Peru - Second Agricultural Machinery Project

Al - f-gEV RETURN TO TO 28-a REPORTS DESK CIRCULATING COPYRESTRICTED ONE WEEK TO BE RETURNED TO REPORTS DESK This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT A REPORT on the PROPOSED SECOND LOAN TO PERU FOR AGRICULTURAL MACHINERY in PERU March 26, 1954 Department of Technical Operations  TABLE OF EQUIVALENTS U.S. $ 1.00 = S/. 20.00 S/. 1.00 = U.S. $0.05 S/. 100,000 - U.S. $5,000 S/. 1,000,000 U.S. $50,000 1 Quintal * 101.4 pounds  TABLE OF CONTENTS Page I. Summary 1 II. The SCIPA Organization 2 III. Performance of Present Pools 3 IV. SCIPA's Request for a Second Loan 4 V. Justification of the Project 5 VI. Economic Benefits 7 VII. Recommended Basis for a Loan 8 Table I. Details about SCIPA's Tractor Fleet about October 1, 1953 t" II. Preliminary List of Goods  A REPORT ON THE PROPoSED SECOND LQA.N mO PERU 1OR AGRIC-;JITTAL LYQJINERY I. Summary 1. The Government of Peru has approached the Bank through SCIPA (Ser- vicio Cooperativo Inter-Americano de Produccion de Alimentos), an agency of the Linistry of Agriculture, for a second loan to finance the import of agricultural machinery. This report presents an analysis of the project and is based on information available in the Bank in the progress reports for the first loan, additional information supplied by SCIPA, and personal observations made by members of the Bank's staff during visits to Peru in January and February 1953 and 1954. 2. On July 8, 1952 the Bank concluded a loan agreement (Loan no. PE/67) with the Government of Peru, which made it possible for SCIPA to import agricultural machinery for an amount of US`1.3 million. Purchases have been completed and all the machinery has been received and is in operation. Only a minor amount of spare parts remwains to be received. The information available indicates that the targets described in Technical Report L-170 on the first loan to SCIPA have been met. 3. The present request is for a loan of US$1.7 million. The greater part of the machinery to be purchased under the proposed loan would be heavy equipment for the rehabilitation of land now cultivated and of abandoned land and for the clearing and preparation of new land. This machinery would very substantially increase the pools of heavy machinery nov being operated. About one-third of the loan would be used to purchase equipment for tillage pools. Some of this equipment is to replace outwvorn equipment. M1aintenance machinery and spare parts have been included. 4. SCIPA, now operating 16 machinery pools, can satisfy only part of the demand for development and rehabilitation work in the coastal plains with the present stock of equipment. MIoreover, it envisages a demand for clearing work on the plateaus of the eastern slopes of the Andes to the development of which Peru now attaches inmportance. 5. The economic benefits of rehabilitating land in the coastal plains and of clearing land in the other areas are large, and the costs compara- tively low. 6. SCIPA has built up a well organized and ef-ficiently run system of machinery pools which has expanded rapidly in recent years. Its purpose is not to earn profits, but rather to render a service to Peruvian farmers. The pools have in the past covered ail their costs, including depreciation charges which are calculated by SOIPA on a conservative basis. These de- preciation charges, which are geared to the repayment of the Bank's loan, would have to be increased if the sole were to depreciate substantially. Under a new supplemental agreement to be signed by the Government and SCIPA, the foreign exchange risk would not be undertaken by SCIPA, but unless the situation became extreme, SCIPA will continue to cover the sol cost of ser- vicing the Bank's loans.  - 2 - 7. Because of the profitability to farmers of the operations performed by SCIPA, they should be able to absorb any increase in rates which SCIPA might have to impose wiere the sol to depreciate above 20 to the dollar. 8. The suggested term of the proposed loan is seven years, including a twvo-year period of grace on capital repayments to cover the period of pur- chasing, transporting and assembling the equipment. !I. The SCIPA Organization 9. The Servicio Cooperativo Inter-Americano de Produccion de Alimentos was formed in 1943 under an agreement between the Governments of Peru and of the United States. Tais basic agreement was renewed in 1950 and runs for a period of 5 years. The purpose of SCIPA is to aid in the formulation and execution of the Food Production Program of Peru. It acts as an agency of the Ministry of Agriculture. 10. Its activities are of tvo main types: (a) the non-reimbursable activities; mainly demonstration and advisory work among farmers, and: (b) the reimbursable activities, wihich consist in large part of the opera- tion of machinery pools, and furthermore of the supply of certain requisites (seeds, insecticides, etc.). The operation of the pools is intended to pro- vide a service to Peruvian farmers on a non-profit basis. 11. SCIPA has its headquarters in Lima and local offices in some 30 rural centers. There are now in operation 16 machinery pools. The machines of these pools are serviced by a central workshop in Lima and two regional work- shops, one in the north and one in the south. The central workshop is equipped to perform major overhauls, and the regional workshops perform day to day servicing, repairs and preventative maintenance. 1a. The funds for SCIPA's onerations are contributed by the Government of Peru and the U.S.A. on a mutually agreed basis. The pools were organized for the first time in 1945 as a separate project, agreed upon by the two governments. The nroject agreement provided for the contribution which each government had to make for the pools initial funds. The pools have since then been operating on a self-supporting basis. 13. SCIPA is headed by a Chief of Party. who is an official of the Insti- tute of Inter-American Affairs, an agency of the U.S. Govermaent. The staff consists of some U.S. exoerts and of Peruvian members who have received in- tensive and thorough training, and are now able to run all SCIPA's operations efficiently. 14. Performance to date shows the organization, management and operation of the pools to be excellent.  -3- III. Performance of Present Pools 15. On July 8, 1952 IB.RD loan PE/67 for US,`.3 million was made to the Government of Peru for the purpose of enlarging the machinery pools of SCIPA. Purchases under this loan have been completed. On October 1, 1953 SCIPA owmned 176 tractors, of wvhich 114 were purchased under the IBRD-loan. The distribution of tractors allocated to pools in various parts of the country is given in Table I. 16. Wriork done by the pools is classified under two main headings; "cul- tivation" work and "levelling" work. The first category includes plowing, harrowing, dusting, harvesting, etc. The second covers various types of work which aim at improving land already under cultivation, or at rehabili- tating land Which has been abandoned, or at clearing new land. This in- volves such operations as levelling, terracing, drainage, canal and ditch clearing, clearing of bushland, and improvement and building of farm roads. 17. SGIPA calculated that, using the machinery financed under the first loan as described in Technical Report L-170, it would rehabilitate 5,000 hectares a year and do tillage work on 20,000 hectares each year. 18. Reports of pool operations shown that the number of tractor hours worked, and the number of hectares serviced, increased steadily over the last few years and that the objectives under the first loan were reached. Hours of Operation Levelling Cultivating Hectares Year Total lork W,1ork Cultivated 1950 61,700 8,000 53,600 1h,900 1951 75,700 20,800 54,900 16,800 1952 108,200 3)4,300 73,800 23,300 1953 (10 months) 171,100 84,400 85,300 32,900 1953 (prelim.) 209,500 38,700 19. Figures for the first 10 months of 1953 indicated that the demand for levelling work was increasing very rapidly. In these 10 months machines assigned to levelling work operated for 84,000 hours, or half the total num- ber c' hours during vwhich all tractors were in operation. 20. Total costs of operating the pools during 1953 were S/o 9,720,000. The costs can be apportioned as follows: M4ain Categories of Costs of SCIPA Pools in 1953 as % of Total Qosts Wages 17.0 Fuel 4.6 Lubricants 5.1 Parts and repairs 13.2 Transportation 5.3 Depreciation 34.0 Administration 20.8 100.0  - 4 - 21. Gross receipts for all pools during 1953 were S,o 10,788,000 pro- viding a profit of S/o 1,068,000 on the years operation. This profit was earned in spite of heavy allowances for depreciation. Although SCIPA is intended to be a non-profit organization, it has consistently shownl a small profit in each of the past six years. The strong demand for pool services indicates that farmers consider the charges to be economic. The profits of the pools can be attributed largely to the efficiency of the management and particularly to the efficient maintenance organization that has been esta- blished. IV. SCIPA's Request for a Second Loan 22. There is a very rapidly increasing demand for levelling work. Level- ling makes the application of irrigation water more efficient and, conse- quently, higher yields are harvested and more land can be irrigated with the same supply of water. Although the machines allocated to levelling work operate more hours per month (over 200) than those assigned to tillage work (azproximately 165), SCIPA is unable to meet the demand. 23. In order to expaind SCIPA's ooerations to meet this demand the Minis- terio de Agricultura has asked for a second loan of approximately l. mil- lion on terms and conditions similar to those of the first loan. The main items of the preliminary list of goods a-e: (000 dollars) 20 crawler tractors of 80 hp. 314 25 crawler tractors of 65 hp. 258 35 crawler tractors of 44 hp. 286 Heavy earthmoving equipment 175 Scrapers, graders and borderers 88 Plows, cultivators, sub-soilers, threshers 101 Transport equipment 155 Spare parts and shop tools 206 Contingencies 117 General Total 1,700 The detailed list is attached to this report (Table II). 24. Thie list of goods includes transportation equipment and replacements of old equipment obtained by SCIPA prior to the first IBRD loan. Transpor- tation items include trailers, trucks and pickups, which SCIPA needs for the transportation of equipment to and from pools and farms, and for the trans- portation of staff members. A high degree of mobility of personnel and equipment is required in order to arrive at an efficient operation. Among replacement items are 30 tractors and most of the cultivation equipment. The extension of cultivation services is not contemplated.  - 5 - 25. The major portion of the funds will be spent for the purchase of heavy equipment to be used for the clearing of new or the rehabilitation of old land. This involves such operations as described in par. 16, as levelling and building of farm roads. Since 30 tractors are to be ob- tained as replacements, the proposed loan would allow SCIPA to expand her fleet by about 50 tractors. 26. Most of the equipment now in use by SCIPA is manufacturerd in the United States (see, as Dar as tractors are concerned, Table I). SCIPA aims to simplify its maintenance operations by using only a few makes of machines. Since tuhere are advantages in purchasing the samre malces of machines as the ones now in use, procurement is intended to be mainly from the same suppliers as in the case of the first loan. However, since SCIPA wants to be acquainted with new developments, it intends to purchase a few units from other suppliers. Part of the shop equipment will be bought from European suppliers. V. Justification of the Project 27. There are large areas of land (estimated at nearly 150,000 hectares, or one-fourth of the area listed by the Ministry of Public -hT1orks as being under irrigation) in the coastal plains that formerly were in production, but which are now out of use, as: (a) the land has never been properly levelled so that it uses too much irrigation water and its cultivation is too ex- pensive; (b) the irrigation ditches have deteriorated in the course of the years and some of the fields require drainage. 28. Other lands which are still in use are also badly levelled so that they use too imch irrigation water and give low yields. Levelling -would not only increase the crops, but also make water available for additional land. 29. The rehabilitation of land with hand tools is costly and slow. Every year thousands of man-hours are spent cleaning, with hand tools, irri- gation ditches, which have been silted by muddy water. By far the larger part of this land can be rehabilitated at rather low costs if the proper machinery is available. If the appropriate machines are rented such work gives a good return to the farmers. Farm.us on the Costa (The Coastal Plains) are as a rule oiner-operated so that farmers are interested in improving their property and most of these farms are large enough for machine opera- tions. That farmers are able and eager tC pay the $CIPA-rates for this type of work is shown by the fact that though in 1952 each machine assigned to levelling operations worked for an-average of 200 hours per month, SCIPA was frequently unable to meet the demand. 30. It is also intended that the equipment will be used to clear land on the plateaus on the eastern slopes of the Andes. One of the SCIPA1s pools in this area is located in the region of Jaen-Bagua. This is a fast growvng agricultural area in the Departments of Cajamarca and Amazonas, which produces rice, tobacco and other tropical products. SCIPA is of the  opinion that it can employ there more than the 10 tractors which are now allocated to that pool. Some tractors have to be of the heavy type for brush clearing. There are about 8-10 thousand hectares to be cleared in this region alone. 31. In addition to the foregoing demands there are the requirements of the Quiroz-Piura Irrigation Project. As a result of completion of Stage I, there is a large demand for levelling work wuhich SCIPA has been unable to meet in full. If Stage II is constructed, about 40,000 hectares of newr land will have to be prepared for irrigation. The rate of clearance in any one year would probably not exceed 8,000 hectares. SCIPA has stated that if the Bank makes a second loan, it would have sufficient equipment ready to undertake this operation wAhich would not get into full swing until 1957 even if construction on the Quiroz-Piura project is started by the middle of this year. 32., The experience which SCIPA has accumulated in six years of pool operations together with the applications for rehabilitation and clearing work now available, indicate that there will be such a volume of work to be done by the pools that an expansion of their equipment is fully justi- fied. 33. SCIPA mvill continue its tillage work in the Costa but gradually mnore attention is being paid to increasing the production of food in the valleys in the Andes. For this, the six existing demonstration pools in that region are of great importance, and the purchase of some light equip- ment for tillage work in order to replace worn-out equipment is justified. 34. SCIPA charged on average 50 Soles per hour for machinery services, or about $3 at the avera-e exchange rate in 1953, but these charges may have to be increased under a substantial depreciation of the Sol. SCIPA wishes to depreciate its machinery at a rate sufficiently fast to repay the first loan made by the Bank and intends to do the same for machinery financed under a second loan. Because of the greater margin of profit, and the fall in administration costs, which should follow from the in- creased volume of its operations, SCIPA expects it can continue -rith the same scale of charges unless the Sol depreciates above 20 to the dollar. 35. If it were to depreciate above this figure, SCIPA would have to choose between asking the GoverrrAent to subsidize its operations or rais- ing its charges. At the present time, the total cost of levelling and rehabilitating land can probably be earned back by the farmer in two or three years operations. In the event of a substantial depreciation, it appears that SCIPA could well contemplate raising its charges, since the farmer, particularly the cotton grower, would increase his profits in Soles.  - 7 - VI. Economic Benefits 36. As it is impossible to know in advance the exact area or location of the lands to be rehabilitated or developed, or the type of crops to be grow^n thereon, it is necessary to base estimates of the economic benefits of the project on certain assumptions. 37. The loan under consideration w'ould enable SCIPA to enlarge her fleet wiith 50 tractors. These tractors will be used for the improvement of land now under cultivation, abandoned land, and for the preparation of land that has not yet come under cultivation. The experience of SCIPA is that a fleet of 50 tractors could theoretically rehabilitate or clear 30,000 hectares per annum, if the machines work on average 2,000 ho'urs a year. 38. However, in order to make a conservative estimate of the economic benefits, this report assumes that the new equipment will rehabilitate 15,000 hectares and will make available another 5,000 hectares of new land per year, or a total of 20,000 hectares. 39. Further assumptions are: (a) that half of this land will grow ex- port crops (mainly cotton), and the other half will produce food crops fruit, and tobacco; and: (b) that three-quarters of the production of ex- port crops will actually be exported. 40. Calculations based on these assumptions and on conservative price estimates show that after five years of full opeiation, the period during which the cost of the machines is to be amortized under the loan, an in- crease in agricultural production of the order of US$36 million will have been produced, of which the equivalent of US,17 million will be exported. After the clearing or rehabilitation operations have been completed, the land will continue to produce at a higher level. The value of the increased production each year will be equivalent to 12 million after the 5th year. 41. The costs to the farmer of the increase in production consists of tv,io elements: (a) recurrent costs for the cultivation of new land, or an increase in recurrent costs for the cultivation of improved land; (b) charges for SCIPA services, which are low if compared with the recurrent costs. 42. The available information shows that the costs to the farmer are considerably less than either the value of the production from new land or the increase in value of production from rehabilitated land. In fact the increase in their costs calculated as an average over the 20,000 hectares mentioned in par. 38 will be only about one-third of the average increase in the value of production. 43. Tlhe foregoing calculations of benefits and costs only cover the addi- tional "levelling" operations of SCIPA. Further benefits would be derived from other operations of SCIPA including the ability to maintain past opera- tions at the present level through replacement items. Even without taking into consideration these benefits, the cost benefit ratio is extremely favorable to the farmers.  - 8 - 44. It is necessary, in addition to the foregoing appraisal of the costs and benefits of the project to the farmers to consider the costs of the project to SCIPA. The foreign exchange costs of the additional equip- ment and expanded operations to SCIPA can be estimated as follows: Amount of loan US$ 1.7 million Interest: 5% over period of grace and 5 years interest over the unpaid balance " 0.41 " Consumption of additional fuel & luorication(l) i 0.09 " US$ 2.20 million It is estimated on the basis of the figures shown in par.20 that local currency costs of the expanded operations to SCIPA will be S/o 33 million on the basis of S/o 20 to the dollar. The total costs of the project estimated at S/0 77 million will be covered by SCIPA's revenue from its various services. Since the expansion of operations will occur over a period of years, no immediate provision to cover local currency costs to SCIPA is necessary. The funds can be appropriated from current income as necessary, particularly as farmers pay for services in advance by contract. 45. In accordance with the foregoing estimates of foreign exchange cQats and benefits, the foreign exchange earnings under the project amount to US$17.0 million (par.40), compared with foreign exchange costs of US$2.2 million (par. 44). The net improvement to the balance of payments position would, therefore, be of the order of USt14.8 million. These rough figures indicate that from a balance of payments standpoint this loan vwould be very advantageous. VII. Recommended Basis for a Loan 46. Investigation and appraisal of this project indicates that it is sound and that the list of goods is acceptable. 47. A term of seven years, the same as for the first loan to SCIPA, in- cluding a twvo-year grace period, in which SCIPA would be able to buy, import and assemble the machines, is reasonable for a loan of this kind. 48. On this basis the request for a loan to the equivalent of US:1.7 mil- lion as submitted by the Peruvian Government through SCIPA should be favor- ably considered. (1) These items amounted to l0; of total costs in 1953, which vworks out at S5 per hour. For the Suture a cost of fuel and lubrication of ,-O.30 per hour is assumed. The benefits of the project are calculated on the basis of 60,000 hours of work of the addition to the tractor fleet. This means that over a period of 5 years a sum to the equivalent of $90,000 has to be expended for fuel and lubrication.  TABLE I Details about SCIPA's Tractor Fleet about October 1, 1953 Number of Tractors owned by SCIPA Producer Source of Funds Total Bank Others Caterpillar 60 28 88 Allis Chalmers 10 20 30 Oliver 20 6 26 John Deere 8 2 10 Avery - 1 1 Ferguson 5 1 6 International 10 4 14 Case 1 - I Total 114 62 176 Distribution of Tractors over Pools Commercial Pools Demonstration Pools Arequipa 3 tractors Ayacucho 3 tractors Bagua 10 " Cajamarca 1 " Camrana 6 " Cuzco 3 Casma-Santa 14 *ihuancayo 10 Chiclayo 16 " Huaraz 1 Chincha 26 " Juliaca 2 " Ica 26 " Lima 18 " Total 20 tractors Pacasmayo 8 Piura 16 " Total 1L3 tractors  TABLE II SCIPA' s REQUEST FOR A SECOND LOAN Preliminary List of Goods Price Item Quantity c.i.f. Calao 1. Tractors, CaterDillar Mod. D-7 7)4" tread (81.00 HP) or equal equipped with hydraulic control 20 $ 313,710.00 2. Tractors, Caterpillar Ivlod. D-6 744" tread (65.OO EP) or equal equipped with hydraulic control 257,50000 3. Tractors, Caterpillar Mlod. D-4 60" tread (4)4.00 HP) or equal 35 286,000.00 4. Bulldozers, Caterpillar angular blade M4od. 7-A 74" or equal 20 70,830.00 5. Bulldozers, Caterpillar angular blade Iiod. 6-A 744" or equal 25 60,000.00 6. Scrapers Caterpillar sItod. 70 with hydraulic control or equal for use with D-7 tractor or similars 3 i6,740.00 7. Motor Graders Caterpillar Lod. No. 12 of 100 HP or equal equipped with scarifier and hydraulic buster in the steering system 4 66,ooo.oo 8. Plows Disc 6 and 7 discs 28" and Mliold Board plows IMiodel to be selected 30 36j500.00 9. Combination PlowT and Harrow for use with D-4 or D-6 tractors 5 7,500.00 10. Disc Harrows, Standard Disc or equal 28 disc 26" disc for use with D-4 tractors 15 18,0oo.00 11. Borderers "Brown" or equal 4 4h,000,00 12. Threshers stationary "Case" or equal, capacity 200 sacks per day minimum 6 14,4oo.6i0 13. Threshers Peanut-Picker type Lor threshing beans "Turner" or equal 4 5,