to achieve those objectives.Where appropriate, work programs will designate those activities to be carried out by the DirectorateGeneral of Protected Areas and Wildlife (DGAPFS) and those components which could beimplemented by NGOs, universities or consulting firms. The Board of PROFONANPE will send theannual work programs to the Bank for comment no later than November 15 of each year. (SeeAnnex 7 for a detailed summary of project eligibility and selection criteria.)

31. PROFONANPE's coordinator will prepare for presentation to INRENA and the Board areport of the preceding year's activities and accomplishments. This report will assist the Board andthe TC in their evaluation of the performance of each protected area. Moreover, the report wouldserve as the basis for the preparation of the progress report which the Board will present to the Bankby April 1 of each year for the length of project supervision.

32. Asset Management Arrangements and Investment Guidelines. The fund's assetswould be managed by a Peruvian investment bank, according to investment objectives and guidelinesspecified below. These guidelines define the investment risk profile and the acceptable trade-offsbetween growth of the total value of the investment capital and the stability of annual income flows.Part of the investment income generated each year would be spent to finance conservation activities inPeru, while a predetermined amount of the income would be reinvested to maintain the real value ofthe principal. Given the project's objectives, PROFONANPE's investment strategy will seek tomaximize total return, including interest, dividends and capital appreciation, while safeguarding aminimum level of annual income to maintain the real value of the capital and cover operatingexpenses and grant commitments. PROFONANPE's initial investment guidelines are detailed inAnnex 2.

33. Reporting Requirements for Asset Manager The investment manager will preparequarterly reports for PROFONANPE including a full accounting on changes in market value, totalreturns and cash distributions.

34. Performance Evaluation. For purposes of evaluating the investment manager'sperformance relative to this objective, an initial benchmark of 10 percent (dollarized, nominal return)will be used. For reference purposes, this level approximates a 500 basis point spread over thecurrent "tipmex" (the deposit rate on foreign exchange certificates of deposit, and a local benchmarkused for evaluating fixed income investments), and the year-to-date 1994 gain on the Lima StockExchange. Following a review of the investment manager's performance in the initial two years,another type of benchmark could be considered such as a weighted average index of the tipmex plus aspread for the fixed income component and the official Lima Stock Exchange index for the equityportion of the portfolio.

35. PROFONANPE's financial experts appointed to its technical committee will conduct anannual evaluation of the investment performance. While the Peruvian market is anticipated to yieldsatisfactory results over the next few years, these high returns may not be sustainable over the longterm. The Board of Directors will therefore reserve the right to reconsider alternative investmentmanagement options, including offshore markets, and if necessary will make adjustments under termsof reference satisfactory to the World Bank.

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36. Project Supervision. Given the open-ended nature of the proposed project, and thepractical difficulty of continuing supervision into the indefinite future, it is expected that supervisionwould take place for three to five years. The decision concerning the termination or extension ofsupervision beyond five years will be based on the Bank's examination of project performance,specifically, by evaluating whether the project has met its objectives. The impact of the project onthe protected areas will be evaluated against the baseline information collected during projectpreparation and summarized in the background paper on each of the selected areas titled: "Informesobre las Areas Protegidas Seleccionadas para Apoyo por el GEF." The criteria which will be usedto evaluate the success of the project as a whole can be found in Annex 6.

37. Program Monitoring. The goals of monitoring and evaluation for the project are: (i)to evaluate the long-term effectiveness of the private trust fund mechanism for biodiversityconservation; (ii) to determine the optimal institutional, legal and financial arrangements for such amechanism; and (iii) to evaluate what can be "bought" in terms of biodiversity conservation (andinstitutional capacity-building) by the trust fund. The success of the project is measured ultimately inbiodiversity protection, while satisfactory institutional and legal arrangements and asset performanceare only means to this end. A description of the proposed monitoring and evaluation arrangementsand indicators is found in Annex 6.

38. Reporting Requirements. Prior to the Board's approval of the annual work programs,PROFONANPE will provide the Bank with the opportunity for review and comment. In addition,PROFONANPE will submit an annual project progress report by April 1 each year. This report willinclude the reports prepared by each protected area manager summarizing the preceding year'sactivities and accomplishments, as well as an overall evaluation of the operation of the program.

39. Mid-term Review. PROFONANPE and the Bank would conduct a mid-term review atthe end of 1997 to evaluate its implementation arrangements, its on-the-ground effectiveness in theprotected areas themselves, and the performance of the asset manager. This review would serve threefunctions: (i) fine-tune the project and determine any needed modifications; (ii) evaluate investmentperformance; and (iii) serve as the launching point for the concerted fund-raising effort to increase thetrust fund's capital. Furthermore, if the mid-term review shows a clear accomplishment of the projectobjectives, it would provide interested but presently cautious donors with specific evidence of themerits of environmental trust funds.

40. Implementation Completion Report. Given that the Bank will make a one timedisbursement, the project closing date (the latest date in which the GOP may withdraw the proceedsof the grant) will be defined as one year from the date of effectiveness. The Grant and ProjectAgreements will have a duration of twenty five years. PROFONANPE will prepare anImplementation Completion Report within three months of the end of the Bank's supervision period.Since the trust fund has no finite time frame, the Implementation Completion Report will relate toimplementation performance during the length of the Bank's supervision period.

-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 mI Natural 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 mI Natural 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

Protectod Fore

B.P. ALTO MAYO San Maitin 1987 182,000.0 VIl Managed Reourca Arca

B.P. DE CANEf limna 1980 18.1 VIII Manged Reaowure Are

B.P. DE PAGAIBAMBA Cajamarca 1987 2,078.4 Vm3 Maaged Reaourea Area

B.P. PUI-PUI Junin 1985 60,000.0 VIm Manaed Raurces Area

B.P. PUQUO SANTA ROSA Ia Libertad 1982 72.5 Vm Mawged Rmources Area

B.P. SAN MAIIAS-SAN CARLOS Paco 1987 145.818.0 Vm Managed Raourcn Area

Hunfin Pracrvea

C.C. EL ANGOLO Piun 1975 65,000.0 Vm Multiple Ua Managemmt AreS

C.C. SUNCHUBAMBA Cajamarca 1977 59,735.0 VII Muhipke Use Mangeaaet Ana

Comunal Reserves

RC. YANESHA Pasco 1988 34,744.7 VllI Mnged Rerour Area

9 IUCN: International Union for the Conservation of Natr

-13 - ANNEX 2

Annex 2: Financial Analysis and Management

Backgiround

During the preparation of this project, several options for the investment of the trust fund assets wereconsidered. These included establishing a trust account in the United States for the benefit of Peru'sNational System of Protected Areas, or alternatively, establishing a trust fund in an offshorejurisdiction such as the Bahamas Islands. These options were deemed unsuitable due to a number ofreasons, including the risk of attachment of the funds by creditors of the Peruvian government.Following extensive analysis of these issues, it was determined that the optimal option from a legalperspective was to establish the fund in Peru where FONANPE enjoys express legislative freedomfrom attachment, as well as other privileges such as tax exemption, due to its not-for-profit status.

At the request of PROFONANPE's Board, a consultant undertook a thorough analysis of localinvestment options in Peru, and on the basis of proposals solicited from five leading financialinstitutions, prepared a recommendation for the selection of a local investment manager. The analysiswas completed on August 17, 1994 and recommended a local investment manager forPROFONANPE. This recommendation was subsequently ratified by PROFONANPE's Board in ameeting on August 23, 1994. The report, titled "Informe para el consejo directivo delPROFONANPE sobre la seleccion de un banco nacional para la administracion de los fondos delPROFONANPE en 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, emerging markets are by definition lessdeveloped and characterized by a higher degree of volatility. Due to the fact that the Peruvian stockmarket has only been in full operation for a period of less than three years, a meaningful analysis ofhistorical results is not available at this time. Hence, the superior returns obtained to date fromemerging market instruments are based on a substantial risk premium corresponding to the high levelof volatility associated with anticipated results.

The Peruvian financial market has experienced dynamic growth over the past few years, based onsound macroeconomic changes undertaken by the Fujimori administration and the correspondingconfidence of the international investment community. The recent enactment of a new General Lawon Banking, Financial and Insurance Institutions (Legal Decree 770) has substantially expanded andliberalized the operations performed by the financial sector. Under this law, a national privatepension system was established, which is expected to capitalize the domestic financial markets further.

While traditional endowments and trust funds are not prevalent in Peru given the historic scarcity oflong-term capital in this market, there are several experienced local financial institutions in Perucapable of managing the PROFONANPE trust account. The fact that the Peruvian market is largelydollarized facilitates free monetary exchange and enhances the attractiveness of a local investmentmanagement option.

The Lima Stock Exchange set new price, volume and market capitalization records for the thirdconsecutive year in 1993. During 1993, the general market index rose 91% in dollars, compared to124% in 1992. Trading volume in stocks reached US$1.63 billion, a near four-fold increase from theUS$409 million shares traded in 1992 and significantly greater than the volume in 1991 (US$122.5million). Market capitalization nearly doubled from US$2.6 billion at the beginning of 1993 toUS$4.9 billion by year-end 1993. Behind the market's three-year bull run were extensive market-

-14 - ANNEX2

oriented structural reforms implemented since 1990, increasing the economic stability created by anIMF-monitored structural adjustment program, and with a significantly improved investment climatefor 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 economic and financial outlook for Peruviancompanies, and hence their share values.

Average daily trading value levels settled at US$8 million towards the end of 1993, and are expectedto approximate US$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. Substantial increases in trading volumeand market capitalization should continue to result from the privatization process, as it will lead to thelisting of a number of new and important companies on the exchange, including Entel(telecommunications) and Electrolima (power utility).

Two years ago, shares traded on the Lima Exchange were substantially undervalued, accounting forthe significant share appreciation noted above. While spectacular gains are not anticipated, growth isexpected to remain strong for several years, with average dollarized annual returns (nominal) in the15-30% range, provided political stabilization and economic reform continue.

By the end of 1994, the Lima Stock Exchange continued to set new price, volume and marketcapitalization records for the fourth consecutive year. While this market did experience a lowertrading volume in the month of December, precipitated by the sharp devaluation of the Mexican pesoand subsequent capital flight from that market, weekly trading volumes appear to be stabilizing.

The fixed income market in Peru, while relatively small, is growing at a rapid pace. Traditionalmoney market instruments, such as commercial bank deposits, repurchase agreements, bankers'acceptances, Central Bank Certificates of Deposit, treasury bonds and corporate bonds are currentlyyielding average annual returns of 7.5-11.5% on a dollarized basis.

Financial Risks and Mitigating Factors

The financial risks to the GET grant to PROFONANPE, resulting from a concentration ofinvestments in Peru, have been mitigated to the fullest extent possible in the proposed investmentmanagement arrangement, as follows:

Political Risk. Due to the legal nature of the FONANPE trust in Peru, the funds are not subject toattachment risk, as might be the case if the funds were invested offshore or in a market where Peru'sinternational creditors could attempt to make a claim against these assets. In addition to attachmentrisk, political risk could also arise from political uncertainties that would destabilize financial marketconditions. In the case of Peru, however, it is widely believed that regardless of the outcome of theApril elections, current economic policies will be continued. Nonetheless, to safeguard againstunanticipated risks in this capital market, the investment management agreement has been structuredsuch that an average of 20% of the fund's assets will be invested offshore. In the event of a politicalemergency, all of the fund's assets could be transferred to this offshore account.

Investment Risk. To the extent that investments are concentrated in a single emerging market, theymay run the risk of high return fluctuations and potential loss of value. For this reason, theinvestment management strategy for this account has been conservatively structured to provide for amajority of the portfolio's assets (approximately 70%) to be invested in domestic and internationalfixed income returns. As noted above, the international component of this portfolio managementarrangement provides for additional diversification into developed market securities to further reducethe risk of single market volatility to this fund.

-15 - ANNEX 2

Devaluation Risk. Emerging market investments that are denominated in local currency may run therisk of loss of value, due to currency devaluation. However, in the case of Peru, where the capitalmarkets are largely dollarized, this risk is significantly mitigated. The FONANPE trust account willbe maintained in U.S. dollars and all fixed income investments will be made in local currency.Sophisticated currency hedging techniques are not currently available in emerging markets such asPeru. For dollar-denominated portfolios, local equity investments are denominated in local currencyand U.S. dollar equivalent market values for this component are determined using the exchange ratein effect on the reporting or trade date (in the case of a sale transaction). Short-term currencyhedging instruments (commercial bank foreign exchange contracts) are available to protect the valueof investments from the date the trade is negotiated to the settlement date (usually a 2-3 day interval).This technique will be used by InterBanc/Interlnvest for the FONANPE trust (associated fees areincluded in the transaction cost assumptions for net return expectations). While this presents somedevaluation risk to the FONANPE account, this risk is largely mitigated by the investment structure(majority of the portfolio is invested in short-term fixed income, dollar denominated investments) andthe solid market fundamentals of the Peruvian economy.

Inflation Risk. In a highly inflationary market, financial investments may run the risk of loss of realcapital value due to inflation erosion. In order for PROFONANPE to achieve its long-term objectiveof maintaining the real value of the trust's assets, approximately 4% of the net asset value (in U.S.dollars) from the total annual return will be reinvested annually in the fund to safeguard its real value.This annual reinvestment provision is specified in a spending rule which is incorporated in thedocumentation governing this project.

With respect to local currency-denominated equity investments of this trust, Peru has experiencedfavorable inflation trends that are expected to continue. Based on the local outlook for the LimaStock Exchange, growth is expected to remain strong for several years with average annual returns(nominal) in the 15-30% range, provided political stabilization and macro-economic reforms continueas planned.

Analysis of Proposals

Investment management proposals were received from five top Peruvian financial institutions. In theRequest for Proposal, these institutions were asked to present a global investment strategy for theinvestment of PROFONANPE's funds, based on a conservative risk profile.

The principal criteria used to evaluate local banks as prospective investment managers wereinstitutional capacity, investment banking experience, substance of investment strategy proposals forPROFONANPE, international capability (to invest a portion of the funds offshore) and administrativecosts. Based on these criteria, three banks were qualified as acceptable investment managers forPROFONANPE's funds. In separate meetings with high-level representatives from the Ministry ofEconomy and Finance, these three institutions were confirmed as the most experienced banks in thecountry. In the absence of an official bank rating system in Peru, these official endorsements weredeemed essential. Copies of the proposals submitted by these banks can be found in the project files.

Investment Manaeement Parameters

Given the project's objectives, PROFONANPE's investment strategy will seek to maximize totalreturn, including interest, dividends and capital appreciation, while safeguarding a minimum level ofannual income to maintain the real value of the capital and cover operating expenses and grantcommitments.

-16 - ANNEX 2

Since Peru's capital markets are expected to continue to develop at a rapid pace, the investmentmanagement contract will include fairly broad investment parameters with a significant degree ofdiscretion for the asset manager, within the following specified investment guidelines:

1. The objective of the GEF grant investment account will be to maintain a conservativeallocation of capital between fixed and variable income securities that will safeguard aminimum level of annual income to: a) cover program needs, which are set at a minimum of5 percent; b) generate a capital reserve to offset potential investment losses in future years;and c) provide for an annual reinvestment in the amount of the projected long-term inflationrate (as estimated by the World Bank) to maintain the real value of the seed capital.

2. The starting asset allocation will be 70% in a variety of fixed income instruments and 30% inequities. The investment manager will then have the option to alter this allocation in fixedincome assets from a high of 80% to a low of 60%, based on previous market performanceand on their professional perception of market conditions. The equity component willconversely be adjusted between a low of 20% to a high of 40%. These asset allocationparameters will be reviewed, and possibly revised, on an annual basis to account for changesin market conditions. As the Peruvian market matures, a higher allocation in equities may beprudent given the potential for higher returns from this asset class. At the same time, oncePeru concludes its external debt negotiations, an alternative offshore investment arrangementcould be considered.

3. For domestic equity investments, the asset manager will select Peruvian companies with thestrongest market fundamentals for this portfolio. Since Peru is an emerging market, themanager will diversify portfolio risk in complementary and countercyclical economic sectors.PROFONANPE will maintain some portfolio liquidity (through fixed income instruments withrelatively short maturities) to take advantage of new issues, as they emerge. It is anticipatedthat the asset allocation of this portfolio can be adjusted in future years, by continuallyincreasing the allocation of stocks, in order to maximize returns to PROFONANPE. Theinvestment manager will be responsible for selecting investments whose underlying activitiesdo not have adverse environmental impacts.

4. The manager will have the option to invest a small percentage of the total portfolio ininternational securities that qualify as high-grade investments in developed markets. Themanager will use their professional discretion in determining the composition of theinternational component of this portfolio, between fixed income and variable securities.

5. The portfolio will be administered on a dollarized basis.

Reportinig Requirements

The investment manager will prepare quarterly reports for PROFONANPE including a full accountingon changes in market value, total returns and cash distributions.

Performance Evaluation

For purposes of evaluating the investment manager's performance relative to this objective, an initialbenchmark of 10 percent (dollarized, nominal return) will be used. For reference purposes, this levelapproximates a 500 basis point spread over the current "tipmex" (the deposit rate on foreign exchangecertificates of deposit, and a local benchmark used for evaluating fixed income investments), and the

-17 - ANNEX 2

year-to-date 1994 gain on the Lima Stock Exchange. Following a review of the investment manager'sperformance in the initial two years, another type of benchmark could be considered such as aweighted average index of the tipmex plus a spread for the fixed income component and the officialLima Stock Exchange index for the equity portion of the portfolio.

PROFONANPE's financial experts appointed to its technical committee will conduct an annualevaluation of the investment performance. While the Peruvian market is anticipated to yieldsatisfactory results over the next few years, these high returns may not be sustainable over the longterm. The Board of Directors will therefore reserve the right to reconsider alternative investmentmanagement options, including offshore markets, and if necessary will make adjustments under termsof reference satisfactory to the World Bank.

Proiected Cash Flows

Regardless of the size of the trust fund's capital, the amount actually spent on project funding eachyear will be determined by a "spending rule" designed to provide a sustainable and predictable streamof income over time. A conservative spending rule, tied to a moving average of the value of thefund, will smooth out variations in total return caused by market volatility, and ensure a steady levelof available income for program activities. The proposed spending rule specifies that only fivepercent of the three-year moving average of the value of the portfolio will be available for programspending in any given year. Given that a moving average is based on the lagged values of actualportfolio size, expenditures for the first three years will be set at a conservative rate of five percent ofthe current value of the portfolio. Subsequently, the spending rule will be used to determine allowedannual expenditures.

Given that the project activities financed by the trust fund have no ending date, the purpose of thefigures presented below is to illustrate likely patterns of income and expenditure during the first fiveyears of the project. These figures show how according to the spending rule and based on aminimum annual return of 10%, the annual spending income for PROFONANPE would be equal tofive percent of the average asset value. Of the balance remaining, the annual reinvestment rate tomaintain the real value of the fund's assets would approximate 3.7 percent, and investmentmanagement fees and the contribution to the capital reserve would be 1.3 percent.

Two models are presented: Table 1 shows anticipated revenues and expenditures for project years 1 to5, under the assumption that the PROFONANPE does not receive any additional contributions. Toput this "worst case" scenario in perspective, this limited level of funding would result in resourcesdevoted to protected areas which are three times those allocated by the government at present. Table2, on the other hand, provides a projection under the assumption that the US$ 40 million target isreached progressively over a five year period.

-18 - ANNEX 2

TABLE 1Trust Fund Anticipated Revenue Flow for Years 1 to 5

Assuming no Additional Capital Contributions (US$ '000)

YEAR Year I Year 2 Year 3 Year 4 Year 51995 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 2Trust Fund Revenue Flow for Years 1 to 5

Assuming Progressive Total Capitalization to 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 expenditureswould 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 description of the complementary project activities financed by the GTZ.

1. Institutional Strengthening, Equipment and Training (US$627,000). To date,INRENA and its predecessors have been unable to adequately carry out their mandate of managingPeru's protected areas due to lack of personnel, equipment, operating funds and a united, thoughtfullystructured administration. To alleviate the lack of technical staff, the project will provide INRENA,for a period of two years, the services of a full time expert who will provide support in parkmanagement, planning and policy development. The project will also provide short-term consultantsto carry out specific research and planning tasks. After the initial GTZ contribution ends, FONANPEwould continue providing support to INRENA as needed, at the discretion of the Board of Directors.In addition to human resources, the project would provide INRENA with facilities and equipment.PROFONANPE has already transferred to INRENA part of the computers and one of the vehiclesreceived from the Canadian International Development Agency (CIDA). This support shouldfacilitate the integration of project activities with the ongoing work of INRENA, resulting in amutually beneficial association. To improve communications with the remote protected areas, theproject has also equipped INRENA with short wave radio communication equipment to linkheadquarters with the field stations. Also, the project is providing funding for the purchase ofadditional office equipment, furniture, supplies and some basic operational costs.

2. Training, however, will be the main vehicle for building Peru's long-term institutionalcapacity. Accordingly, GTZ is currently financing training for INRENA staff both at headquartersand in the field. The training programs range from short-term workshops and field courses toparticipation in training programs abroad. To coordinate this work, the project would provide aconsultant to assist with the design and implementation of the training program.

3. Development of a National Strategy for the Conservation and Management ofPeru's Protected Areas (US$360,000). INRENA does not currently have an integrated strategy forthe management of its protected areas. Without such a plan, management of Peru's protected areas ishaphazard and ineffective. Consequently, the project is financing the formulation of a master plan forthe integrated and comprehensive management of all protected areas in the country. This master planwill also provide recommendations as 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 awarded through open competition toNGOs, local grassroots organizations, or universities based on proposals submitted to FONANPE tobe approved according to established procedures. The grants would finance the implementation ofprojects geared to advance the complementary objectives of natural areas conservation and incomegeneration for rural inhabitants, such as agroforestry development, marketing of non-timber forestproducts and small-scale, ecotourism and commercial wildlife breeding of caimans or other species.Project selection mechanisms and criteria have already been developed by PROFONANPE, and thefirst round of proposal review will take place by mid-October 1994.

5. Operational Support for PROFONANPE (US$173,000). Initial donations by theCanadian International Development Agency provided PROFONANPE with office space and fullyequipped offices in Lima. For the initial two years of the project, the expenses of the projectcoordinating unit would be borne by the GTZ grant with a possible extension of up to four years.Thereafter, and on a increasingly diminishing rate, these costs will be financed using a portion of theincome of FONANPE.

- 20 - ANNEX 4

Annex 4: Description of the Protected Areas Supported Under the Trust Fund

Manu National Park and Biosphere Reserve

1. The Manu Biosphere Reserve encompasses over 1.5 million hectares, divided into threemanagement categories: Manu National Park, a core area preserved in its most natural state; theExperimental or Reserved Zone, a buffer zone set aside for controlled experimental research andtourism; and the Cultural Zone, a transition area of permanent human settlements where sustainableuses of land and forest are promoted. The Reserve contains the world's highest recorded diversitiesfor birds, mammals, reptiles, amphibians, freshwater fishes, all vascular plants, trees, butterflies, andinvertebrates. In only a few square kilometers, at the Cocha Cashu Biological Station in the park'slowland rain forest, over 560 species of birds have been recorded. It is estimated that acomprehensive inventory would reveal close to 1,000 bird species in Manu. Current bird counts inManu represent 25 percent of all bird species known in Latin America and nearly 10 percent of theearth's birds. Despite the botanical interest in Manu, relatively few plant collections have been madethere. At least 1,200 species of vascular plants are reported from limited samples of the lowlands.This estimate is likely to increase substantially when plant inventories are completed for all altitudinallevels. The more than 200 species of trees reported from a 1-hectare plot of forest in Cocha Cashualone makes this one of the world's most diverse forests. The appearance of the mature forests atManu is impressive, with emergent trees reaching heights above 55 meters on well-drained sites.Manu is one of the last South American wilderness areas with extensive pure stands of large cedro(Cedrela spp.) trees. Elsewhere in the Neotropics this valuable timber species has been virtuallyeliminated.

2. The Manu National Park and Biosphere Reserve has been subject to mild stresses but isthreatened by a dramatic escalation of both the number and intensity of its problems. The difficultiesthe Reserve faces originate from its management as well as from outside forces. No coherentmanagement exists: Manu's administration is the responsibility of the regional government, whereasgiven that it is also a national park and biosphere reserve INRENA is responsible for technicalsupport. Despite the existence of biannual management plans, and an "anthropological plan"addressing indigenous populations inside park boundaries, insufficient funds have precluded theirimplementation. In 1992, Manu's staff dropped from 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 inadequately trained staff. The lack of infrastructure such as guard posts,docks and roads, as well as insufficient numbers of boats, trucks and radios, make policing the parkextremely difficult.

3. Managing and protecting the park coherently and efficiently is increasingly important in thelight of mounting outside threats. Immigrants from the highlands are encroaching on park territory,practicing destructive forms of shifting agriculture. Wood extraction from park lands is alsoreportedly increasing. Peasants have cleared and burned areas along the western highland and southwestern borders for pasture and cropping. The Camisea natural gas deposits near the western borderwill start being developed in 1995. This could cause an influx of population and subsequent pressureon the resources of the surrounding area. Park boundaries are at best poorly marked, and much ofthe Reserve frontier is totally unmarked. No planning or control accompanies the chaotic touristindustry operating in the reserve. Intrusions by outsiders, as well as the park's failure to establishgood relations with indigenous populations, has meant that frictions between colonists or park staffand indigenous populations are mounting. Many volatile land tenure issues remain unresolved.

- 21- ANNEX 4

4. Through time, as funds permit, income from the trust fund will help implement the biannualmanagement plans, and fit them into the National Park Strategy. The park's administration andplanning will be consolidated and streamlined to allow for both more coherent and efficientmanagement of the park as well as a strong, united public front to defend the park from threats likeenergy, logging or agricultural interests. Park facilities and equipment for transportation andcommunication will be provided specifically to patrol the park, while at the same time making theseresources available to researchers to the degree possible. The park's boundaries will be marked.With a regular, adequate budget, sufficient personnel may be (re)hired and provided with training ifneeded. A public relations/education campaign to make known the objectives and importance of thepark will be undertaken in and around the area. Tourism to the area will be managed according to acoherent plan that assures its adherence to the park's objectives. Through local governments, NGOsand Universities, sustainable development efforts will be supported in areas inside and around thepark according to the park's guidelines and Peruvian law. Scientific studies will be supported, bothto study the ecosystems and species of Manu and to monitor the impacts of various interventionsinside and outside the park.

Noroeste Biosphere Reserve

5. Three contiguous protected areas in northwestern Peru--Cerros de Amotape National Park, theTumbes National Forest and the El Angolo Hunting Reserve comprise the Noroeste BiosphereReserve. Totaling over 233,000 hectares, the Reserve contains the best remnants of the once-extensive areas of western South American dry tropical forests, and harbors many endangered wildlifespecies. Additionally, a coastal mangrove forest is also part--albeit not contiguous--of the Reserve.The Manglares de Tumbes National Sanctuary protects a sample of the southernmost boundary ofmangrove distribution in western South America. Like all mangrove ecosystems, the TumbesMangrove Sanctuary provides an important basis for the area's artisanal fisheries. In general, thetropical dry forests and coastal mangroves are two of the most threatened and rare natural ecosystemsleft in Latin America. This set of protected areas in Peru offers a unique opportunity to preserverepresentative examples of those communities and ecosystems, as well as to learn how to manageportions 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 havebeen notably increasing over the past few decades, particularly the last ten years. Those include:poaching and firewood extraction by the Peruvian Army and local artisans; extensive logging in onearea of the park by parquet production companies; cattle grazing in several areas of the park duringthe dry season; illegal hunting of wildlife for the international pet trade; and fires that invade fromsurrounding agricultural zones. The Reserve's infrastructure and protection capacity are woefullyinadequate in the face of these pressures. Additionally, an irrigation dam on the Rio Tumbes hasbeen proposed and enjoys popular support. It would affect the Park and the National Forest andjeopardize several endangered species like the American crocodile and the river otter. The mangrovesare particularly threatened by over 200 shrimp breeding farms, depletion of natural populations ofshrimp larvae, over-exploitation of black scallops, and tree felling for fuelwood. In general, thehabitat degradation is caused and exacerbated by outside special interest groups, not local people.Local communities are using the resources, in some cases only on a subsistence basis, at levels thatcould be withstood by the resources if properly managed. A lack of government involvement in thepast has aggravated the pressures on the natural resource base in this region.

7. The trust's income would allow the Reserve to stabilize and strengthen its administrative andprotection capacities through hiring more staff, providing training for all employees, constructing newguard posts and infrastructure, and equipping staff with adequate offices, supplies and means of

- 22 - ANNEX 4

transportation and communication. The Reserve plans an intensive education and public relationscampaign because the Reserve has been degraded by people who poorly understand its objectives andvalue. At the same time, sustainable development efforts have been promoted by environmentalNGOs in the region since 1990. FONANPE would support efforts by these NGOs to take the lead indeveloping the region with environmentally sensitive activities. It would also try to generate localsupport for the Reserve to help discourage incompatible activities like dam-building. It will promotetourism and scientific inquiry.

Rio Abiseo National Park

8. The Rio Abiseo National Park is one of the newest and most diverse protected areas in Peru.The park was established by the Peruvian government in 1983, primarily to protect a representativesample of cloud forest habitats. Hidden in the clouds much of the year, these forests harbor manyunique species of plants and animals, including the endangered yellow-tailed woolly monkey. Foundonly in these forests, this animal has been chosen as the park's symbol. Rio Abiseo encompasses274,000 hectares, enclosing the entire Abiseo River watershed. Within its boundaries the riversdescend abruptly from 14,000 feet above sea level to 1,000 feet. Ecologically this park contains atleast five distinct life zones, ranging from the premontane tropical forests to the treeless paramo orfrostland, and harbors exceptional biological diversity. In addition to its natural riches, it containsspectacular archaeological remains with great research and tourism potential. Maintenance of thisarea in its pristine state is essential in the protection of the Huallaga River Basin Watershed.

9. The Rio Abiseo National Park and buffer zones are relatively intact, but are at risk on severalfronts. Peasant villages along the western border threaten the integrity of the highland ecosystems,especially in areas where park land has been burned for pasture. Seven families reportedly livewithin Park boundaries, and property rights are poorly defined along its western border. Luckily,however, relations between local populations and the park have been relatively good. Gold mines tothe west have attracted settlers, many of whom wish to prospect inside the park. A road wasproposed, cutting straight through the Park, which would inevitably bring in a wave of migratoryfarmers. Were tourism developed, peasants from the neighboring areas would be apt to relocate atthe border of or inside the park to capture some of the wealth. Plundering of archaeological sites isincreasing. No humans are known to live in the eastern portion of the Park, but the area has beenconsidered for small-holder agriculture, logging and access roads to other areas.

10. Administrative and budgetary problems have plagued the park since its creation. At present,the government contributes almost nothing to its support. All resources come sporadically fromprivate sources, and planning is difficult when the park must survive based on such scarce andunpredictable funding. Over half its guards quit in 1992, perhaps due to low morale and the highersalaries offered in the neighboring gold mines. This lack of on-the-ground supervision has resulted ina much higher incursion rate than in previous years. Neighboring communities perceive the parkadministration to have abandoned its protection efforts. A lack of infrastructure and equipment meansthat protection, transportation, access and communication are extremely difficult.

11. The trust fund annuity would support efforts to hire and train personnel, paying locallycompetitive salaries. It would support guard posts, infrastructure, means of transportation, radiocommunications and other equipment necessary to protect the Park, thereby dispelling the perceptionthat the area is one of open access. As funding permits, it would construct education centers andpromulgate the objectives of the park to neighboring communities. It would help maintain orestablish open and friendly relations with neighboring populations. It would help develop a planned,controlled tourist industry, emphasizing preservation and study of the magnificent natural and cultural

- 23 - ANNEX 4

resources of the park. It would support the sustainable development efforts of NGOs working in thearea like the Asociaci6n Peruana para la Conservaci6n de la Naturaleza. This continued supportwould establish a consolidated, unified administration that will be effective not only in protecting andmanaging the park within its boundaries, but also in defending the park at a national level fromthreats such as mining, logging and road-building concessions.

- 24 - ANNEX 5

Annex 5: Terms of Reference for the Technical Committee of PROFONANPE

1. Objectives: The Technical Committee of PROFONANPE (TC) will:

(i) Provide technical assistance and advice on the allocation of funds to the Board ofPROFONANPE as needed concerning the field and office operations of the program.Whereas it will have no voting power concerning how to allocate funds, Banksupervision missions will evaluate whether its suggestions have been adequatelyincorporated into programming.

(ii) Develop guidelines for monitoring and evaluation for the program, and as needed, carryout specific monitoring and evaluation tasks.

(iii) Conduct an annual evaluation of the performance of the asset manager.

2. Composition: The TC will be composed of specialists in various technical areas pertaining tothe operations of PROFONANPE and program beneficiaries. Such specialists includes those withexperience in the program's field work, such as ecologists, biologists (plant, marine, animal), wildlifespecialists (ornithologists, primatologists, entomologists), foresters, park managers,anthropologists/rural sociologists, geographers, epidemiologists or doctors, pharmacologists andexperts in rural development, education and gender issues. It should also contain advisors on officeoperations, such as specialists in business, finance, investments, accounting,organization/management, law, policy and institution-building. It should draw most of itsmembership domestically, but some members may be drawn internationally to benefit from newexperience and thinking elsewhere in the world and to promote the program abroad.

3. Structure and Responsibilities: The TC will have an in-country core unit and a mixeddomestic-international roster. The core unit will be responsible for advising on small issues asneeded, as well as for the writing of reports and the monitoring and evaluation guidelines. Both thedomestic unit and the international roster will review annual work plans, as well as conservation unitmanagement plans and the monitoring and evaluation guidelines. The core unit may write reports(which the entire TC should review) if either it desires or if requested by the Board. The core unitswould 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 attheir own expense. The Board will devise procedures for the regular supervision of the program bythe TC, and for TC approval of the reports and guidelines the TC generates.

4. Nomination and Selection: The core unit will be composed of 12 to 18 members selected fortheir expertise in areas of direct relevance to FONANPE's activities. The number of members wouldnot be fixed, because experts with new skills may be required after its formation, whereas otherspecialists may not be needed subsequently. Based upon nominations received from the Board ofPROFONANPE, INRENA, concerned NGOs, the World Bank/GEF and the GTZ, the ProjectCoordinator will present a proposal to the Board with a list of nominees to be invited to serve on theTC.

5. Financing: Members of the TC will assist PROFONANPE free of charge since members'responsibilities are small and FONANPE's funds are scarce and should be directed instead towardsthe conservation units themselves. If specific tasks arise requiring significant work, however, theBoard and Project Coordinator may commission members of the TC to perform them at rates to bedetermined for each individual task.

- 25 - ANNEX 6

Annex 6: Monitoring and Evaluation

Introduction.

1. In keeping with the pilot nature of the first tranche of GEF projects, the Peru Trust Fund forProtected Areas will serve as a test of the effectiveness of trust funds as mechanisms for long termfinancing of biodiversity conservation. The project will provide an opportunity to address the designand management issues associated with financing the recurrent costs of biodiversity conservation.The ultimate goal of the trust fund itself, however, will be the preservation of biodiversity in Peru byproviding a stable source of funding for conservation programs and activities.

2. Given the dual objectives of the project, the monitoring strategy will consist of two types ofevaluation: (i) the monitoring and evaluation of the implementation of the GEF project per se; and (ii)the evaluation of how trust funds contribute to biodiversity conservation. The lessons learned in thissecond form of evaluation would contribute to the global body of knowledge of biodiversityconservation strategies. The sections below delineate the specific benchmarks for both projectimplementation success and the criteria for success of the trust fund as a mechanism for financingbiodiversity conservation.

Evaluation of Project Implementation

3. The following benchmarks will be used to evaluate the effectiveness of project implementation.Success in meeting the implementation benchmarks will also serve to determine at what point theBank ceases supervision of the project. The benchmarks fall under three broad categories:institutional capacity, financial effectiveness, and the adequacy of the legal framework.

INSTITUTIONAL CAPACITY

* The Board of Directors has met at least twice each year and has carried out its responsibilitiesas established in PROFONANPE by-laws for three years in a row.

O The project coordinating unit is functioning and staffed with qualified professionals.

* The Technical Committee is functioning and has provided relevant technical input to the Boardof Directors, including conducting an annual evaluation of the asset manager of the fund for 3years in a row.

* The selection of activities and projects is made in accordance with the Board's projecteligibility and selection criteria, and following the agreed-upon participative and consultativeprocess for three years in a row.

* Satisfactory annual work programs are submitted to the Bank for review in a timely manner forthree years in a row. A satisfactory work program would contain a clear statement ofobjectives and the proposed activities would be consistent with these objectives.

* The disbursement of funds for the various activities and projects is made in a timely andefficient manner for three years in a row.

* Satisfactory annual progress reports are submitted by the Board to the Bank in a timely basisfor 3 years in a row.

- 26 - ANNEX 6

* The fund has a clear written strategy for raising additional funds and is actively pursuingfurther donations.

* Administrative costs are kept within agreed-upon limits, not exceeding a 5% increase per year.

* Annual audits show satisfactory performance in funding approved work programs andcompetent record-keeping for three years in a row.

* Procurement is made in accordance to Bank-approved procedures for three years in a row.

FINANCIAL EFFECTIVENESS

* Adherence to investment guidelines for three years in a row.

* Adherence to disbursement guidelines, based on the "spending rule" for three years in a row.

LEGAL FRAMEWORK ADEQUACY

* All necessary legislation and other arrangements are in place to assure effective functioning ofthe fund, including protection from attachment and taxation.

Evaluation of the Trust Fund as a Mechanism for Financing Biodiversity Conservation.

4. The impact of the trust fund will ultimately be measured by what is "bought' in terms ofbiodiversity protection. Such an evaluation, however, would not be feasible within the time frame ofthe GEF project; the evaluation of changes in natural systems takes decades and requires the extensiveinventory of key species to obtain data on population sizes and distribution. The collection of suchdata is technically difficult, time consuming, and expensive. Moreover, what can be measured isoften hard to interpret both due to inherent natural fluctuation in ecological processes as well as thedifficulty of determining the counterfactual case, that is, what might have occurred in the absence ofthe project. For these reasons, project design and implementation are used as proxies for impact.

5. The success of the trust fund will depend on a series of factors, some of which are under thecontrol of the project implementors and some of which are not. For example, the trust fund willrequire favorable market conditions to generate adequate investment returns, as well as successfulfund raising yet both will depend largely on outside forces. Similarly, the effectiveness ofconservation measures adopted will depend on the quality of their design as well as on nationalpolicies and socio-economic circumstances.

6. Taking these factors into consideration, the achievement of the benchmarks below will indicatethe success of the trust fund as a mechanism for financing biodiversity conservation.

* FUND RAISING SUCCESS: The fund has reached a minimum capital level of $40 milliondollars (the goal is to reach this capitalization level within five years from the date of thegrant).

* FINANCIAL EFFECTIVENESS: The investments are providing reliable and adequatereturns. This entails a minimum of 10% annual return of the investment so as to coverprogram needs (5%); provide annual reinvestment to maintain real value of seed capital; andafford a capital reserve to offset low-yield years.

- 27 - ANNEX 6

* GOVERNMENT COMMITMENT: The government is committed to providing long-termfinancing for protected areas, as evidenced by their active participation in the activities of theBoard of Directors of PROFONANPE and by supporting its fund raising efforts by facilitatingdebt-for-nature transactions and other contributions. Commitment is also reflected by thegovernment's continued funding for the protected areas at the current level of budget allocation(in real terms), thus ensuring that the GEF funding is truly additional.

* BIODIVERSITY IMPACT: The stable financing provided by the trust fund ensures that theprotected areas receive adequate management, which in the long run results in decreased parkencroachment, deforestation, poaching and biodiversity loss. The impact of the project on theprotected areas will be evaluated against the baseline information collected during projectpreparation and summarized in the background paper on each of the selected areas titled:"Informe sobre las Areas Protegidas Seleccionadas para Apoyo por el GEF." Moreover, theimpact of the project will also be evaluated as a function of how it has contributed towards thegoals established in the management plan or operating plan of each protected area.

* SOCIAL IMPACT: The trust fund's decision-making processes have fostered local and NGOparticipation in the management of the protected areas, as evidenced by their activeinvolvement in decisions about the allocation of resources in each protected area and theirunderstanding and commitment to the goals of park management.

- 28 - ANNEX 7

Annex 7: Project Eligibility and Selection Criteria

Project Eli2ibility Criteria

The income generated by PROFONANPE's trust fund will be used to finance a variety ofconservation activities in the selected areas and their buffer zones. The activities eligible for fundinginclude:

1. Financing the recurrent costs of protected area management (such as facilities and infrastructurefor park personnel, operational expenses of park administration, etc.). This funding should notreplace regular government allocations.

2. Drafting, revising and implementing management plans

3. Establishing and managing buffer zones

4. Training professionals in park and wildlife management

5. Instituting environmental education and public awareness programs for communities associatedwith protected areas

6. Implementing projects that integrate conservation and development to benefit the communitiesliving in the protected areas and buffer zones

7. Institutional support the strengthening of INRENA's General Directorate of Protected Areasand Wildlife (DGAPFS)

8. Administrative expenses of PROFONANPE

The protected areas initially selected for financial support are:

a) Northwest Biosphere Reserve (includes Parque Nacional Cerros de Amotape, BosqueNacional de Tumbes, Coto de Caza El Angolo and their areas of influence).

b) Parque Nacional Rio Abiseo and buffer zones.

c) Manu Biosphere Reserve (includes Parque Nacional and Zona Reservada del Manu, aswell as their areas of influence).

As the trust fund grows, additional areas may be added to this list by the Board of Directors ofPROFONANPE, based on the Master Plan for the National System of Natural Areas Protected by theState (SINANPE), currently under development. Initially, grants are not expected to exceed $50,000per year per grant, although this level may be revised by PROFONANPE's Board of Directors at alater date.

The specific allocation of funds generated by the trust's investments will be determined byPROFONANPE's Board of Directors, based on a draft work program prepared by the projectCoordinator. This draft work program will be based on an analysis of the requirements and needs foreach area, made jointly by INRENA and PROFONANPE's Coordinator. This analysis of needs will

- 29 - ANNEX 7

be based on the Master Plan for SINANPE, and the management plan and/or operating plan of eachconservation unit. Given the project's commitment to fostering a participatory approach toconservation, this analysis of needs will be made in close coordination with each protected area'sadministrative officer, local committees, (where they exist), park officers, local grassrootsorganizations and local communities.

After this participatory and consultative process has taken place, PROFONANPE's Coordinatorwill present to the Board a proposal outlining the prioritized actions in each area, and arecommendation on which activities are suitable for being carried out directly by the DGAPFS andwhich are appropriate for allocation on the basis of an open contest process. The draft work programwill include a statement of specific objectives to be pursued during the year and a description of theactivities to be undertaken in order to achieve those objectives. PROFONANPE's coordinator willsend this draft work program to the Technical Committee for written comments, and will prepare amemo to the Board summarizing the comments received and how these were taken into account inrevising the work plan. The Board will send this program to the Bank for comment no later thanNovember 15 of each year.

Once the Work Program has been approved, PROFONANPE will issue the appropriate"Request for Proposals" for the prioritized activities to be awarded on the basis of an open contest.

Eligibility Criteria for Participating in the Open Contest

Proposals submitted on an annual open contest basis will be eligible under the followingconditions:

i. Proposals may be presented by each protected area administrative authority as well as byprivate institutions, universities and community-based organizations, or associations comprisedof more than one of these entities. In the case of private institutions they should:

a) Have at least two years of experience in natural resource conservation projects. Anexception can be made in the case of cooperatives, agricultural credit unions and smallproducers associations, as long as the group can satisfactorily demonstrate experience inother communal projects.

b) Have updated accounting procedures in accordance with accepted accounting practices.

c) Have been legally established for at least one year prior to the date of launching of thepublic contest process. Organizations which have not been legally constituted, butwhose activities relate to a specific protected area or represent the local populations, mayapply for funds through sponsoring organizations which fulfill the above requirements.

2. Proposals must:

a) Adhere to the priorities established by PROFONANPE in coordination with theDGAPFS, following the guidelines of the Master Plan for SINANPE.

b) Be in keeping with other on-going efforts to further the appropriate management of theprotected area.

c) Be based on one-year work plans.

- 30 - ANNEX 7

Procedures for Project Selection

To evaluate the proposals presented, PROFONANPE will establish an evaluations committee.This committee will be comprised of:

1. One representative appointed by the Board of PROFONANPE.

2. One representative appointed by INRENA.

2. One representative of PROFONANPE's Technical Committee appointed by PROFONANPE'sCoordinator, with the relevant professional qualification in keeping with the subject matter ofthe proposal.

Announcement of the open contest process will be made in a national paper and through othersuitable media in localities near the protected areas two months prior to the applications deadline.Announcements will be made as well through the managers of each protected area. It will be theresponsibility of the Coordinator of PROFONANPE to ensure that the information regarding therequest for proposals reach the local and grass-roots levels.

Evaluation Criteria

Proposals will be selected for funding according to the following criteria:

1. Relevance and adherence of the proposal to the Master Plan for SINANPE and to the MasterPlan of the specific area under consideration (if available).

2. Clear definition of methodology and reasonable costs.

3. Likelihood that the activities are socially, environmentally and financially sustainable.

4. Relevance of the proposal to the priorities defined for the funding period.

5. Innovativeness and replicability of activities at the local level and at other natural protectedareas.

6. Participation of local grassroots organizations and the affected population in identification ofneeds, as well as in the planning, implementation and evaluation of the results of the project.

7. Social viability insofar as the proposed activities address the needs identified by the affectedpopulations.

8. Technical and administrative capacity of the sponsoring institution to execute the proposedproject, based on the qualifications of its staff and its record with other projects.

9. Degree of commitment to the project, as demonstrated by the provision of financial or in-kindcounterpart resources.

- 31- ANNEX 8

Annex 8: PROFONANPE's Administrative Costs

TABLE IPROFONANPE Administrative Costs

(US$ '000)

YEAR Year I Year 2 Year 3 Year 4 Year 5 TOTAL1995 1996 1997 1998 1999 l

PROFONANPE's 0 150 159 166 175 650Administrative Costs l

TABLE 2PROFONANPE Annual Operating Costs

(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 - ANNEX 9

Annex 9: Selected Documents Available in Project File

* The initial proposal from the Government of Peru to the GEF for the establishment of a TrustFund for Parks and Protected Areas, March 1992.

* A report of the investment opportunities in the United States titled: "Informe sobre la Eleccion deuna firma financiera para la administracion de activos del fondo fideicomiso," by Mr. FranciscoTourreilles, May, 1992.

* A report of the investment opportunities in Peru titled: "Informe para el consejo directivo delPROFONANPE sobre la seleccion de un banco nacional para la administracion de los fondos delFONANPE en el Peru," by Ms. Bernardita Zapata, August, 1994.

* A report on the future perspectives of the Peruvian Economy, Business and the Lima Stock Markettitled "Peru: Looking Ahead," by Intervalores, Peruvian Equity Research, May, 1994.

* A background paper on the protected areas selected for support under this project titled: "Informesobre las Areas Protegidas Seleccionadas para Apoyo por el GEF."

* Copies of the following legal decrees:Decree Law No. 26154, establishing FONANPE and PROFONANPESupreme Decree No. 024-93-AG, ratifying PROFONANPE's bylawsSupreme Decree No. 43-94-AG, modifying the composition of PROFONANPE's BoardLegislative Decree No. 769, establishing the general law of banking institutions.

* A paper on the conservation strategy for Peru titled: "Estrategia Nacional para la Conservacion,"by the Nacional Commission to Develop a National Conservation Strategy, 1991.

* 1993 Annual progress report of PROFONANPE, titled: "Memoria 1993."

* 4A Manual of Norms and Procedures for PROFONANPE, January 1994.

* A Manual of Organization, Functions and Policies for PROFONANPE.

* A legal opinion on the risk of attachment of the trust fund in the U.S.A, issued by the firm ofBaker and Hostetler, dated May 19, 1993.

* Management Plans for Manu National Park, Rio Abiseo National Park and Noroeste BiosphereReserve.

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