Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021

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Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Opening the Tap:
State of Finance for
Natural Infrastructure
for Water Security in
Peru, 2021

Natural
Infrastructure
for Water Security
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Authors:
Lucas Benites Elorreaga and Gena Gammie

Collaborators:
Mia Smith, Omar Valencia, Renán Claudio Valdiviezo, Sydney Moss, Óscar Angulo, Fernando Momiy Hada

Production and Editing: Gabriel Rojas Guillén

Supervision and review: Doris Mejía                                                                                                                                                            Photo: Carlos Alberto Vergara Manrique de Lara

Formatting: Antonio Luya Cierto

Design and layout: Diana La Rosa

Cover photo: Juan Patiño
                                                                                                                                       Content

Edited by: Forest Trends Association                                                                                                   Prologue                                                                           6
RUC: 20606691204
Av. Ricardo Palma 698, Miraflores
                                                                                                                                       Executive Summary                                                                  8
Lima, Peru
1st edition, February 2022
                                                                                                                                       Introduction                                                                     11

Acknowledgements
                                                                                                                                       Current Context                                                                  13
We appreciate valuable contributions from the following people who helped guide the methodology, collect information, and provide
context for the results of this report: Albert Bokkestijn (Helvetas), Aldo Cárdenas (TNC), Alonzo Zapata (SEDAPAL), Anthony Moreno     Challenges and Bottlenecks                                                       20
(formerly MEF), Carmela Landeo (Celepsa), César Medianero (MIDAGRI), Daniel Morales (MINAM), Daniela Rojas (APCI), Dirk ten
Brink (formerly USAID), Doris Rueda (MINAM), Fernando León, Fernando Maceda (Nestlé), Ítalo Arbulú (PRODERN), Luis Acosta
(SUNASS), Martín Orellana (MEF), Nancy Zapata, Pamela Aquino (Aquafondo), Paul Viñas (Naturaleza y Cultura Internacional), Rafael      New Trends and Opportunities                                                     24
Galván (advisor to the Canadian government), Yéssica Armas (Forest Trends and formerly CONDESAN), Luis Marino (MINAM), Susana
Saldaña (MINAM), Miguel Bernuy (MINAM) and Carlos Rojas (MINAM).
                                                                                                                                       Annex 1
                                                                                                                                       Scope, Method, and Definitions                                                   28

                                                                                                                                       Annex II
                                                                                                                                       Database of natural infrastructure for water security
This publication "Opening the Tap: State of FInance for Natural Infrastructure for Water Security in Peru, 2021" is made possible by   projects and initiatives included in the study                                   32
the generous support of the American people through the United States Agency for International Development (USAID) and the
Government of Canada. The contents are the responsibility of the authors, and do not necessarily reflect the views of USAID, the
United States Government or the Government of Canada.
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Acronyms

    APCI                     Peruvian Agency for International Cooperation (“Agencia Peruana de Cooperación
                             Internacional”)

    ARCC                     Authority for Reconstrucción con Cambios (“Autoridad para la Reconstrucción con
                             Cambios”)

    CONDESAN                 Consortium for the Sustainable Development of the Andean Ecoregion (“Consorcio para
                             el Desarrollo Sostenible de la Ecoregión Andina”)

    COVID                    Coronavirus Disease

    IOARR                    Investments in Optimization, Marginal Expansion, Rehabilitation and Repositioning
                             (“Inversiones de Optimización, Ampliación Marginal, Reposición y Rehabilitación”)

    MEF                      Ministry of Economy and Finance of Peru (“Ministerio de Economía y Finanzas”)

    MERESE                   Compensation Mechanisms for Ecosystem Services (“Mecanismos de Retribución por
                             Servicios Ecosistémicos”)

    MIDAGRI                  Ministry of Agricultural Development and Irrigation of Peru (“Ministerio de Desarrollo
                             Agrario y Riego”)

    MINAM                    Ministry of the Environment of Peru (“Ministerio del Ambiente”)

    NDC                      Nationally Determined Contribution

    PRODERN                  Program for Sustainable Economic Development and Strategic Management of Natural
                             Resources (“El Programa de Desarrollo Económico Sostenible y Gestión Estratégica de los
                             Recursos Naturales en las regiones de Ayacucho, Apurímac, Huancavelica, Junín y Pasco”)

    SEDAPAL                  Water utility servicing Lima, Peru (“Servicio de Agua Potable y Alcantarillado de Lima”)

    SPDA                     Peruvian Society of Environmental Law (“Sociedad Peruana de Derecho Ambiental”)

    SUNASS                   National Superintendence of Water and Sanitation Services of Peru (“Superintendencia
                             Nacional de Servicios de Saneamiento”)

    TNC                      The Nature Conservancy

    USAID                    United States Agency for International Development

2         Natural Infrastructure for Water Security                                                                     Opening the Tap: State of Finance for Natural Infrastructure for Water Security
                                                                                                                                                                                                 Photo:inFiorella Inés Villanueva3Berrospi
                                                                                                                                                                                                           Peru, 2021
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
About the Natural Infrastructure
             for Water Security project

             The Natural Infrastructure for Water Security (NIWS) project works to
             scale the conservation, restoration and sustainable use of ecosystems and
             ancestral technologies, in order to reduce water risks, such as droughts,
             floods and water pollution in Peru.To achieve this objective, NIWS works
             to improve the enabling conditions for scaling natural water infrastructure
             approaches, improve the information generated and used for decisions
             on natural water infrastructure, and develop, secure financing, and
             facilitate implementation of natural infrastructure projects. Throughout
             these components, NIWS works to reduce gender inequalities in water
             resource management and natural infrastructure solutions.

             NIWS is funded and supported by the United States Agency for
             International Development (USAID) and the Canadian Government. It is
             implemented by a consortium led by Forest Trends, with local partners
             the Consortium for the Sustainable Development of the Andean
             Ecoregion (CONDESAN) and the Peruvian Society for Environmental
             Law (SPDA), international experts from EcoDecisión, and researchers
             from Imperial College London. It began implementation in December
             2017 and is programmed to conclude in June 2023.

         4          Natural Infrastructure for Water Security                              Opening the Tap: State of Finance for Natural Infrastructure for Water Security in      2021 Núñez5Oporto
                                                                                                                                                                              Peru,Mauricio
                                                                                                                                                                           Photo:
Foto: Juan Patiño
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Photo: Julio Angulo Delgado

    Prologue

    In Peru, policymakers and water managers are          The beginnings of this multisectoral effort        instruments such as Compensation Mechanisms                     As part of the Natural Infrastructure for Water
    increasingly recognizing the indispensable role       can be seen in resource allocations from           for Ecosystem Services (MERESE, for its Spanish                 Security (NIWS) project funded and supported
    natural infrastructure and ancestral technology       sanitation and agriculture sectors shown in        acronym) promote the participation of local                     by USAID and the Canadian government, Forest
    play in managing water risks.As this report shows,    this report. There are also signs of longer-term   communities in this new approach, including                     Trends works with the Peruvian government,
    investments in the maintenance and restoration        commitment, as the agriculture, sanitation,        both upstream communities who provide                           civil society, water users, communities in upper
    of natural infrastructure that play key roles for     energy and environment sectors have included       ecosystem services through the conservation,                    watersheds, academia, and the private sector to
    water security, from forests and grasslands to        climate change adaptation measures in Peru’s       recovery and/or sustainable use of ecosystems,                  bridge gaps and address bottlenecks that limit
    amunas (pre-Incan canals that support aquifer         Nationally Determined Contribution, and the        as well downstream communities that benefit                     the adoption of natural infrastructure within
    recharge), are growing at an accelerated rate.        Authority for Reconstruction with Changes          from these services.                                            the Peruvian water sector; improve knowledge
    Financing for natural infrastructure for water        has developed an unprecedented investment                                                                          generation and information management to
    security in Peru grew by a factor of 13 between       portfolio in natural infrastructure.               We recognize that significant efforts are still needed          support science-based decision making; and
    2014 and 2020, reaching the equivalent of USD                                                            to consolidate this vision.A gap between investments            implement initiatives that can serve as models for
    10.2 million executed in 2020, despite impacts        This silent revolution in the way Peru             planned and executed remains despite improved                   replication across Peru.
    of the COVID-19 pandemic on public resources          values nature has been possible due to the         capacities of the executing entities. In addition, there is
    and the ability to execute activities in the field.   transformative vision and new regulatory           a need to strengthen the monitoring and evaluation              We renew our commitment to continue working
                                                          framework promoted by multiple sectors across      of hydrological benefits of these interventions,                with the entities that have contributed to the great
    These numbers are only the tip of the iceberg.        the Peruvian government over the last ten years.   the incorporation of a gender approach, and                     advances highlighted in this report, as well as others
    While financing was mostly executed by                On one hand, the regulatory framework now          compensation to communities who carry out                       who are just joining the effort, to strengthen natural
    regional governments and public ministries            recognizes natural infrastructure as an asset,     positive land and water management practices.                   infrastructure for water security in Peru.
    in 2020, water utilities have also begun to           allowing a new approach to public investment
    invest and develop projects, recognizing that         and spending that goes beyond previous
    fulfilling their mission to provide public water      investments in biodiversity and landscape                       Michael Jenkins                                        Fernando Momiy Hada
    supply also depends on natural infrastructure.        conservation. On the other hand, new legal                    President, Forest Trends                           Director, Natural Infrastructure for Water
                                                                                                                                                                                Security Project, Forest Trends

6   Natural Infrastructure for Water Security                                                                                       Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021       7
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Photo: Juan Carlos Casafranca Sayas   15

Executive Summary                                                                                                                                            10
                                                                                                                                                                                                                                                                     Millions of Dollars
                                                                                                                                                                                                                                                                         Private Sector
                                                                                                                                                                                                                                                                         National Government
                                                                                                                                                                                                                                                                         Local Government
    Current Context
                                                                                                                                                             5                                                                                                           Regional Government
                                                                                                                                                                                                                                                                         International
    In 2020, USD 10.2 million1 was invested in natural infrastructure for water security in Peru. 83% of these
                                                                                                                                                                                                                                                                         Development Agencies
    investments came from public Peruvian sources, and 17% were from international development agencies.
                                                                                                                                                             0
    »       Between 2014 and 2020, finance for natural infrastructure for water security in Peru grew rapidly, increasing                                          2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

            13x overall, and reaching the high point of this period in 2019, just before the COVID-19 pandemic, when
            USD 13.1 million was invested.                                                                                                                       Figure 1. Finance (USD) for natural infrastructure for water security in Peru executed between 2008-2020, by type
                                                                                                                                                                 of financing source. Source: prepared by the authors.

    »       Public financing led investments in natural water infrastructure in Peru; within this field, regional governments
            took the lead with almost 86% of the public funds executed in 2020, followed by local governments with 9%,
            and the national government with 5%.                                                                                                             Challenges and Bottlenecks

    »       In 2020, 86% of the public financing was concentrated in six regions: Cusco, Ica, Huancavelica, Junín, Piura,                                    »     The exponential growth in financing of natural water infrastructure has also been
            and Apurímac.                                                                                                                                          accompanied by an execution gap: the last years of the period studied showed consistently
                                                                                                                                                                   lower execution of investment than had been planned and budgeted. This gap closed slightly
    »       Of the projects analyzed, the most common objective driving investment was promoting water infiltration                                                in 2020 when 91% of planned amounts were executed, although this could be because the
            (mentioned by 56% of projects), followed by increasing the natural capacity for water regulation (41%).                                                total planned amount for 2020 was smaller than previous years.

    »       The most common interventions financed through these projects included reforestation or afforestation,                                           »     A critical factor contributing to this execution gap is the complexity of the public investment
            followed by infiltration ditches, rustic water and soil conservation practices (often known as water sowing and                                        system used to finance actions in natural infrastructure in Peru, which involves several
            harvesting), and the construction of permeable micro-reservoirs (known in Peru as qochas).                                                             extended bid and contract processes during project development. According to our analysis,
                                                                                                                                                                   public financing of natural infrastructure for water security by regional governments and
    »       International development agencies have been investing in natural water infrastructure since the beginning of                                          ministries in Peru takes an average of 4.5 years to progress from an approved project profile
            the period studied (2008-2020), playing a key role in laying the groundwork for the transformative change                                              to physical execution.
            documented in this report. In recent years, subnational governments have overtaken international funding
            sources as the leaders in natural water infrastructure financing; their participation is responsible for the                                     »     Even though the finance tracked in this report was justified by hydrological objectives, the
            exponential growth documented in this study.                                                                                                           projects executed in 2020 lack precision in the description, quantification, and monitoring
                                                                                                                                                                   of expected hydrological outcomes. In almost all cases – except, notably, the most recently
    »       The extraordinary growth tracked in this report reflects an evolution in Peru’s public investment system and                                           developed initiatives by the drinking water sector – monitoring and evaluation of hydrological
            regulatory framework that recognizes and promotes investments in nature that go beyond a traditional nature                                            results is absent.
            conservation approach, towards one in which ecosystems are also understood as assets for managing water
            and water risks. This evolution took place through a series of legal and regulatory shifts, driven by multiple                                   »     The project descriptions analyzed did not demonstrate any consideration for gender
            sectors, over the last ten years.                                                                                                                      differences in their design. This omission reflects a broader gender bias in the water sector
                                                                                                                                                                   and represents a risk to the efficacy and sustainability of the investments.
    1
        All values are reported in United States Dollars (USD) and based on the 2020 exchange rate of 3.5 Peruvian Soles to 1 USD.

8             Natural Infrastructure for Water Security                                                                                                                                     Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021       9
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Introduction
                     New Trends and Opportunities                         Peru is on the front lines of the water and climate                             the conservation of nature: natural infrastructure
                                                                          crises. Between 2016 and 2017, the country was hit                              is an asset for water risk management beyond the
                     »   While regional governments led financing         by successive states of emergencies – first droughts                            traditional conservation of ecosystems, and should
                         of natural water infrastructure in recent        and forest fires in Northern Peru and then floods                               be recognized as the base of a critical supply chain
                         years, we are starting to see new key            and landslides along the Pacific coast– with the latter                         that safely delivers water where it’s needed. Both
                         players enter the field, like water utilities.   resulting in damages valued at over USD 3 billion.2                             public good providers, like central governments,
                         Their entry marks a recent trend in              Climate change has caused an accelerated melting of                             and water users are starting to recognize the
                         the expansion of financing of natural            Peru’s glaciers, large natural reservoirs that have stored                      importance of natural infrastructure in meeting
                         infrastructure beyond providers of public        water over thousands of years, and deforestation of                             their water resource management objectives and
                         goods such as regional and national              riverbanks and upper watersheds for human activities                            to act accordingly by investing directly in natural
                         governments, to incorporate downstream           add further urgency to address water and climate risks.                         infrastructure projects.4, 7
                         beneficiaries of ecosystem services.
                                                                          Natural infrastructure—like forests, grasslands, and                            This report shows how Peru has begun to act
                     »   As new actors entering this field do not         wetlands—buffers the effects of climate variability                             based on this new way of thinking about nature
                         have much experience in formulating,             and its extremes that cause droughts and floods.3,4                             and water resource management. It describes how
                         executing, or managing natural                   In addition, natural infrastructure improves the                                much is being invested in natural infrastructure
                         infrastructure investments, their successful     performance of gray infrastructure by reducing                                  for water security in the country, who is investing,
                         incorporation will require additional            suspended solids in water and their sedimentation,                              where they are spending, and what actions they are
                         capacity building and new partnerships.          and offers additional benefits such as food security,                           financing. This report also summarizes key changes
                                                                          recreational opportunities, and climate change                                  in the regulatory framework that have allowed
                     »   As this new field develops, Peru is              mitigation.5 Ancestral techniques for water regulation,                         this remarkable change to take place and identifies
                         building new capacities and fine-tuning          especially in Peru,6 have long played a key role in                             challenges and opportunities for growth in the years
                         the regulatory framework for natural             the effective management of natural infrastructure                              to come.
                         water infrastructure that is helping to          and represent an enormous untapped potential to
                         address some of the challenges identified.       address modern water risks in Peru.4,7                                          Annex 1 of this report details the scope, methods,
                         For example, new implementation                                                                                                  and key definitions used to prepare this study.
                         mechanisms are now available that could          Understanding the role nature plays in reducing                                 Annex 2 lists the projects and initiatives in natural
                         significantly accelerate the formulation of      water risks has led to a new way of thinking about                              infrastructure for water security analyzed.
                         public investments.
                                                                          2
                                                                            Redaccion EC. “Daños de El Niño: US$3.124 millones hasta ahora, Macroconsult”. El Comercio. 24 March 2017.
                                                                          3
                                                                            Bonnesoeur V., Locatelli B., Ochoa-Tocachi B.F., 2019. Impactos de la Forestación en el Agua y los Suelos de los Andes: ¿Qué sabemos?
                                                                          Resumen de políticas, , Forest Trends, Lima, Perú.
                                                                          4
                                                                            Molina A., Vanacker V., Rosas Barturen M., Bonnesoeur V., Román F., Ochoa-Tocachi B.F., Buytaert W, 2021. Infraestructura natural para la
                                                                          gestión de riesgos de erosión e inundaciones en los Andes: ¿Qué sabemos? Resumen de políticas, Proyecto “Infraestructura Natural para la
                                                                          Seguridad Hídrica”, Forest Trends, Lima, Perú.
                                                                          5
                                                                            IPBES (2019): Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental
                                                                          Science-Policy Platform on Biodiversity and Ecosystem Services. S. Díaz, J. Settele, E. S. Brondízio E.S., H. T. Ngo, M. Guèze, J. Agard, A. Arneth, P.
                                                                          Balvanera, K. A. Brauman, S. H. M. Butchart, K. M. A. Chan, L. A. Garibaldi, K. Ichii, J. Liu, S. M. Subramanian, G. F. Midgley, P. Miloslavich, Z. Molnár,
                                                                          D. Obura, A. Pfaff, S. Polasky, A. Purvis, J. Razzaque, B. Reyers, R. Roy Chowdhury,Y. J. Shin, I. J. Visseren-Hamakers, K. J. Willis, and C. N. Zayas
                                                                          (eds.). IPBES secretariat, Bonn, Germany. 56 pages.
                                                                          6
                                                                            Willems B., Leyva-Molina WM, Taboada-Hermoza R., Bonnesoeur V., Román F., Ochoa-Tocachi BF, Buytaert W., Walsh D., 2021. Impactos
                                                                          de andenes y terrazas en el agua y los suelos: ¿Qué sabemos? Resumen de políticas, Proyecto “Infraestructura Natural para la Seguridad
                                                                          Hídrica”, Forest Trends, Lima, Perú
                                                                          7
                                                                            Ochoa-Tocachi, B. F., Bardales, J. D., Antiporta, J. et al. “Potential contributions of pre-Inca infiltration infrastructure to Andean water security”.
                                                                          Nat Sustain 2, 584–593 (2019).
                                                                          8
                                                                            Bennett, G. and Reuf, F. (2016). Alliances for Green Infrastructure: Investments in Watershed Services 2016. Washington, DC: Forest Trends.

        10                                                                                                      Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021                       11
Photo: Juan Patiño
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Current Context
                                                                                                                    In 2020, more than USD 10.2 million was                                       Financing for natural infrastructure for water
                                                                                                                    invested in natural infrastructure for water                                  security is still in development and relatively small
                                                                                                                    security in Peru, 83% came from Peruvian public                               compared to other public and private spending.
                                                                                                                    financing (Figure 2). This compares to 17% from                               For example, the annual public budget for the
                                                                                                                    international development agencies, reflecting the                            environmental sector in 2020, as defined by
                                                                                                                    current leadership of the domestic public sector in                           official public classification, was USD 0.9 billion,
                                                                                                                    nature-based solutions for water in Peru.                                     more than 80 times the total investment in natural
                                                                                                                                                                                                  infrastructure for water security in the same year.

                                                                                                                     2020
                                                                                                                                                                                                  However, the growth in financing in this area is
                                                                                                                                    4%
                                                                                                                            7%      0.4 M                                                         extraordinary. Between 2014 and 2020, the
                                                                                                                            0.8 M
                                                                                                                                                              Millions of Dollars                 annual execution of financing of natural
                                                                                                            7%
                                                                                                            2.7 M                            17 %                  International
                                                                                                                                                                                                  infrastructure for water security in Peru
                                                                                                                                             1.7 M                 Development                    grew by a factor of 13 (Figure 3). Before
                                                                                                                                                                   Agencies                       2014, public financing of natural infrastructure
                                                                                                                                                                   Regional Government
                                                                                                                                                                                                  interventions for water security was not
                                                                                                                                                                   Local Government
                                                                                                                                                                                                  significant; however, as of 2014, this trend began
                                                                                                                                    72 %                           National Government
                                                                                                                                                                                                  to change, coinciding with initial changes to the
                                                                                                                                    7.3 M
                                                                                                                                                                                                  legal framework (Box 1). The growth between
                                                                                                                                                                                                  2016 and 2019 is the most remarkable, with an
                                                                                                                                                                                                  average annual growth rate of 110%, in contrast
                                                                                                                      Figure 2. Finance (USD) for natural infrastructure for                      to the average annual growth rate of public
                                                                                                                      water security in Peru executed in 2020, by financing                       investments in the environmental sector at the
                                                                                                                      source. Source: prepared by the authors.
                                                                                                                                                                                                  same time, which was around 3%.

                                                                                                                    14 M
                                                                                                                                                                                                                                  Millions of Dollars
                                                                                                                    12 M
                                                                                                                                                                                                                                         International
                                                                                                                    10 M                                                                                                                 Development
                                                                                                                    8M                                                                                                                   Agencies
                                                                                                                    6M                                                                                                                   Regional Government
                                                                                                                    4M                                                                                                                   Local Government
                                                                                                                    2M                                                                                                                   National Government
                                                                                                                     0                                                                                                                   Private Sector
                                                                                                                           2008   2009      2010     2011   2012    2013    2014   2015    2016     2017   2018    2019    2020          Total

                                                                                                                      Figure 3. Evolution of financing (USD) of natural infrastructure for water security executed in
                                                                                                                      Peru. Source: prepared by the authors.

12   Natural Infrastructure for Water Security                                                                                                          Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021       13
                                                 Photo: Infraestructura Natural para la Seguridad Hídrica
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Millions
                                                                                                                                                                                                                                                    of Dollars

                                                                                                                                                                                                                                                     2M
                                                                                                                                     Other regions:
                                                                                                                                     Amazonas USD 0.4 M
                                                                                                                                     Ayacucho USD 0.3 M
                                                                                                                                     San Martín USD 0.3 M                                                                                         0.2 M
                                                                                                                                     Huánuco USD 0.2 M

                                                                                                                                                                              Amazonas
                                                                                                Photo: Orlando Rogelio Silva Palma

                                                                                                                                       Piura
                                                                                                                                       0.8 M
                                   2020
                                                                                                                                                                                       San Martín
     Figure 4. Public
     finance (USD) for                                        9%
     natural                                                   0.8 M

                                                                  5%
     infrastructure for
     water security
     executed in 2020, by                                          0.4 M
     level of government.                                                                                                                                                                                                                                   Cusco
     Source: prepared by                                                   Millions of Dollars                                                                                                Huánuco                                                       2M
     the authors.
                                                     86 %                    Regional Government
                                                     7.3 M                   Local Government
                                                                             National Government                                                         Junín
                                                                                                                                                         0.9 M

                                                                                                                                                    Huancavelica
 This remarkable growth in finance for natural               companies in Lima invest through Aquafondo, and                                        1.1 M
 infrastructure can largely be attributed to the growth      the hydroelectric company Celepsa invests through
 of financing from regional governments over the last        the Nor Yauyos Cochas Landscape Reserve. The
 decade, despite decreases in 2019 and 2020. In 2020,        private investments we analyzed primarily focused                                                                                                Ayacucho
 regional governments led the execution of public            on infiltration ditches, followed by the restoration of                                                                  Ica
 funding for natural infrastructure (86%), followed by       grasslands, wetlands, and infiltration channels.
                                                                                                                                                                                      1.9 M
 local governments (9%) and the national government
 (5%) (Figure 4).                                            In 2020, public financing of natural
                                                                                                                                     Regions without investment:
                                                             infrastructure for water security was
                                                                                                                                     Áncash, Arequipa, Cajamarca, La Libertad, Lambayeque, Lima,
 The private sector has been investing in natural            concentrated in six departments: Cusco, Ica,                                                                                                                                          Apurímac
                                                                                                                                     Loreto, Madre de Dios, Moquegua, Pasco, Puno, Tacna,
 infrastructure for several years, although the total        Huancavelica, Junín, Piura, and Apurímac.                                                                                                                                             0.5 M
                                                                                                                                     Tumbes, Ucayali
 amount of its financing — USD 1.2 million during the full   These departments represent 86% of the
 period analyzed— is still considerably lower than public    public financing of natural infrastructure for
 sector financing. Private companies usually work with       water security in Peru across different levels of
                                                                                                                                      Figure 5. Public finance (USD) of natural infrastructure for water security executed in 2020, by region.
 partners to implement their projects; for example, many     government (Figure 5).                                                   Source: prepared by the authors.

14       Natural Infrastructure for Water Security                                                                                                                Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021     15
Natural Infrastructure - for Water Security - Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021
Photo: Paul Vallejos

 The amount of public financing executed per                                                                          Number of Projects
 project in 2020 ranges widely, from USD 1,700                                                                                                                                                                Public financing was most frequently
 to USD 1.5 million, the majority of which was                                                                        40      38                                                                              directed at reforestation and afforestation
 executed by just six large projects. Figure 6                                                                                                                                                                efforts, followed by infiltration ditches,
                                                                                                                      30                 28
 shows the total amount of public financing of natural                                                                                                                                                        practices for sowing and/or harvesting water,
 infrastructure for water security executed in 2020:                                                                                               20                                                         qochas (reservoirs, often permeable, for water
                                                                                                                      20
 each project is represented by a different colored      Percentage of                                                                                       14          Infiltration
                                                                                                                                                                                                              retention and aquifer recharge), and amunas
 column and the width of the columns represents          total investment
                                                                                                                                                                         Regulation
                                                                                                                                                                                                              (ancestral infiltration canals) (Figure 8).
                                                                                                                      10
 the amount of financing. Six projects (30% of                                                                                                                           Recharge
 projects) concentrate 66% of the financing, while                                                                                                                       Erosion Control
                                                                                                                                                                                                              This distribution contrasts with investments in
                                                                                                                      0
 the remaining 70% of projects only account for 34%                                                                                                                                                           natural infrastructure for water security globally,
 of total financing. On one hand, this distribution                                                                        Figure 7. Frequency of hydrological objectives                                     which tend to focus more heavily on forest
 suggests that this area of public investment is very                                                                      included in public investments for natural water                                   conservation. In Latin America, the most popular
                                                                                                                           infrastructure in Peru executed between 2008 and
 sensitive to the execution of a few projects —if a                                                                                                                                                           intervention for watershed conservation is
                                                                                                                           2020. Source: prepared by the authors.
 few major projects were discontinued, the annual                                                                                                                                                             reforestation, followed by sustainable grazing.9
 financing would be dramatically reduced. On the
 other hand, the fact that there are so many projects
                                                                                                                           Figure 8.                            50
 with such small levels of execution suggests that                                                                         Frequency of                                43
 high transaction costs impact this sector.                                                                                interventions included in            40                                                               Reforestation and afforestation
                                                                                                                           public investments in
                                                         0%        20 %      40 %       60 %       80 %       100 %                                                               29                                             Infiltration trenches
 Of all the public projects analyzed between                                                                               natural water                        30
                                                                                                                           infrastructure in Peru                                           23                                   Water sowing and harvesting practices
 2008 and 2020, promoting water infiltration                                                                               executed between 2008                20
                                                               66% of investments in       34% of investments                                                                                                                    Qochas (rustic, often permeable
 was the most common hydrological objective.                      30% of projects           in 70% of projects             and 2020.
 The projects also mentioned increasing the                                                                                Source: prepared                     10                                      7                        microreservoirs)
                                                                                                                           by the authors.                                                                        4
 natural capacity for water regulation, responding                                                                                                                                                                               Amunas (ancestral infiltration canals)
                                                          Figure 6. Distribution of public financing of natural                                                   0
 to water scarcity in the dry season or excess
                                                          infrastructure for water security executed in 2020, by
 in the rainy season; groundwater recharge; and
                                                          project. Source: prepared by the authors.
 erosion control (Figure 7).                                                                                          9
                                                                                                                          Bennett, G. & Ruef, F. (2016). Alliances for Green Infrastructure: State of Watershed Investment 2016. Washington, DC: Forest Trends.

16      Natural Infrastructure for Water Security                                                                                                           Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021                 17
BOX 1. REGULATORY CHANGES THAT OPENED THE TAP, 2013-2020
                                                                                                                                       The Ministry of Economy and                                            The FRAMEWORK LAW FOR THE
 The extraordinary growth in finance for natural infrastructure documented in this report was enabled                                  Finance (MEF) and MINAM published                                      MANAGEMENT AND PROVISION OF
by a series of key regulatory changes implemented by visionary leaders across the environmental,                                       GUIDELINES FOR THE                                                     SANITATION SERVICES was published,
drinking water, and public finance sectors in the last decade.These changes allowed public investment to                               DEVELOPMENT OF PUBLIC                                                  specifying that water utilities are authorized to
flow to efforts to restore and conserve ecosystems as natural assets that provide critical services for                                INVESTMENT PROJECTS                                                    develop, evaluate, approve, and execute MERESE
water management, much as it does for built infrastructure.                                                                            FOR BIOLOGICAL                                                         projects and are responsible for their operation
                                                                                                                                       DIVERSITY AND                                                          and maintenance costs, even when the projects
                                                                                                                                       ECOSYSTEM SERVICES.                                                    have been executed by third parties.

  2013                                                                      2014                                                       2015                                                                                                                   2016

The MODERNIZATION OF                                               The COMPENSATION                                                    The Ministry of the Environment           MINAM approved the                     The Ministry of Housing, Construction and
SANITATION SERVICES LAW                                            MECHANISMS FOR                                                      (MINAM) published                         REGULATION FOR THE                     Sanitation (MVCS) approved the
established a new tariff for                                       ECOSYSTEM SERVICES                                                  GUIDELINES FOR PUBLIC                     MERESE LAW, to promote,                REGULATION FOR THE
environmental compensation                                         (MERESE) LAW established a                                          INVESTMENT POLICY                         regulate and supervise the design      MODERNIZATION OF
mechanisms to be charged to users by                               pathway for using public funds for                                  FOR BIOLOGICAL                            and implementation of MERESE,          SANITATION SERVICES LAW,
water utilities, which should be included                          the conservation of ecosystems                                      DIVERSITY AND                             which establish actions for the        further clarifying that water utilities are
in the utilities’ long-term planning                               that contribute to water security.                                  ECOSYSTEM SERVICES                        conservation, recovery, and            authorized to develop, evaluate, approve, and
instruments, known as Optimized                                                                                                        (2015-2021), which established            sustainable use of ecosystems          execute MERESE projects and are
Master Plans, with the approval and                                                                                                    specific objectives and lines of          through voluntary agreements.          responsible for their operation and
supervision of the national water utility                                                                                              action to promote public                                                         maintenance costs.
regulator, SUNASS.                                                                                                                     investment in this area.

  2020                                                                                    2019                                                          2018                                                                              2017

 MINAM approved the SIMPLIFIED                                    MEF approved                             MINAM published             MINAM issued GUIDELINES              MINAM approved the                       MEF issued the                   SUNASS published the
 TECHNICAL DATASHEET                                              GUIDELINES FOR THE                       GUIDELINES FOR              FOR INCORPORATING                    TECHNICAL                                REGULATION FOR                   RAPID
 FOR INVESTMENT                                                   IDENTIFICATION OF                        PROJECT                     CRITERIA ON                          DATASHEET FOR                            THE NEW                          HYDROLOGICAL
 PROJECTS IN THE                                                  INVESTMENTS IN                           DEVELOPMENT FOR             NATURAL                              STANDARD                                 NATIONAL SYSTEM                  DIAGNOSTIC TOOL
 RECOVERY OF WATER                                                OPTIMIZATION,                            ECOSYSTEMS,                 INFRASTRUCTURE                       INVESTMENTS                              FOR MULTI-YEAR                   to help water utilities
 REGULATION ECOSYSTEM
                                                                  MARGINAL                                 SPECIES, AND                AND RISK                             AND/OR SIMPLIFIED                        PROGRAMMING                      identify opportunities to
 SERVICES,, which provides a specific
                                                                  EXPANSION,                               SUSTAINABLE USE OF          MANAGEMENT TO                        INVESTMENT                               AND INVESTMENT                   use MERESE to manage
 instrument to design and evaluate public
                                                                  REPLACEMENT AND                          BIODIVERSITY, a key         ADDRESS CLIMATE                      PROJECTS FOR THE                         MANAGEMENT,                      water risks they face
 investment projects in natural
                                                                  REHABILITATION                           instrument on which other   CHANGE UNDER                         RECOVERY OF                              INVIERTE.PE, which               through coordination with
 infrastructure related to ecosystem
                                                                  (IOARR),, which opens a                  policies for natural        RECONSTRUCTION                       ANDEAN                                   explicitly recognizes that any   local actors.
 services that provide water regulation.
                                                                  simplified, much more agile              infrastructure are based.   WITH CHANGES, which                  ECOSYSTEMS, with the                     reference to infrastructure
                                                                  pathway for investment in                                            was a result of coordination         objective of streamlining the            also includes natural
                                                                  natural assets.                                                      between MVCS, MIDAGRI, the           project development process              infrastructure.
                                                                                                                                       Council of Ministers, the National   for public investments in
                                                                                                                                       Center for the Estimation,           natural infrastructure.
                                                                                                                                       Prevention and Reduction of
                                                                                                                                       Disaster Risk, and the National
                                                                                                                                       Institute of Civil Defense.
Photo: Héctor Armando Arrunátegui Ochoa

 Challenges and Bottlenecks
 In 2020, the financing for natural water infrastructure   Even in this context, the public sector budgeted USD          agencies involved in developing, evaluating, and executing                     execution of investment than had been planned and
 in Peru slowed down, due in part to the redirection       9.4 million for natural water infrastructure investments      natural infrastructure investments.                                            budgeted (Figure 9). This gap could simply reflect that
 of public spending towards public health needs, like      in 2020, and 91% of that was actually executed                                                                                               the implementation capacities are catching up with
 the response to the COVID-19 pandemic. Between            – suggesting that resource diversions to cover                The exponential growth in financing of natural water                           the large growth of planned financing. Improvements
 March 2020 and December 2021, the Peruvian                public health needs did not overcome the growing              infrastructure has also been accompanied by an                                 in capacities and processes may lead to improved
 government issued at least five Emergency Decrees         momentum to prioritize investments in natural assets          execution gap: recent years show consistently lower                            efficiency in the future.
 to prioritize and facilitate public health spending       for water management. Moreover, the improvement
 by regional governments, as well as an Emergency          in the execution gap compared to the previous two
 Decree to allow water utilities to use earmarked          years suggests that capacities for managing natural                  24 %      64 %      34 %       72 %        96 %             74 %              83 %           55 %         83 %         91 %
 resources, including their MERESE funds, to cover         infrastructure investments in line with growing demand
 operating and maintenance costs for water and             are improving over time. However, this execution                                                                                                                            12.3
                                                                                                                                                                                                                          11.9
 sanitation services since the economic impacts of the     efficiency could be a result of the lower total amount
 pandemic affected the general public’s ability to pay     planned for the year and could be anecdotal if the                                                                                                                             10.2
 their fees.                                               trend is not confirmed over the longer term.                                                                                                                                              9.4
                                                                                                                                                                                                        8.8                                                8.5
                                                                                                                                                                                                              7.2
                                                                                                                                                                                                                             6.6                                      Execution
                                                                                                                                                                                                                                                                      efficiency
 Challenge #1: Delays in Project Execution                                                                                                                                                                                       5.3
                                                                                                                                                                                                                                                                   Millions
                                                                                                                                                                                      3.4                                                                          of Dollars
 The gap between allocated and executed                    A number of bottlenecks in public investment development                                                                         2.6
                                                                                                                                                                                                                                              2.1                     Allocated
 funds is due, in part, to bottlenecks in the              contribute to delays in project development,approvals and                                                   1.61.5                                       1.6
                                                                                                                                                                                                                                                                      Executed
 public investment process that slow down                  mobilization —such as lengthy processes for hiring and                                         0.70.5                                  0.8                                                        0.9
                                                                                                                         0.2 0.1 0.1 0.20.10.1 0.50.2 0.3        0.2
 the development and evaluation of projects.               contracting the development of project profiles, detailed                                                            0.1                                                                                   Not executed

 According to our analysis, Peruvian public investments    designs, and implementation.These bottlenecks, while not       2011         2012      2013       2014        2015           2016              2017              2018          2019         2020
 in natural water infrastructure take an average of        specific to natural infrastructure, may be accentuated in
                                                                                                                           Figure 9. Allocated vs. executed public financing (USD) of natural infrastructure for water security in Peru, between
 4.5 years to go from an approved project profile to       this field because they intersect with technical capacities     2011 and 2020. Source: prepared by the authors.
 physical execution.                                       that are also in early stages of development in the myriad

20     Natural Infrastructure for Water Security                                                                                                         Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021                             21
Challenge #2:                                                                             10,000,000
                  Inconsistencies in the
                                                                                                             1,000,000
                  Estimation of Project
                  Benefits                                                                                     100,000

                                                                              Estimated                          10,000
                  Despite having specified hydrological                       Number of
                  objectives, the projects analyzed lack a                    Beneficiaries
                                                                              (Logarithmic Scale)                  1,000
                  consistent approach to describe, quantify,
                  and monitor their hydrological benefits.                                                           100
                  Peru’s public investment system does not
                  currently require the quantification of hydrological                                                10
                  benefits related to improved ecosystem services             Estimated
                  for these types of investments, mainly because of           Project Budget                            1
                  the practical difficulties associated with this type
                                                                              (Millions of Dollars)                         0                       2M                         4M                     6M
                  of estimation. As a result, the identification and
                                                                              Figure 10. Number of beneficiaries estimated ex ante compared to the total project budget, for public natural
                  quantification of the benefits and beneficiaries of         infrastructure for water security projects, between 2008 and 2020. Source: prepared by the authors.
                  projects has been inconsistent. Of the financing
                  destined for natural infrastructure for water
                  security in 2020, there is a very large variability
                  when comparing the ex ante estimates for
                  project budget and number of beneficiaries. For
                                                                                         Challenge #3: Lack of a Gender Approach
                  example, one project with a budget of USD                              An approach to project development                       address public policies prioritized by
                  23,000 is estimated to serve 2,000 beneficiaries,                      and implementation that recognizes                       the Peruvian government is lost.
                  while another of USD 2.8 million is only estimated                     gender inequality—and differentiated
                  to serve 850 beneficiaries (Figure 10). Even                           needs, knowledge, and roles between                      The projects analyzed do not
                  though the projects are very different, a normal                       men and women—is essential for the                       explicitly include a gender approach,
                  distribution should be expected for the project                        efficacy and sustainability of financing.                which puts their efficacy and
                  budget per beneficiary, however, the standard                          In most communities in the upper                         sustainability at risk. Although many
                  deviation is very high, approximately ± 1075.                          watersheds where many natural                            women have been great agents of change
                                                                                         infrastructure projects intervene, most                  in favor of the implementation of natural
                  In almost all cases – except, notably, for the                         young men and women travel outside                       infrastructure for water security, a gender
                  projects recently developed by the drinking                            the community for work or education,                     approach is not documented within the
                  water sector – the monitoring and evaluation                           leaving primarily older women at                         projects: the projects do not mention the
                  of hydrological results is completely absent. A                        home.10 Not involving these women in                     difference in water risks for women and
                  number of actors, including the Ministry of the                        the development and implementation                       men; the differences in knowledge and
                  Environment (MINAM), the national water utility                        of natural infrastructure investments                    uses for natural infrastructure between
                  regulator (SUNASS), the Initiative for Hydrological                    misses important opportunities to                        women and men are not explicitly stated
                  Monitoring of Andean Ecosystems (iMHEA), and                           benefit from their valuable knowledge                    in the description of the interventions; and
                  the Natural Infrastructure for Water Security                          and participation. In addition, a key                    women and men are not differentiated
                  project, are promoting monitoring and evaluation                       opportunity to close gender gaps and                     among the beneficiaries.
                  through the generation of technical and
                  methodological tools as well as new capacities, in
                  order to address this need.                            10
                                                                              Carrillo, P. 2020. Brechas de género en la gestión de la infraestructura natural y el agua en el Perú. Forest Trends.

        22                                                                                                      Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021   23
Photo: Liz Tasa
Lima                                                                                                          $ 4,925,391

 New Trends and                                                                                                                                                                   Cusco
                                                                                                                                                                           Lambayeque
                                                                                                                                                                                                                                                                                     $ 764,439

 Opportunities
                                                                                                                                                                                                                                                                        $ 252,416
                                                                                                                                                                              Huancayo                                                                    $ 167,143
                                                                                                                                                                             Cajamarca                                                       $ 165,409
                                                                                                                                                                     San Martín, Lamas
                                                                                                                                                         Huallaga, El Dorado, Picota                                                     $ 165,371
 In the last six years, international development agencies                        and the development of key elements of the                                                                                                                                   Total:
                                                                                                                                                                                 Cañete                                                $ 126,916
 have executed an average of USD 1.6 million per year                             technical-regulatory framework11 presented in Box 1.                                                                                                                         USD 7.8 Million
                                                                                                                                                                                  Tacna                                               $ 120,818
 in direct interventions in natural infrastructure in the                         Since 2017, the Natural Infrastructure for Water Security
 field; while there is some fluctuation year-to-year in this                      project, funded and promoted by the development                                               Chincha                                              $ 116,465

 financing, the contribution of international donors has                          agencies of the United States and Canada, has invested                                              Ica                                           $ 110,757
 been relatively consistent over the period studied. For                          even greater resources in strengthening these enabling                                       Abancay                                            $ 97,509
 example, the largest project financed by international                           conditions and mobilizing a new generation of scaled                                 Coronel Portillo                                           $ 95,959
 development agencies in natural infrastructure                                   investment in natural water infrastructure.                                                        Jaén                                    $ 68,206
 in execution in 2020 was the “Conservation and                                                                                                                             Tambopata                                  $66,110
 sustainable use of Peru’s high Andean ecosystems                                 While the environmental sectors of regional                                                 Ayacucho                                 $ 65,886
 through Payment for Environmental Services for rural                             governments are currently leading financing of natural                                        Huaura                               $ 63,613
 poverty alleviation and social inclusion” project funded                         infrastructure for water security, there have recently                                              Ilo                      $ 58,570
 by the International Fund for Agricultural Development                           been new actors entering the scene with modest                                               Huánuco
                                                                                                                                                                                                                                                         In this regard, water utilities are a case study
                                                                                                                                                                                                            $ 49,610
 and executed by the Ministry of the Environment.                                 amounts. Among public sources, as shown in Figure                                                                                                                      of particular interest. In the last decade, water
                                                                                                                                                                             Moquegua                      $ 39,098
                                                                                  11, since 2016 we have seen financing implemented                                                                                                                      utilities have experienced a dramatic change:
                                                                                                                                                                                 Huaral                   $ 36,568
 While outside of the scope of this study, it should be noted                     for natural infrastructure not only by the environmental                                                                                                               from being prohibited to invest in activities
                                                                                                                                                                          Huancavelica                    $ 35,953
 that international donors have added a new emphasis in                           sector, but also by the agriculture and sanitation sectors.12                                                                                                          that take place above their intake to being
                                                                                                                                                                                   Pisco                  $ 34,659
 recent years that has supported the rise of Peruvian-led                         Their entry indicates an incipient trend to expand                                                                                                                     required to implement a MERESE tariff (i.e.,
 investments by investing in the enabling conditions for                          financing of natural infrastructure beyond providers of                            Jauja, Concepción,                                                                  allocate a percentage of the fees they collect)
                                                                                                                                                                              Chupaca                   $ 29,771
 scaling and enhancing the impacts of natural infrastructure                      public goods (i.e., regional and national governments                                                                                                                  to ensure the sustainability of their water
                                                                                                                                                                                   Rioja               $ 25,063
 finance. The German and Swiss development agencies                               investing through the environment sector) and include                                                                                                                  sources under the supervision of SUNASS.
                                                                                                                                                                              Chimbote                $ 22,857
 were early movers in this space, supporting some of the                          downstream beneficiaries of the watershed services                                                                                                                     This new regime was pioneered by the
                                                                                                                                                                                  Bagua           $ 16,798
 first public investments in natural water infrastructure                         provided by nature.                                                                                                                                                    cities of Moyobamba and Cusco13 and made
                                                                                                                                                                                  Tarma           $ 16,310                                               official through the 2013 Modernization of
 10 M                                                                                                                                                                            Sicuani          $ 16,278                                               Sanitation Services Law and its regulations
                                                                                                                                                                               Barranca          $ 16,129                                                (Box 1).
     8M
                                                                                                                                                                         Bagua Grande            $ 13,914
                                                                                                                                     Millions
     6M                                                                                                                                                                    Andahuaylas           $ 13,188                                                According to information provided by
                                                                                                                                     of Dollars
                                                                                                                                                                            Vista Alegre        $ 10,234                                                 SUNASS based on Optimized Master Plans
     4M
                                                                                                                                     Sectors:                       Iquitos, Yurimaguas,
                                                                                                                                                                                                                                                         of 40 water utilities with active MERESE
                                                                                                                                                                                                $ 9,700                                                  tariffs, projected MERESE revenue for the
     2M                                                                                                                                  Agricultural                          Requena
                                                                                                                                                                           Quillabamba          $ 8,319                                                  period 2015 – 2019 was USD 39 million;
                                                                                                                                         Environmental
      0                                                                                                                                                                           Otros            $ 17,431                                              SEDAPAL was expected to have the most
                                                                                                                                         Sanitation
          2011       2012        2013       2014        2015        2016        2017       2018        2019        2020                                                                                                                                  MERESE revenue during that period, at USD
                                                                                                                                                              Figure 12. Estimated MERESE revenue (USD) of the 40                                        25 million.14 Taking a yearly average, we
      Figure 11. Financing (USD) in natural infrastructure for water security executed between 2011 and 2020, by                                              water utilities in 2019, by location. The annual revenue is
                                                                                                                                                              based on rates established by the water utilities on a five-year
                                                                                                                                                                                                                                                         estimate that the total MERESE revenue of
      public sector. Source: prepared by the authors.
                                                                                                                                                              basis. Source: prepared by the authors, based on information                               the 40 water utilities together in 2019 was
                                                                                                                                                              provided by SUNASS.                                                                        USD 8 million,15 as shown in Figure 12.
 11
      Coxon, C., Gammie, G., and Cassin, J. 2021. Mobilizing funding for nature-based solutions: Peru's drinking water tariff. Jan Cassin, John
 Matthews, Elena Gunn (Eds.). Nature-Based Solutions and Water Security: An Action Agenda for the 21st Century (pp. 241-262). Elsevier.                  13
                                                                                                                                                              Coxon et al. (2021).
 12
      In this case, sector (Función in Spanish) is an official public classification that refers to a category of public spending.                       14
                                                                                                                                                              This estimation is based on an ex-ante calculation of the water utilities' rates.
                                                                                                                                                         15
                                                                                                                                                              The year 2019 is used because the collection of water fees –and therefore also MERESE tariffs—was disrupted in 2020 by the pandemic.

24          Natural Infrastructure for Water Security                                                                                                                                            Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021           25
Photo: Carlos Palacios Núñez

 Despite this impressive ability to raise new                      Although water utilities have been gradually improving       0.5 M
                                                                                                                                                                      0.50
 funds for natural water infrastructure, so far                    their implementation processes, their budget planning        0.4 M
 the water utilities have executed less than 1% of                 still far exceeds execution capacity. For most water                                                       0.35                                                               Millions
                                                                                                                                0.3 M                                                                                                            of Dollars
 the estimated MERESE revenue. This represents                     utilities, significant amounts of planned financing have                                                                   0.26           0.26
 an important opportunity—if the water utilities had               yet to be executed; the most efficient among them has        0.2 M                                                                                                                Allocated
                                                                                                                                                                                     0.15                             0.17         0.17
 executed all the funds anticipated for 2019, it would have        only achieved 70% execution (Figure 14).                     0.1 M                                                                                                                Executed
                                                                                                                                               0.03         0.03
 resulted in an increase of 77% of the public investment                                                                                              0.0                                             0.0                    0.0                     Not executed
                                                                                                                                       0
 on natural infrastructure for that year (Figure 13).              A great opportunity that has presented itself in
                                                                                                                                                 Ayacucho                    Cusco                   Junín              San Martín
                                                                   the last two years is the incorporation of natural
                                                                   infrastructure interventions in the field by the Authority        Figure 14. Total allocated vs. executed financing (USD) of natural infrastructure for water security by water
     12 M                                                                                                                            utilities in 2018. Source: prepared by the authors.
                                                                   for Reconstruction with Changes (ARCC). The ARCC
                                                10.2 M
     10 M                                                          has ten projects in advanced stages of development,
     8M
                    7.8 M                                          representing more than USD 203 million, which are
                                                                   expected to be implemented in the coming years and           infrastructure.16 The guidelines define how IOARRs,                     monitoring equipment for natural and ancestral
     6M
                                                                   increase total public financing for natural infrastructure   which apply broadly to gray infrastructure, can                         infrastructure, including for hydrological monitoring.
     4M
                                                                   by an order of magnitude.                                    also be used for natural infrastructure. The IOARR
     2M                                                                                                                         implementation mechanism has enormous potential                         On the other hand, direct contracts with local
      0                                                            The ongoing fine-tuning of the regulatory                    to accelerate investment in specific natural assets                     land users, as an alternative to financing through
             Estimated MERESE         Total public investment in   framework has created new implementation                     by simplifying the design and justification required                    large public investment projects, represent an
            revenue collected by      natural infrastructure for   mechanisms       that    represent     important             for a given intervention in natural infrastructure. For                 important opportunity to directly compensate
            water utilities in 2019    water security in 2019
                                                                   opportunities to accelerate the process of                   example, a regional government can use IOARR to                         land users, benefit local communities, and align
                                                                   formulating public financing. For example, in                quickly respond to wildfires and restore affected areas.                their interests with effective natural infrastructure
      Figure 13. Estimated MERESE revenue (USD) collected
                                                                   December 2019, the Ministry of the Environment               The use of IOARR allow public institutions to avoid                     management practices. This contract mechanism is
      by water utilities vs. the total public investment in
                                                                   approved guidelines for applying the Investments             the extensive bureaucratic processes and approvals                      still being developed and will likely require additional
      natural infrastructure for water security in 2019.
      Source: prepared by the authors.                             in Optimization, Marginal Expansion, Rehabilitation          associated with public investment projects. IOARRs                      changes to the regulatory framework to facilitate its
                                                                   and Repositioning (IOARR) mechanism to natural               also enable public entities to quickly acquire or replace               implementation.

                                                                                                                                16
                                                                                                                                     R. M. No. 410-2019-MINAM. El Peruano. Lima, 31 December 2019.

26           Natural Infrastructure for Water Security                                                                                                             Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021       27
Photo: Renny Daniel Díaz Aguilar

 Annex 1
 Scope, Method,
 and Definitions
 Approach and objectives                                        »   Evaluate the impacts of the interventions.          low quality, and the deterioration of the resilience             We consider it important to include these practices,
 The objective of this study is to characterize the financing                                                           of freshwater systems. Water security takes into                 given their historical use in Andean culture to
 of direct interventions in favor of natural infrastructure     This study follows a similar methodology and format     consideration all uses and users of water, as well as all        manage natural spaces (using mixtures of abiotic and
 that intend to contribute to water security.                   used in a series of international studies produced by   activities and entities affected by water risks.                 biotic actions) to ensure the provision of ecosystem
                                                                Forest Trends that cover ecosystem services markets                                                                      services such as water regulation and erosion control.
 The study seeks to:                                            and investments, such as the State of Forest Carbon     Scope
 » Describe the current state and trends of                     Finance, State of Watershed Investments, and State of   All financing projects and initiatives considered in this        For example, a financing initiative to secure water for
    financing for the recovery, protection, or                  Biodiversity Investments.                               report must explicitly state the following selection             a community that builds a qocha for storage, reforests
    sustainable use of natural infrastructure as a                                                                      criteria in their primary design documents:                      the water catchment, and provides sedimentation
    strategy to manage water risks, specifically:               Definitions                                             1. Implementation of direct interventions in favor of            control, would be included. Among others, the
     • who is funding the interventions,                        Natural infrastructure is the network of spaces that         natural infrastructure that                                 following factors do not impact the decision to
     • how much is executed,                                    preserve the values and functions of the                2. Seek to contribute to water security, whether in              include or exclude a given financing initiative:
     • where the interventions take place, and                  ecosystems, and provide ecosystem services.                  part or by its entire definition.
     • what specific measures are executed.                                                                                                                                              »    Sector (the project can be from any public level/
                                                                Direct interventions in favor of natural                Practices for “sowing and harvesting water” are                       sector or private).
 »   Analyze the factors that contribute to the trends          infrastructure include all physical actions performed   included in the scope of the study if their design               »    Category, production unit, or any other technical
     observed, and                                              to recover, maintain, or sustainably use natural        explicitly includes biotic elements (i.e., vegetation).               criteria beyond the two criteria referenced above.
 »   Identify opportunities and challenges for growth           infrastructure.                                         For example, the construction of a qocha for the                 »    Quality of design or execution. In other words,
                                                                                                                        capture, storage and infiltration of water would                      the study does not question whether the
 The study does not intend to:                                  Water security is the ability to maintain acceptable    not be considered if it is not associated with other                  interventions will successfully generate the
 » Rate the quality of the design or execution of the           levels of the following four water risks: scarcity      practices such as pasture management, replanting                      hydrological ecosystem services as designed.
    interventions, or                                           (including droughts), excesses (including floods),      natural pastures, reforestation with native species, etc.

28      Natural Infrastructure for Water Security                                                                                                    Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021       29
The main unit of analysis is the project but can vary
                                   due to the nature and objective of the financing.

                                   For public investments:
                                   » When the entire public investment project
                                       is about investing in 1) interventions in favor
                                       of natural infrastructure, 2) to provide water
                                       security, the entire public investment project is
                                       considered as the unit of analysis. This includes
                                       public investment projects implemented under
                                       MERESE, as well as other mechanisms.

                                   For other public spending:
                                   » Public spending, executed outside of public
                                       investment projects, may also be considered
                                       as long as they verifiably comply with the two
                                       primary selection criteria.

                                   For financing by the private sector or international
                                   development agencies:
                                   » All projects, programs, and initiatives that meet
                                       the selection criteria are analyzed according
                                       to their defined unit – in general, these are
                                       usually projects.

                                   For all projects:
                                   » When a project or program (public
                                       or private) is primarily about natural
                                       infrastructure for water security, intangible
                                       actions like capacity building (training,
                                       organization, management instruments, legal
                                       clearances, etc) will be considered if they
                                       complement physical actions.

       30                                                                                  Opening the Tap: State of Finance for Natural Infrastructure for Water Security in Peru, 2021      31
Photo: Sharon Castellanos Tuesta                                                                                                                                              Photo: Frank Egoavil Granados
Annex II
 Database of Natural Infrastructure for Water
 Security Projects and Initiatives Included in
 the Study

                Project                                                                                                                                         Initial Date                                 Amount     Amount executed
                                                                                                                                                                                                  Budget
     Number                                                        Name                                                   Entity               Category         of Financial           Region                executed      in 2020
               ID/APCI                                                                                                                                                                            (USD)
                 Code                                                                                                                                            Execution                                    (USD)         (USD)

     1          2398144        RECUPERACIÓN DEL SERVICIO ECOSISTÉMICO DE REGULACIÓN HÍDRICA EN LA                  GOBIERNO REGIONAL      ECOSISTEMAS          1/8/2019        SAN MARTÍN       1 595 603   464 397      255 238
                               MICROCUENCA JUNINGUILLO, DISTRITO DE MOYOBAMBA - PROVINCIA DE MOYOBAMBA -           DE SAN MARTÍN
                               REGIÓN SAN MARTÍN

     2          2394643        RECUPERACIÓN DEL SERVICIO ECOSISTÉMICO DE REGULACIÓN HÍDRICA EN LA                  GOBIERNO REGIONAL      ECOSISTEMAS          1/7/2018        CUSCO            460 631     521 376      256 498
                               MICROCUENCA DE HUAYLLAHUAYCCO DE LA COMUNIDAD CAMPESINA DE                          DE CUSCO
                               PATACANCHA, PATACANCHA - DISTRITO DE HUANCARANI - PROVINCIA DE
                               PAUCARTAMBO - DEPARTAMENTO DE CUSCO

     3          2399797        RECUPERACIÓN DE LOS SERVICIOS ECOSISTÉMICO PARA LA REGULACIÓN HÍDRICA EN EL         MUNICIPALIDAD          SISTEMA DE           1/12/2017       CUSCO            423 981     372 608      0
                               SECTOR DE CAN CAN Y MONITOREO EN EL SECTOR MILLPU EN EL DISTRITO DE                 PROVINCIAL DEL         SANEAMIENTO
                               CHINCHERO - PROVINCIA DE URUBAMBA - REGIÓN CUSCO                                    CUSCO                  URBANO

     4          2334603        RECUPERACIÓN DEL SERVICIO DE REGULACIÓN HÍDRICA EN LA SUBCUENCA ALTA SAN            GOBIERNO REGIONAL      -                    1/10/2018       PIURA            2 804 677   1 128 741    838 256
                               PEDRO ARENALES DE LOS DISTRITOS DE FRIAS, SAPILLICA, LAGUNAS Y PACAIPAMPA,          DE PIURA
                               PROVINCIA DE AYABACA, DEPARTAMENTO PIURA

     5          2191829        RECUPERACIÓN DEL SERVICIO AMBIENTAL DE PROVISIÓN HÍDRICA EN EL BOSQUE               MUNICIPALIDAD          -                    1/6/2015        PIURA            1 329 053   18 085       0
                               ANDINO EN LA CABECERA DE LA CUENCA DEL RÍO HUANCABAMBA, PROVINCIA DE                PROVINCIAL DE
                               HUANCABAMBA - PIURA                                                                 HUANCABAMBA

     6          2344101        RECUPERACIÓN DEL SERVICIO ECOSISTÉMICO DE REGULACIÓN HÍDRICA EN LAS                 GOBIERNO REGIONAL      -                    1/7/2017        PIURA            342 831     235 801      0
                               MICROCUENCAS DE LAS COMUNIDADES CAMPESINAS DE LUCARQUI, JORAS, CUYAS,               DE PIURA
                               SOCCHABAMBA, ARAGOTO, CHOCAN, MOSTAZAS, SAMANGA, SANTA ROSA, SICCHEZ,
                               MARMAS Y COOPERATIVA LA TINA DE LOS DISTRITOS DE AYABACA, SUYO, SICCHEZ Y JILILI,
                               PROVINCIA DE AYABACA, DEPARTAMENTO PIURA

     7          2378489        RECUPERACIÓN DEL SERVICIO DE REGULACIÓN HÍDRICA EN LA CUENCA DE                     MUNICIPALIDAD          -                    1/4/2018        CUSCO            341 751     847 186      0
                               PACHATUSAN, EN LAS LOCALIDADES DE PATABAMBA, CCAJYAPATA, KEHUAR Y                   DISTRITAL DE OROPESA
                               PATACANCHA, DISTRITO DE OROPESA - QUISPICANCHI - CUSCO

     8          2306031        RECUPERACIÓN DE LOS SERVICIOS ECOSISTÉMICOS DE PROVISIÓN Y REGULACIÓN               MUNICIPALIDAD          -                    1/12/2016       CUSCO            243 662     122 182      25 210
                               HÍDRICA EN LA MICROCUENCA DE POMACANCHI, DISTRITO DE POMACANCHI -                   DISTRITAL DE
                               ACOMAYO - CUSCO                                                                     POMACANCHI

     9          2223165        MEJORAMIENTO DE LOS SERVICIOS AMBIENTALES PARA LA CAPTACIÓN Y FILTRACIÓN DE         MUNICIPALIDAD          -                    1/12/2014       CUSCO            140 261     113          0
                               AGUA EN EL ACUIFERO DE MISMINAY, EN EL SECTOR DE MISMINAY DE LA COMUNIDAD           PROVINCIAL DE
                               CAMPESINA DE MULLAKAS MISMINAY DEL DISTRITO DE MARAS, PROVINCIA DE URUBAMBA         URUBAMBA
                               - CUSCO

     10         2216437        RECUPERACIÓN DEL RECURSO HÍDRICO MEDIANTE REFORESTACIÓN EN PARTES ALTAS Y           MUNICIPALIDAD          INFRAESTRUCTURA DE   1/5/2013        SAN MARTÍN       22 857      429          0
                               FRANJAS DE LAS QUEBRADAS ASANZA, LIMON, ATUNRARCA Y PALLCANA, DISTRITO DE           DISTRITAL DE SAN       RIEGO
                               ALONSO DE ALVARADO - LAMAS - SAN MARTÍN                                             ROQUE DE CUMBAZA

     11         2430118        RECUPERACIÓN DE LOS SERVICIOS DE REGULACIÓN HÍDRICA EN LA CABECERA DE LA            GOBIERNO REGIONAL      -                    1/11/2018       HUANCAVELICA     6 333 392   77 471       0
                               CUENCA DEL RÍO ICA, EN SEIS DISTRITOS DE LA PROVINCIA DE HUAYTARÁ -                 DE HUANCAVELICA
                               DEPARTAMENTO DE HUANCAVELICA

 N/A = Not Available.

32        Natural Infrastructure for Water Security                                                                                                                                                                                       33
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