1. INFRASTRUCTURE, GROWTH AND POVERTY REDUCTION Experience with Camisea Gas Pipeline in Peru Lessons Learned November 19th 2007

2. Contents 1.Camisea Project Overview 2.Growth in Public Revenue from Canons, Peru 2000 - 2007 3.Distribution of Camisea Gas Royalties 4.The Camisea Gas Canon 5.The FOCAM 6.The FOCAM in UCAYALI 7.Distribution of Camisea Revenues and Poverty: Results 8.Lessons learned from Camisea regarding poverty

3. Camisea Project Overview: Location within Peru

4. Camisea Project Overview: schematic

5. Camisea Project Overview : Block 88

6. Camisea Project Overview : Malvinas Plant

7. Camisea Project Overview: Pipeline route

8. The Canon Law The Canon Law of 2001 defines Canon as the effective and adequate share to regional and local governments of the total income and rents obtained by the State, due to the economic exploitation of the natural resources. The Law determines which natural resources, when exploited, generate canon. The Law also regulates its distribution, in accordance with indexes set by the MEF based on population and unsatisfied basic needs criteria.

9. Growth in Public Revenue from Canons, Peru 2000 - 2007 Millions of soles

10. The Camisea Gas Canon The natural gas Canon is constituted from 50% of revenue taxes paid by companies, and 50% of the royalties for exploitation of this resource. The Canon is distributed to the Department where the natural gas wells are located (Cusco, in the case of Camisea) according to the following: 75% to Local Governments (District, Province) 25% to Regional Governments, of which 20% go to local public universities as budget for research. The criteria for asignation is based on population and Unsatisfied Basic Need.

11. Distribution of Camisea Gas Royalties Source: MEF, 2005 and Law 26221

12. Effects of Camisea Project on Cusco Regional Government´s Source: MEF Budget doubledBudget to be tripled Camisea canon transfers have a substantial impact in the Cusco Regional Government budget. Budget: 2005-2014

13. The FOCAM (Law 28451, 2004) The FOCAM is constituted from 25% of the royalties of Block 88 and 56 (after Canon payments). a) 30% to the Regional Governments (Ayacucho, Huancavelica, Ica, and Lima, excluding Metropolitan Lima) using as criteria population, Unsatisfied Basic Needs (UBN), and length of pipeline in each jurisdiction. b) 30% to the Provincial Municipalities of the Regional Governments, using as criteria population, UBN, in each jurisdiction. c) 15% to the District Municipalities crossed by the pipeline, using as criteria population, UBN and length of pipeline in each jurisdiction. d) 15% to the other District Municipalities of the Regional Governments, using as criteria population, UBN, in each district. e) 10%, in equal share to public universities in the Departments of Ayacucho, Huancavelica, Ica, and Lima, excluding Metropolitan Lima.

14. Distribution of Camisea Revenues and Poverty: Results Due to the decentralization process under way in Peru and the execution of the Camisea Project, the sub national governments and the public universities in the area of influence of the Project have received an exceptional amount of resources in the last 3 years. (about US$300 million in total, under Gas Canon and FOCAM) In the coming years these resources are likely to increase, as the gas production in the Bajo Urubamba area increases. Gas Canon and FOCAM have become the main source of transfer for the Regional Governments of Cusco and Ayacucho, and for the local Governments of Cusco Region, where the gas is produced. For the districts in the Andes, which are the poorest along the Camisea pipeline ROW, the FOCAM is the third most important transfer, only supplanted by the FONCOMUN and tranfers from food programs.

15. Distribution of Camisea Revenues: Conclusions Difficulty to access financial information at the district level, particularly in the poorest and most isolated municipalities. Both the Gas Canon and the FOCAM have a poverty criterion built into the formulas for fund transfers (Unsatisfied Basic Needs). However, It is too early to analyze trends on how effective the Canon and FOCAM have been in terms of poverty reduction, as gas production only started in mid 2004. Data and protocols for such analyses should be initiated, in order to inform and orient public decision making and investments for the coming 3 decades, in the area.

16. Importance of having good poverty data: HDI, down to the lowest level of Government (District), FONCODES Poverty maps with recent data (2006); census 2005, and 2007 (under way). Key for targeting. The main challenge in the short term is to increase the capacity of sub national governments to spend these new resources wisely. The training in the last 3 years of over 600 civil servants in sub national governments along the pipeline ROW in public project management, and the participatory design of regional and local development plans are a first steps to ensure effective investment of the funds, but much work lies ahead. Close coordination among privately (community development plans) and publicly financed projects (through canon or Focam) is key to more effectively reach a critical mass of investments in depressed areas. The establishment of a representative coordinating body can play this role. Lesson learned from Camisea regarding poverty