Peru - Agricultural Machinery Project

No. P-39 FILE COPY RESTRICTED .' tER C'S~~~t This report is restricted to use within the Bank.| INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF PERU for the IMPORTATION OF AGRICULTURAL MACHINERY July 2, 1952  INTERNATIONAL BANK FOR RECOIISTRUCTION AND DEVELORJENT REPORT AND RECO11ENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR THE IMPORTATION OF AGRICULTURAL MACHINERY 1. I submit herewith a report and recommendations on a proposed loan of `41.3 million for the importation of agricultural machinery to enlarge the agricultural equipment pools operated by the Servicio Cooperativo Inter- Americano de Produccion de Alimentos (SCIPA), an agency of the Mlinistry of Agriculture of the Republic of Peru. PART I - HISTORICAL 2. Many projects for increasing agricultural production were presented to the Bank Mv1ission which visited Peru in July, 1950. These projects were discussed with the Peruvian authorities and with SCIPA by two agricultural experts from the Bank in May and June of 1951. It was mutually agreed that a project prepared by SCIPA for expanding its operations in Peru was of the highest priority in the agricultural field. However, the Bank delayed action pending further progress in the settlement of Peru's defaulted external debt. 3. In April, 1952, the Peruvian Government passed legislation on the basis of vrhich a formal offer will soon be made to the holders of defaulted dollar bonds. This offer vill be recommended for acceptance by the Foreign Bondholders Protective Council, Inc. I understand that the Council of Foreign Bondholders (London) are prepared to accept the terms agreed with the Foreign Bondholders Protective Council, Inc. provided full effect is given to tlle dollar option clauses in the sterling loan contracts. Negotia- tions have been held up on this one point, namely, whether the dollar option should be honored at the contractual rates of 4P4.80 and 4.8665 to the pound. 4. As I explained at the Executive Directors' meeting of June 27, 1952, Peru's ability to reach a prompt settlement on this point has been limited by the fact that - (a) the Council of Foreign Bondholders is currently negotiating settlements of German debts which also have currency options, and expects shortly to have similar discussions with the Japanese. In the circumstances, it is reluctant to discuss the Peruvian case further until a decision has been reached in the German and Japanese discussions; (b) the representatives of the dollar bondholders,have expressed t,he view that an offer by Peru to honor the dollar option at the contractual rate would violate a "most favored nation"  2 provision in the dollar settlement. In vievw of the readiness shown by Peru to attempt to reach mutually satis- factory settlements, I do not consider it inappropriate for the Bank to proceed with further lending to Peru. PART II - DESCRIPTION OF THE PROPOSED LQAN Borrower 5. The Borrovwer would be the Republic of Peru, a member of the Bank. Amount 6. The amount would be 41.3 million, or its equivalent in other currencies. Purpose 7. The proceeds of the Loan would be used to import equipment to enlarge the agricultural machinery pools which are operated by SCIPA to assist farmers in preparing and cultivating their lands, harvesting their crops, and reclaim- ing old and developing new land. The small amount of local funds necessary to bring the machinery into operation will be provided by SCIPA. 8. SCIPA is a semi-autonomous agency of the lviinistry of Agriculture established in 1943 by the Peruvian Government and the Institute of Inter- American Affairs of the United States to develop a program which would both increase food production during the wrar period and lay the foundation for long-range improvements in agriculture. Since its inception it has con- *ducted an effective agricultural extension program and since 1947 it has also operated agricultural machinery pools. Although its expenditures have been moderate, its achievements have been substantial. .erms 9. Thie Loan would bear interest at the rate of 4 1/8% per annum including the statutory commission of 1%. 10. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan or from September 1, 1952, whichever is the earlier. 11. The Loan would be for a term of seven years. It would be amortized by seni-annual payments beginning July 15, 1954 and ending July 15, 1959, as set out in Schedule 1 of the proposed Loan Agreement. 12. I consider the proposed schedule for the repayment of principal and the rate of interest and other charges on the proposed loan to be reasonable and appropriate.  3 Legal Instruments and Legal Authority 13. A draft Loan Agreement between the Republic of Peru and the Bank is attached as Appendix I. Section 5.09 provides in substance that in the unlikely event that SCIPA's life is not extended after the present contract betvween Peru and the Institute of Inter-American Affairs expires on June 30, 1955, Peru will maintain a successor organization mutually satisfactory to the Borrower and the Bank. In Section 5.08 the Borrower undertakes to make arrangements with SCIPA satisfactory to the Bank for carrying out the Project and Section 7.01 provides that before the Loan can become effective these arrangements must have been made. The last sentence of Schedule 2 would permit SCIPA to sell the equipment financed by the Bank provided the proceeds are used to buy other equipment for the machinery pools. Otherwise the draft Loan Agreement follows the general form of loan agreement. 14. The report of the committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached as Appendix II. 15. The Government has authority to contract this Loan under a law enabling it to contract loans up to a total of (160 million from this Bank and the Export-Import Bank. PART III - APPRAISAL OF TIC PROPOSED LOAN 16. A technical appraisal of the project to be financed by the Bank is attached as Appendix III. Justification of the Project 17. Agriculture has been, and continues to be, the principal enterprise of the Peruvian people. It employs tv7o-thirds of the working population, provides exports which account for 50% of foreign exchange income and pro- duces the bulk of her food supply. 18. Agricultural production has been lagging behind the increase in population. As a consequence, imports of foodstuffs have been increasing and domestic consumption of cotton and sugar, the main export crops, is increasing more rapidly than output. 19. An important reason for the relative decline in agricultural output is the decline in man and animal poizer available for working the soil. Industry and services are increasingly drawing workers awvay from the farm, and draft animals, principally oxen, have been slaughtered on a large scale. 20. Peru's commercial crops are produced in the arid coastal region where the availability and disposition of vwater limit output. Increase in output can be obtained quickly by improving use of present water supplies. This in turn now requires mechanized methods. 21. Experience indicates that both the volume and efficiency of agri- cultural production can most readily be increased by expanding the machinery pools vhich SCIPA is operating effectively in Peru. The operations performed  4 attack the problem in a number of important ways. 22. The machinery pools enable farmers Who have not been acquainted vith, or cannot afford to own, machinery to have the advantage of mechanized methods of plowving, cultivating and harvesting their crops. As a result, seeding can be completed and crops harvested at the favorable seasons and land which would otherwise be idle for lack of man and animal power is brought into production. 23. The equipment in the pools is also used for leveling, draining and con- touring land and the building or relocating of irrigation water courses. This type of work enables land now in use to be cultivated vwith less wvater, once productive land to be reclaimed, and new land to be irrigated and brought into cultivation. 24. SCIPA estimates that the additional equipment to be purchased vwith the proceeds of the proposed loan vill enable the SCIPA pools to restore to culti- vation a minim.um of 5,000 hectares of now unused land per year and to increase tillage and cultivation operations by a minimum of 18,000 hectares per year. Altogether the additional production from the many operations vwhich SCIPA can perform with the addition4l equipment should earn and save for Peru at least enough foreign exchange both to service the loan and to provide for a rise in local consumption. Economic Situation 25. Reports R-528 dated October 12, 1951 and R546 dated December 28, 1951 showed Peru's economic situation to be generally favorable and the long-term prospects as warranting some increase in the foreign debt. It was stated that the outbreak of wvar in Korea had brought about an increase in world demand for Peruvian products, while monetary and financial reforms had created an improved environment for development of both private and public enterprises. Favorable factors in Peruts balance of payments wvere said to be the variety of the types of goods vwhich it exported, and a demonstrated ability to reduce imports in times of exchange shortages, though it was pointed out that the growing population's need for more food would lead to greater imports unless food production wvas increased. 26. Information obtained since these reports were issued showsthat the above trends persist and that the situation continues to improve. Total exports rose from US$190 million in 1950 to US$250 million in 1951. All import prohibitions were abolished in 1951 and mainly for this reason the value of imports exceeded that of exports by $11 million. However, this deficit on current account was offset by an inflow of short-term capital, and foreign exchange and gold reserves of the Central Bank increased by $8 million. In December 1951 a decrease of the inflationary pressures described in the reports mentioned in paragraph 25 permitted a slight relaxation of credit restrictions. Reforms initiated in 1949 and 1950 such as liberalization of foreign exchange control and measures to stabi- lize the money supply have begun to bear fruit and further reforms have been initiated and carried out. For instance, a law was enacted to encourage foreign investment in petroleum development. At present the fiscal system and development institutions are in the process of reorganization.  5 27. Peru's foreign public and government guaranteed debt as of October, 1951, consisted of 81.4 million US dollars, 47.4 million Argentine pesos ($11.8 million) and E 2.7 million. The I.B.R.D. Port of Callao Loan has increased the dollar debt to 83.9 million. The Export-Import Bank has made two loars to private companies in' Peru, amounting to $21.4 million, which are not guaranteed by the Government. There is also a City of Lima issue, not guaranteed by the Government, amounting to 1`2.9 million. Part of the public debt consisting of dollar and sterling bonds and the City of Lima issue were in default on both interest and amortization. Pending final settlement of the defaulted bonds, the amount of the total debt cannot be accurately stated but it is of the general order of $130 million, including the Export-Import Bank loans and the City of Lima issue. If the pound sterling bonds wvere serviced at the contractual rates of 4.80 and 4.8665 to the pound, annual service payments of the public and guaranteed debt, and the non-guaranteed Export-Import Bank debt, would amount to about $8 million in 1954, $6 million for the years 1955-58 and about $3 million thereafter until 1973. In view of Peru's economic situation and prospects, the additional burden of service of the proposed new Loan should not prove excessive. Political 5ituation 28. The political situation continues to be stable. General Odria, who became President after Presidential and Congressional elections in June, 1950, appears to be well established and does not face substantial opposition. His term of office will expire in July 1956.. Prospect of Fulfillment of Obligations 29. SCIPA is a going concern vith an efficient and experienced staff capable of maintaining and operating the new equipment effectively. 30. SCIPA's schedule of charges for the services of the new equipment will be based on the cost of operating the pools in which it is to be used, and amortizing its cost over a period of five years or less. On a conservative basis, SCIPA estimates that the depreciation charges alone on the Bank- financed equipment will total 4 million soles (equivalent to $270,000) per year. This would be sufficient at present exchange rates to service the proposed loan. 31. The increase in agricultural output expected from enlargement of SCIPA operations should strengthen Peru's foreign exchange position. 32. The prospects of sound economic development in Peru continue to be promising and Peru should have no difficulty in providing the foreign exchange required to service this loan. PART IV - COTHPLIANCE `-ITH ARTICLES OF AGREEIvMNT 33. I am satisfied that the proposed Loan vwill comply with the require- ments of the Articles of Agreement of the Bank.  6 PART V - RECO1,2ENDATIONS 34. I recommend that the Bank make a Loan of $1.3 million to the Republic of Peru for a term of seven years at such rates and on such other terms as are specified in the draft Loan Agreement attached as Appendix I. Eugene R.- Black Washington, D. C. July 1, 1952  STATUTORY LOAN COMMITTEE REPORT To: The President, International Bank for Reconstruction and Development Report of Loan Committee under Article III, Section 4(iii), of the Articles of Agreement on the proposed loan to the Republic of Peru The undersigned Committee, constituted under Article V, Section 7 of the Articles of Agreement of International Bank for Reconstruction and Development (hereinafter called the Bank) hereby submits its report pursuant to Article III, Section 4(iii), of said Articles in respect of the proposal that the Bank grant to the Republic of Peru a loan in the principal amount of tl,300,000. The purpose of this loan is to provide foreign exchange for the purchase of tractors, bulldozers, threshers, plows and other equipment for the purpose of developing the agricultural resources of the Borrower. 1. The Committee has carefully. studied the merits of the proposal to grant such a loan and the purposes to which the proceeds of the loan are to be applied. 2. The Committee is of the opinion that the project toward the financing of which the proceeds of such loan are to be applied comes within the purposes of the Bank as set forth in Article I of said Articles of Agreement and that the said project is designed to promote the development of the productive facilities and resources of the  Republic of Peru and is in the interest of the Republic of Peru and of the members of the Bank as a whole. 3. Accordingly, the Committee finds that the said project merits the financial assistance of the Bank and hereby recommends the said project for such assistance. COMMITTEE Isl R. L. Garner Vice President /sl Carlos Gibson Expert Isl A. S. G. Hoar Loan Director Isl L. Rist Director, Economic Department _ /s/ D. Sommers General Counsel /sl Henrv W. Riley Assistant Treasurer Dated at Washington, D. C. July 2, 1952