Case Study: Peru

Context
In 1996-97 the Peru Rural Road Rehabilitation and Maintenance Project (jointly financed by the Inter-American Development Bank, World Bank, and government of Peru) established a micro-enterprise-based road maintenance program. Its goal was “not a welfare program but a cost-effective way of … ensuring the benefits from improved access [following road rehabilitation]” and generation of employment among the poor in the poorest provinces.

The National Road Administration developed the first performance-based contract for micro-enterprises and was initially responsible for signing the contracts with them. Within the recent decentralization process, the National Road Administration has delegated the authority to sign contracts with micro-enterprises to municipalities or Provincial Road Institutes (created only in some provinces).
All rehabilitated roads were entered into the routine maintenance program. Micro-enterprise contractors (with 10–16 employees) received annual performance-based contracts. In the 1st phase of this model, the contracts were negotiated and later renewed. Once micro-enterprises gained technical and business skills and acquired relevant experience and more people were trained, municipalities have moved to an open competitive bidding.

In the second phase of the project, which began in 2002, Provincial Road Institutes were set up to estimate maintenance costs, prepare road maintenance plans, and manage contracts. There are now about 40 institutes in the 105 provinces where the project is operating. The institutes are typically staffed with one engineer, one planner or technical specialist, and one administrative support person.

Contracts
Maintenance contracts cover 20–50 km of road (an average of 45 km of road or 3 km per person). Average maintenance costs fell from US$1,000 per kilometer of rural road in the late 90s to US$700–US$800 in 2000-2002 once maintenance work was being performed regularly. The contract is written in a very simple language, as the employees of the micro-enterprises usually have low reading skills and very basic education (or no education at all).

Payment and Incentive Mechanisms
Micro-enterprises receive a fixed sum payment each month if performance indicators set in the contract have been met. Initially, payment was uniform for maintenance on all types of roads, but gradually roads were classified according to road conditions, traffic load, geographic location, and climate impact. Micro-enterprises are now required to submit at the end of each month brief reports of types of maintenance activities implemented, expenditures incurred and amount of materials used. All of this does not affect payment to micro-enterprises in any way, but helps the Provincial Road Institutes to estimate maintenance costs more accurately. Technical assistants who supervise the performance of micro-enterprises use this type of reports to check the quality of the end results: whether the present road condition indeed reflects the specified amount of material that has been used. If the level of the service provided is lower than the one required, then the payment is reduced.

The pressure of local municipalities and other members of their communities -- their next door neighbors -- is one of the main driving forces for micro-enterprises to comply with the level of service required. The employees of micro-enterprises are members of the local communities living along the roads they maintain.

The other driving force is a possibility to renew their contract for another year without bidding subject to continuing compliance with the performance indicators set in the contract.

Supervision
Monitoring and supervision of micro-enterprises is regularly done by Technical Assistants. In addition to supervision, their other responsibilities are to collect the data on road condition, to provide social assistance (dealing with gender and co-financing issues, and teaching employees of micro-enterprises to read and write).

Technical assistants are individual consultants, who just graduated and got a degree and need to gain some experience in their field. Some of them have successfully found their career in road agencies later.

Roughly, one technical assistant is responsible for 6-7 micro-enterprises. (35 of 87 Technical Assistants are involved in supervision). In addition, the Provincial Road Institutes sometimes undertake site inspections to verify the work done by the Technical Assistants and micro-enterprises.

Funding of PBCs
In the first phase of the project, financing was handled through a maintenance co-financing mechanism under which participating local governments covered a small part of the cost of routine maintenance activities in their jurisdictions, and the Ministry of Transport and Communication financed the greater part through a combination of grants and international loans. The new Municipal Compensation Fund allows municipalities to finance recurrent costs associated with routine road maintenance, and some are already financing 100% of these.

Key success factors:

strong commitment of local communities, who see road maintenance as a means of social and economic development,

use of local micro-enterprises, which employ people who live alongside the roads and so have

an incentive to keep the roads in good repair.