Peru - Irrigation Rehabilitation Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2026-PE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR AN IRRIGATION REHABILITATION PROJECT March 29, 1977 This document has a restricted distribution and may be used by recipients only In the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization. RATE OF EXCHANGE March 9, 1977 Currency Unit = Sol (S/.) US $1 SI. 73.12 S/.1 US$ 0.01368 S/.l,OOO US$13.68 S/.1,000,000 = US$13,676.15 FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS BAP = Banco Agrario del Peru DGA Direccion General de Aguas DGI = Direccion General de Irrigaciones DGP = Direccion General de Produccion MAG = Ministerio de Agricultura MA = Ministerio de Alimentacion (Food) SENAMA = Servicio Nacional de Mecanizacion Agricola SIKAMOS = Si8tema Nacional de Apoyo a la Movilizacion Social 1/ On September 20, 1976, the Government instituted a policy of minidevaluations. Since then, the exchange rate has gradually changed from US$1.00=S/.65.00,to its present level. FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR AN IRRIGATION REHABILITATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Peru for the equivalent of US$25.0 million to help finance an Irrigation Rehabilitation project. The loan would have a term of 17 years, including three and a half years of grace, with interest at 8.5 percent per annum. The Kingdom of the Netherlands will contribute the equivalent of $1.0 million to the financing of the project, under a technical assistance agree- ment with the Republic of Peru. PART I - THE ECONOMY 2. A report entitled "Economic Position and Prospects of Peru" (No. 655-PE) was distributed to the Executive Directors on March 3, 1975. A basic economic report on Peru is now under preparation. The following dis- cussion, as well as the country data sheets attached as Annex I, reflect the findings of recent missions to Peru. 3. Since the military came to power in 1968 the Government has followed a development strategy aimed at linking economic growth to a transformation of society to achieve broader popular participation in the country's economic, social and political life, thus addressing one of the most serious problems of Peru's economy and society--the sharp differences in wealth and opportuni- ties between income classes and geographical regions. A new government headed by General Morales Bermudez, which took office in August 1975, has been reassessing the progress made since 1968 in the onerous task of recon- ciling growth, financial stability and better income distribution. The main problems were a contraction in domestic savings, particularly in the public sector, a fall in efficiency in the productive sectors and a retrenchment in private sector investment. Subsequently the Government made important modi- fications in policies that would leave the basic long-term objectives un- changed, but would call for a more gradual approach to reforms of the economic and social system with an emphasis on measures that increase domestic savings, encourage private sector investment and improve efficiency in production. 4. Between 1970 and 1974 output was growing at an average annual rate at 7%, but this was accompanied by growing financial instability. In 1975 the growth rate dropped to less than 3% and it became clear that sustained high growth rates were dependent upon improvements in both internal and ex- ternal financial policies. Gross domestic investment rose from 13% to almost 19% of GDP between 1970 and 1975, largely because of the increase of public and private investment in mining and petroleum. However, as consumption also grew faster than GDP and heavy losses were incurred by public enterprises marketing imported petroleum and foodstuffs, gross national savings fell to less than 8% of GNP. The excessive growth of aggregate demand combined with the sharp rise in Peru's import prices since 1973 resulted in an acceleration This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 2 - of inflation--from an average annual rate of 7.2% during 1969-73 to over 24% in 1975--and an increase in the deficit of the balance of payments on current account from 0.5 to 11% of GDP between 1972 and 1975. Net long- term capital inflows rose from US$110 million in 1972 to US$840 million in 1974 and allowed a US$275 million increase in net international reserves in spite of the widened resource gap. In 1975, although net long-term capital inflows totalled an estimated US$1.2 billion, they were not sufficient to finance the current account deficit and net international reserves fell from US$680 million in December 1974 to around US$127 million in December 1975. 5. During 1975 the Government approved a series of tax and price measures to reduce the excessive growth of aggregate demand and to stimulate the growth of food output and exports but these were insufficient to reverse the deteriorating financial trends during that year. Additional measures were taken in January 1976, including increases in taxes and official prices and cuts in public expenditures, but Peru's financial position continued to worsen during the first half of the year, with the public sector deficit still growing. The Central Government deficit was caused by a combination of rapid growth of both current and capital expenditures resulting from inflation and very low growth of current revenues. The latter was due mainly to the sharp fall in income tax payments by the mining sector (reflecting trends in world copper prices) and to declining imports subject to duty. Although the income of many public enterprises rose substantially because of price measures taken in January 1976, the combined deficit of all state enterprises remained large for several reasons. These included the operating losses of the steel and fishing companies, the low surpluses of the mining companies and large cost overruns on investment projects, mainly in the petroleum sector. 6. Since the large credit expansion that was required to finance the public sector deficit was not compensated by a reduction in the rate of in- crease of credit to the private sector, net domestic assets of the banking system expanded vigorously during the first semester of 1976, at a time when liabilities to the private sector had practically stopped growing in nominal terms. The resulting expansion fueled both inflation and import demand. At the same time, a decline in international prices for Peruvian exports kept export earnings depressed and the general uncertainty on the economic outlook caused large short-term capital outflows. The overall result was that net international reserves fell by over US$525 million during January-May to a negative level of around US$400 million; the foreign currency holdings were then almost exhausted in spite of US$212 million of IMF assistance which included the first credit tranche and the use of the compensatory and oil facilities. - 3 - 7. During May and June of 1976, a comprehensive package of drastic measures was approved to cut down the growth of aggregate demand, restore balance of payments equilibrium and reduce inflation. The measures included: (a) a sharp increase in taxes on exports, petroleum products, sales, ciga- rettes and automobiles; (b) an increase of 3-4 points in average interest rates; (c) a cut in public expenditures; (d) the freezing of all wages until the end of 1976 after an adjustment of around 10-15% to ease the impact of the other measures on the cost of living; (e) a tight monetary program, involving a sharp contraction in the rate of expansion of credit to both the public and private sectors; and (f) a devaluation of the Sol from S/.45 to s/.65 per US dollar. From mid-September onward Peru adopted a policy of frequent adjustments in the exchange rate roughly in line with relative price increases. By March 9, 1977 the dollar parity had reached S/.73.12. As a complement of the stabilization package the Government obtained US$330 million of balance of payments support loans from North American and European commercial banks in early December. An additional loan of US$32 million from Japanese commercial banks was signed in early March 1977. 8. Preliminary data for 1976 suggest that the tough stabilization program has been moderately successful in turning around Peru's financial trends. Between 1975 and the second semester of 1976, public sector savings rose from minus 1.0% to a positive 1.1% of GDP, and the overall deficit at the public sector was cut from 10.4 to 7.7% of GDP. The improvement was mainly a result of a large fall in the overall deficit of public enterprises from 6.2 to 0.3% of GDP between 1975 and the second semester of 1976, owing mainly to the price adjustments introduced during 1976. The public sector financial performance could have been even better, had it not been for a disappointing performance of tax revenues. The measures taken during 1976 in respect to some taxes were not enough to offset the contractions in yields from other taxes and Central Government current revenues fell from 16 to 14.4% of GDP between 1975 and the second semester of 1976. 9. The improvements in overall public sector finances, the tight credit policy, a strict adherence to wage guidelines set in June and the frequent devaluations led to a reduction in the volume of merchandise imports by 14% and a drop in the inflation rate during the last months of the year. While between December 1975 and December 1976 prices rose by over 44%, their monthly growth rate declined to around 1 in November and December. The cut in im- ports and a 16% increase in export volume narrowed the balance of payments current account deficit from 11.5% of GDP in 1975 to an estimated 7.5% in 1976 and 6.5% in the second semester. Net international reserves rose by US $15 million during the second semester of 1976. 10. The growth of GDP remained sluggish in 1976 (below 3%). The sectors most affected by the restrictions were manufacturing, construction and services. Mining, fisheries and agriculture, on the other hand, showed very significant -14 - improvements. Mining output grew by almost 9%o mainly as a result of fewer labor stoppages and the start-up of the Cuajone mine. Fisheries output rose 26% because of the recovery in anchovy catch. After several years of stagnation, agricultural output is estimated to have grown as fast as population; perhaps most significant, a large part of the better performance of the sector came from a sharp rise in production of food crops for the domestic market (mainly maize) resulting partly from more adequate price policies. Finally, during 1976 much progress was made in completing the oil pipeline from the Amazon region to the Coast, which will be in operation during 1977; with present proven reserves, it is expected that Peru's net petroleum imports will fall from over $240 million in 1976 to less than $20 million by 1980. 11. Besides moving forcefully towards financial stabilization, the Government has been approving a series of important measures with far reaching long-term development consequences. The drive towards eliminating the dis- tortions in relative prices has made considerable progress; price controls are being gradually relaxed. The more flexible exchange rate policies mark a major break with the past and will not only facilitate balance of payments management but promote more efficiency in domestic production. The Government is also pursuing a more flexible interest rate policy to eventually bring the rates to positive levels in real terms. 12. Priority is now given to increasing efficiency in the productive system and real efforts to restore confidence and dynamism in the private sector are being made. The Government has declared that the State will divest itself of some of the nationalized enterprises. The first measure, taken last July, was to return the fishmeal fishing fleet to the private sector. Participation of the private sector in petroleum exploration and medium-scale mining development is also now being encouraged. In the agri- cultural sector a new program to support medium and small farmers (owning between 3 and 100 hectares) is being launched and more attention is given to the management and labor problems in the cooperatives. Moreover, further efforts to prepare rural development projects benefitting the poorer groups and to provide more infrastructure in rural areas are being made. Finally, the pruning of the public investment program to a more manageable size is under way and a reorganization of the public administration has been announced. 13. Total public sector external debt (outstanding and disbursed) tripled between 1970 and 1975--from US$0.9 billion to US$2.67 billion--and average terms deteriorated markedly. Average maturities of new commitments fell from 10.7 years in 1971 to 5.6 years in 1975 as a result both of heavy borrowing for non-project purposes from commercial banks and.the low level of lending from official sources. Between 1970-72 and 1975 the share of net disbursements coming from commercial banks rose from less than 30 to 50%. During 1976 important changes in the source of commitments took place. Although foreign commercial banks remained the main source of external loans, their share in total 1976 commitments fell from 61 to 51%, because of a sharp increase (to 36%) in the share of commitments coming from international agencies and suppliers. This lengthened the average maturity of 1976 commit- -5- ments to the 1971 level. The public debt service ratio rose to an estimated 23% in 1975 reflecting both a sharp increase in interest payments and the decline in the value of merchandise exports. During 1976 the public debt service ratio rose again to 24.7% in spite of the recovery in exports, because of sharply increased interest payments. This level of debt service places a heavy burden on the balance of payments but the Government has committed itself to give first priority in foreign exchange allocation to debt service payments. 14. Improvements in the balance of payments in the future will depend on:(a) continued efforts to increase savings and contain import growth; (b) maintaining a low dependence on imported petroleum, permitted by the comple- tion of the oil pipeline, through additional petroleum exploration; and (c) increasing export volume with the timely completion of mining projects now under way and the expansion of nontraditional exports. The current account deficit would then fall to negligible levels by 1980. However, gross capital requirements would still have to average around $1.1 billion yearly during 1977-80 to allow for some recovery of net international reserves. This is substantially less in real terms than what was required in 1975-76. The public debt service ratio is projected to rise to 28-29% in 1979 but decline in the 1980s if the projected reduction of the current account deficit is achieved and if dependence on foreign commercial borrowing continues to be drastically reduced from the high 1973-75 levels. However, to complement the Government efforts to attain the latter condition and improve the external debt profile, lending from governments and international agencies should not be limited to the foreign exchange component of projects suitable for external financing and will have to include some local currency financing. 15. In the light of the strong measures taken during the past year there are grounds for optimism about continued improvement in economic per- formance. On the assumption that the Government will continue its financial stabilization policies and make further progress in laying the basis for rapid and more balanced development, Peru remains creditworthy for Bank lending. The Bank, both as a lender and as chairman of the Consultative Group, will continue to monitor developments closely. PART II - BANK OPERATIONS IN PERU Bank Operations 16. The Bank has made 32 loans in Peru for a total amount of US$527.3 million, net of cancellations; of these, 23 loans, totalling US$213.2 mil- lion were fully disbursed as of February 28, 1977. About 42% of Bank lend- ing to Peru has been for transportation (mainly highways and ports), 20% for electric power, 15% for agriculture, 15% for mining and industry, and about 8% for an education project and a sites and services project. Pro- ject execution has been generally satisfactory. Annex II contains a state- ment of Bank loans as of February 28, 1977, and notes on the execution of ongoing projects. -6- IFC Operations 17. IFC commitments to date have been about US$24.o million (US$15 million to Southern Peru Copper Corporation for the Cuajone Copper Mining Project and the rest all in industry) of which US$15.3 million is held by the Corporation. A summary statement of IFC investments as of February 28, 1977 is presented in Annex II. Bank Strategy 18. The main objectives of Bank lending to Peru have been to aid in (a) the creation of a physical and social infrastructure capable of sus- taining and fostering the evolution of the nation's productive capacity; (b) the expansion of productive capacity in crucial sectors; and (c) the consolidation of structural and institutional changes now under way, par- ticularly land and educational reforms. In the past Bank lending has been concentrated on infrastructure in the transportation and power sectors; the most recent loans in these fields were made for the Transandean Corridor Project in May 1976 and for a power project in the Lima area in September 1976. Our emphasis is now shifting to the more directly productive fields-- mining, agriculture and industry--to aid Peru in reducing her current bal- ance of payments problem and to strengthen institutions carrying out Peru's economic and social reforms. The FY76 US$40 million mining loan, for instance, was designed mainly to expand production for export and to strengthen the effectiveness of the public mining enterprise, CENTROMIN, particularly in project planning and execution. The Industrial Credit Loan of January 1977 is designed to expand production for export and sub- stitute economically for imports while improving the project evaluation capability of Peru's national development bank, COFIDE. Future Bank lend- ing would give priority to agriculture to help increase food production, raise the standard of living of the rural population and to strengthen the relatively weak ministries and agencies operating in this field. In addition to the proposed irrigation rehabilitation project a second irriga- tion rehabilitation loan is currently being prepared with the assistance of the FAO/IBRD Cooperative Program and an agricultural credit project has been appraised and will be negotiated later this year. Bank staff and the FAO/IBRD Cooperative Program are also assisting the Government in the preparation of projects for rural development in the mountain region. Pre- paratory work is proceeding on other projects in the water supply and trans- port sectors. The Bank also expects to continue to play a role in coordi- nating external assistance and in being a catalyst for new sources of funds for major investment projects through the Consultative Group. 19. Bank loans to Peru constituted about 6.0% of total outstanding debt, including undisbursed, at the end of 1975, and absorbed 4.0% of the country's external debt service obligations in 1975. With the Bank now increasingly active in Peru, our share in the country's total outstanding debt is expected to increase but not to exceed 9% by the end of 1980. PART III - THE AGRICULTURAL SECTOR 20. Although contributing only 15% to Peru's GDP, agriculture employs more than 40% of the labor force. In addition, agro-based industries account for around 30% of employment and 40% of value added in manufacturing. Agri- cultural output, and especially food production, has lagged behind population growth (3.2%) for at least the past 15 years. The resulting growth of food imports has placed increasing pressures on the balance of payments and Govern- ment subsidies have been a serious drain on the public sector budget and national savings. Raising the sector's poor performance thus has become in- creasingly critical for future economic progress and to provide employment for the rapidly increasing rural population. The Resource Base 21. The country's three major regions are: (a) the narrow Coastal Zone along the western edge of the country which encompasses only about one-fourth of the arable land but produces around two-thirds of the value of agricultural output. Rainfall is near zero and virtually all cultivated land is irrigated. This region is highly productive and commercialized, offers good conditions for a variety of crops and livestock, and is close to the major urban markets. Prior to the land reform, summarized below, coastal agriculture consisted of large privately- owned plantations producing Peru's major export crops, sugar and cotton, as well as of large rice estates and small truck farms. Rapid mechanization in the 1960s resulted in increasingly serious problems of labor displacement and urban migration. The plantations and large estates have since been con- verted to worker-owned cooperatives. (b) the Sierra, or highlands region, which is characterized by low- productivity small land holdings and subsistence agriculture. Climate, soils, and water availability are poor and the man-land ratio is extremely high. Commercialization is inhibited by high transport costs to major markets and opportunities for non-farm employment are limited. Cereals, tubers, and livestock are the major products. Most of Peru's rural population subsists in the Sierra, often under the most precarious conditions, although increas- ing numbers have left the Sierra in recent decades to crowd into the urban slums of the coast. (c) the Selva or jungle region which covers two-thirds of Peru but currently accounts for less than 10% of total population. The region is be- coming increasingly important economically because of oil discoveries. Two Transandean Highway projects, ore financed by the Bank and the other under consideration by the Inter-American Development Bank, are expected to con- tribute further to the region's development. Nevertheless, because of the difficulties of transport and frequently unfavorable soil and climatic con- ditions, the jungle offers only limited potential for agriculture with presently known technology. -8- Agrarian Reform 22. Agrarian reform in Peru, one of the most ambitious efforts of its type ever undertaken in Latin America, has dominated the agricultural scene since the Military Government came to power in October 1968. Since that date the previous modest process of expropriating some large holdings for allocation to individual smallholders has been replaced by a massive program of transferring much broader categories of holdings in the Coast and Sierra (but not the Selva) into worker-owned production cooperatives and other associ- ative units. In the process the hacienda system has been virtually eliminated. By the end of October 1975, 7.3 million ha had already been expropriated, of which 6.1 million ha had been adjudicated and assigned to 251,000 families. By the end of 1976, about 10 million ha were scheduled to have been distributed to an estimated 400,000 peasant families, or roughly one-third of the rural population. 23. The institutional structure of Peruvian agriculture has been dramat- ically changed by the agrarian reform program. The results achieved in terms of production, employment and income distribution have thus far been positive but relatively small. The best performance has been on those plantations and estates which had been most efficiently run prior to the reform and which have kept their former management. Problems of decapitalization and inefficiencies owing to the lack of managerial experience and technical expertise did, however, occur. A major current problem in the agricultural sector is the uncertainty that the land reform has created for the remaining medium-sized private land- owners who still account for most of the food supplied to the urban markets. The Government has attempted to assuage their doubts by issuing certificates of exemption from expropriation, but these "guarantees" are heavily conditioned. The Government has recently issued a blanket exemption to private holdings of 15 ha or less. While this increases the security of small farmers, the move may paradoxically have increased the uncertainties felt by the owners of larger farms, now limited by law to 50 ha. 24. One drawback of the agrarian reform is that the process of expropria- tion and structural reorganization has been emphasized at the expense of tech- nical assistance and other programs in both the reformed and private sectors. Long-term investment credit, for example, has been severely constrained by the shortage of qualified field personnel in the national Agrarian Bank. In an effort to attack this and other problems, the Ministry of Agriculture was divided into two ministries in 1975. One of them, the Ministry of Food (MA), was given responsibility for agricultural production programs; the other, which retained the title of Ministry of Agriculture, has responsibility for land and water development and agrarian reform. This reorganization has not yet had significant results, while creating additional difficulties of coor- dination. At the same time, little has been done to alleviate the plight of minifundistas who, particularly in the Sierra, live in extreme rural poverty. 9 Current Government Policy 25. The National Development Plan for 1975-78 aims at consolidating the Agrarian Reform Program initiated in 1968 and at increasing the rate of growth of agricultural output, particularly of import substitutes. Meat imports have been significantly reduced through restrictions on consumption and the promotion of alternative foods. In addition, farmers are legally obliged to devote at least 40% of their arable land to foodcrops. Despite these efforts, Peru's food imports are likely to continue to grow, at least through the medium term, since Peru is not well endowed for agriculture. 26. The Government has recently initiated a nationwide agricultural production acceleration program under the Direccion General de Produccion (DGP) within the Ministry of Food. In this new attempt to respond to the needs of the country for greatly increased agricultural output, "production nuclei" are being formed, consisting of farmers committing themselves to the production of certain agricultural products or crops. Once the production program proposed by a particular "nucleus" (which may be a farmers' coopera- tive or may even consist of only one farmer) has been approved and found to conform to the zonal and national production program and objectives, it is supplied with the necessary support services, including agricultural extension, credit, crop insurance and marketing of the production. The emphasis under the new program is on farm units ranging in size from 3.5 ha to 15 ha; these receive the most complete production acceleration "package" of services. Irrigation 27. Of the total of 3.6 million ha of cropland in Peru, about one- third, or 1 million ha, are irrigated, of which 770,000 ha are located in 52 small valleys in the Coastal region of Peru. This region, where six of the ten largest urban centers are located and where 40% of the total population live, produces about two-thirds of the country's total value of agricultural output. With precipitation in most of the coastal area close to zero, irrigation is essential for agricultural production. In general, where water is available conditions are favorable for high crop production owing to po- tentially good soils and near optimal solar radiation and temperature regimes. 28. Peru's irrigated coastal valleys have for centuries been the primary source of food production in the country. In modern times much of this area was cultivated in large holdings. Development of irrigation and drainage systems, together with on-farm development, was left to private owners with minimal intervention by Government. The irrigation systems are antiquated and generally inadequate to achieve efficient water management and optimum use of the land and water resources. Effective drainage systems were never constructed, and over a period of many years dissolved salts from soils in the upper parts of the valleys have gradually contaminated the groundwater. This saline water has moved downstream by surface or underground flow causing an excessive accumulation of salts in the lower part of the valleys which, together with a high groundwater table, has resulted in moderate to severe waterlogging and salinization of large areas of land; production has suffered - 10 - as a result. It is estimated that a total of 150,000 ha, or 20% of all coastal irrigable lands, are severely affected, with an additional 100,000 ha affected to a lesser degree. Fortunately the lands may be reclaimed and restored to their original condition by flooding and leaching if coupled with adequate drainage. 29. Facing the problem of scarce land resources, a rapidly growing population and an unfavorable trade balance, the Government has decided to initiate a program to rehabilitate once fertile lands in the coastal zone, as had been recommended in the Bank's 1975 Agricultural Sector Survey Report (5k9a-PE). The Government now considers rehabilitation of existing districts an important means of rapidly increasing agricultural output and of consolidating its agrarian reform program and is therefore now giving greater emphasis to rehabilitation of existing areas as compared with costlier, new irrigation schemes. Not only will rehabilitation bring back into full production lands which, over the years, had to be taken out of production, but it will also halt further deterioration and reduction of the presently cultivated area and yields. PART IV - THE PROJECT Project Concept 30. Bank and FAO/IBRD Cooperative Program staff have worked with Peruvian officials in formulating the project, which would be the first in a series of irrigation rehabilitation projects the Government is planning. The project area would consist of six coastal valleys, namely Mala, Pisco and Cah-ete in the central coastal zone and Camana, Majes and Tambo in the southern part of the country. These valleys were selected for the first stage of the long-term rehabilitation program because their relatively high level of agricultural development, good infrastructure base and adequate water supply--in comparison with other valleys--make it possible to increase significantly cultivation and production quickly. The project would consist of: (a) reclaiming about 19,000 ha of salt-affected and waterlogged land which would increase both the area of arable land and agricultural production in the six valleys. This aspect of the project would directly benefit 4,000 families; (b) rehabilitating and constructing main and secondary irrigation and drainage systems for about 33,000 ha, including the 19,000 ha to be reclaimed. This would improve the delivery and use of irrigated water and provide some needed drainage facilities; - 11 - (c) improving the presently inadequate operation and maintenance of existing irrigation systems throughout the six valleys, covering 68,300 ha and nearly 15,000 farms. Support services to farmers would also be strengthened with an emphasis on better water management and land preparations and new head- quarters would be constructed in each valley to serve as operating bases for all irrigation-related activities; and ( consultant services to assist in (i) the design and super- vision of construction of drainage systems; (ii) the estab- lishment of adequate operational and maintenance services in the valleys; (iii) the carrying out of the land reclamation phase of the project; (iv) the supervision of a program of groundwater investigation in the Mala and Pisco Valleys; (v) the organization of extension and training services in the project area; and (vi) preparing feasibility studies for a similar project in other coastal valleys. The project will also provide support, and help consolidate, the Agrarian Reform Program. In this respect, assurances have been obtained from Government that the process of agrarian reform in the project area will be completed dur- ing the course of project implementation, in accordance with the existing laws (Section 3.04 of the draft Loan Agreement). Cost and Financing 31. The cost of the project is estimated at US$40.9 million, equivalent, with an estimated foreign exchange component of US$15.3 million. The Bank loan would cover US$14.6 million of the foreign exchange costs and US$10.4 million of local costs. The remaining US$0.7 million of foreign exchange costs will be provided by the Netherlands under a technical assistance agree- ment. 32. The Bank loan would constitute about 60% of the total cost of the project, and would cover about 40% of its local costs. As discussed in paragraph 14 above, local currency financing is justified in Peru in view of the country's balance of payments position and its efforts to mobilize domestic resources. The Netherlands Government will provide the equivalent of US$1.0 million of technical assistance (US$0.7 million for foreign exchange and US$0.3 million for local costs). The Government's contribution of the equivalent of US$14.9 million to cover the balance of the estimated total cost would be met by annual budgetary appropriations. - 12 - Market and Production Aspects 33. Major crops grown in the project area are cotton, together with maize and potatoes in one basic cropping pattern, and rice followed by beans in another basic rotation. Although agricultural production systems in the area are already at a relatively high level of technology, yields except for rice, are generally low and are reportedly decreasing for most of the crops due to worsening salinity problems. This trend would be reversed with the project and the estimated annual incremental net value of production at full development will be about constant 1975 US$l3.2 million. Marketing of the output would involve no serious problems since transportation and processing facilities are already available in the project area and since there is a present as well as long-range need for crops grown in the project area. Implementation 34. The Ministry of Agriculture (MAG) would have overall responsibility for carrying out the project. The Direccion General de Aguas (DGA), a de- partment in the MAG, would be responsible for planning and final design, pre- paration of specifications and tender documents, entering into contracts and supervision of construction. Following the normal procedure in Peru for large and complex projects, a special project unit known as "Plan de Rehabilita- cion de Tierras Costeras" (PLANREHATIC) has been established under the adminis- tration of DGA and would be responsible for executing the proposed project and similar projects in other coastal valleys. The special unit would have autonomy and flexibility in managing day-to-day operations and coordinating the parti- cipation of other agencies. These include the Direccion General de Reforma Agraria y Asentamiento Rural as regards agrarian reform and the Direccion General de Irrigaciones (DGI) for assisting the special unit on studies, design and execution of those works for improvement and construction of irrigation systems. PLANREHATIC would also have authority to receive and expend project funds for civil works, to purchase equipment, materials and supplies and to carry out other services. It would also have authority, on behalf of MAG, to arrange for the participation of other ministries or agencies for specific assistance in executing and managing the project. 35. The Ministry of Food (MA) would give special emphasis to agricul- tural supporting services, through its Direccion General de Produccion (DGP), to the production program in the six valleys and particularly in the reclaimed areas. The Servicio Nacional de Mecanizacion Agricola (SENAMA), under the MA would participate in providing improved mechanization services in the project area, particularly in the reclaimed areas, and organizing and managing the expanded service for operation and maintenance. MAG and MA would coordinate their efforts in providing for improvement and intensification of supporting services in the project area, particularly extension assistance under the production programs administered by DGP, and would enter into an agreement for organization and management by SENAMA of expanded operation and maintenance services throughout the irrigated areas in the six valleys (Section 3.05 of the draft Loan Agreement). - 13 - 36. The Banco Agrario del Peru (BAP) would act as a banking agent for development credit loans to farmers or cooperative associations for on-farm development, under an agreement to be entered into between the Government and BAP (Section 3.02 of the draft Loan Agreement); execution of such agreement will be a condition of effectiveness of the loan (Section 6.01 (a) of the draft Loan Agreement). BAP would grant these loans on the basis of plans and cost estimates prepared by PLANREHATIC which would contract to have the work performed. The loans would have a term of 20 years including a grace period of up to 5 years and an interest rate of not less than 10% (Section 3.02 of the Loan Agreement). This minimum interest rate, although negative at the current annual price increases in Peru, is expected to be positive over the life of the loans and is compatible with the need to provide incentives to maintain production on newly settled small farms. 37. The project would be executed over six and a half years, 1977-1983, with 1977 and 1978 devoted to preparing final designs, specifications and con- tract documents and construction scheduled to begin early in 1979. Work would proceed on two fronts, i.e., the three northern valleys and the three southern valleys, on a staggered schedule commencing in one valley on each front with the other two valleys scheduled to follow at about one-year intervals. Based on the characteristics of the soils it is estimated that five years could be required following completion of construction to carry out leaching and re- establish fertility so as to achieve full production on all the affected areas in the 19,000 ha to be reclaimed. Procurement and Disbursement 38. Contracting for construction of major project works (US$8.2 million), on-farm development (US$5.2 million), and purchase of major items of imported equipment (US$5.6 million), would be carried out through international competi- tive bidding in accordance with Bank Group guidelines. For purposes of bid comparison, Peruvian manufacturers of material and equipment would be entitled to a preference of 15% or the applicable tariff, whichever is less. Contracts for construction of service centers, and for purchase of drainage pipe or tile and minor items of imported technical and office equipment which cannot be grouped in lots of at least US$50,000 would be done on the basis of competitive bidding advertised locally and in accordance with local procedures, which are satis- factory to the Bank. Vehicles and wheeled tractors would not be purchased with loan funds as under Peruvian law this equipment must be procured from local assembly plants without competitive bidding. 39. Since works in the six valleys are to be staggered, it would be necessary to let contracts on a valley-by-valley basis. This would reduce the value of the contracts and it is expected that these contracts would be awarded mostly to local contractors, who are well organized with staff and equipment, and are fully competent to perform the work. - 14 - 4o. Consultant services to assist with design and supervision of con- struction of drainage systems would be provided by the Government of the Netherlands under a bilateral agreement with the Government of Peru. Addi- tional consultants to be provided under the loan would be retained following procedures satisfactory to the Bank. The average cost of consultant services to be provided under the loan has been estimated at about $80,000 per man-year. 41. The proposed loan would be disbursed over a period of six years. The loan would be disbursed against (i) 60% of the cost for civil works includ- ing buildings; (ii) 75% of development credit loans for on-farm development; (iii) the foreign cost of directly imported equipment and 80% of the cost for imported equipment purchased locally; (iv) 90% of ex-factory cost of eligible equipment manufactured locally; and (v) 100% of foreign expenditures for consultant services or 100% of the salaries of locally recruited consultants. Cost Recovery 42. The impact of the project on its beneficiaries has been analyzed for three farm types considered to be typical for the area. The per capita income, including family labor, but after project charges and before property and in- come taxes, would increase in constant 1975 US dollars from US$206 to US$343 for a 3-ha farm, from US$262 to US$565 for a 8-ha farm and from US$337 to US$840 for a 15-ha farm. 43. Project charges would be introduced as facilities and on-farm develop- ment works are completed. Such charges will be sufficient to cover operational and maintenance costs and will seek to assure reasonable recovery of investment costs. The extent of investment cost recovery will initially be determined in the light of socioeconomic studies to be carried out in each valley and reviewed with the Bank. The charges will thereafter be reviewed with the Bank at least once every two years to evaluate the effect of changes in prices on the value of the investment and to make adjustments in these charges as required (Section 3.06 of the draft Loan Agreement). For the purpose of the financial analysis, and on the basis of current operation and maintenance and investment costs estimates, it has been assumed that annual incremental development charges in constant 1975 terms would average US$10/ha/year for oueration and maintenance, US$9.24/ha/year for capital recovery, excluding the on-farm development com- ponent, and US$38.22/ha/year for the on-farm development component, or a total of US$57.46/ha/year in case the farm invests in on-farm drains and leveling. Such assumed charges would cover operation and maintenance costs and allow full recovery of investment costs in 40 years without interest and would represent 23 and 28% of incremental net farm benefits for small- and medium-sized farms, respectively. - 15 - Economic Analysis 44. The project's principal aim is to increase agricultural production at low cost and in a relatively short period of time. This will result in increased earnings and improved living conditions for some 4,000 families in the area of 19,000 ha of reclaimed land and for another 13,200 families in the remaining 49,300 ha which would benefit from the project. It is ex- pected that out of the 4,000 families primarily benefitting from the project investments, about 2,500 families presently have family incomes from the land of less than US$200 per capita which is considered as the poverty income level for 1975. Out of the 13,200 families benefitting from minor improvements, 9,000 families are considered to have present incomes from the land below the poverty income level. 45. Incremental production of crops, mainly cotton, basic grains and fruit and vegetables would amount to US$13.2 million annually at full develop- ment. There would be a net gain of US$11.3 million annually at constant US dollars in the balance of payments situation at full development, taking into consideration the increased export of cotton fiber and sugar, the re- duced imports of basic grains and the increased imports of project investment goods and farm inputs such as machinery, fertilizers, and chemicals. 46. The economic rate of return of the project is estimated at approxi- mately 18%. If investment costs were assumed to increase by 10% and benefits to decrease by 107o, the project's rate of return would still be a satisfactory 14%. 47. The project would also have substantial unquantifiable benefits through assisting in consolidating the Agrarian Reform Program, strengthening government institutions, and improving the capability to carry out similar future programs in other valleys. Conclusions, Recommendations, Risks 48. Peruvian agricultural performance has been poor in that output has lagged behind population growth and accelerated production is now critically needed to reduce food imports and increase rural employment and incomes. The best current opportunity for the Bank to aid in this objective is the first agricultural rehabilitation project because of its combined benefits in reversing the trend of deterioration of soils and making more effective use of existing productive capacity and infrastructure in Peru's coastal zone. Project risks are no greater than can normally be expected with operations of this type. 49. The most important of the agreed covenants are concerned with (a) the establishment of water charges sufficient to cover operation and maintenance ccsts and to assure a reasonable recovery of investment costs; (b) ensuring that the agrarian reform in the project area will be completed, along the lines enunciated in current legislation, during the project execu- tion period; and (c) ensuring the Government's commitment to improve and strengthen agricultural supporting services and operation and maintenance services. - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 50. The draft Loan Agreement between the Republic of Peru and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of the draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 51. The draft Loan Agreement conforms to the normal pattern for loans for irrigation rehabilitation projects. A special condition of the effective- ness of the loan is the execution of an agreement between the Borrower and Banco Agrario del Peru. As in previous loans to or to be guaranteed by the Republic of Peru, the Republic of Peru must approve the legal instruments therefor by a Supreme Decree to be issued after Board approval and before loan signature. 52. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 53. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. March 29, 1977 TABLE 3A AM PERU -SOCIAL INDICATORS DATA SMEET A"IJ:O hI op LAND AREA (THOU KM) . . . . --FE-----OUNT-ES----0 F.TAL 1285.2 PU Sr RECENT RI ARIC. 30.9 1960 1970 ESTIMATE CHILE MEXICO SPAIN GNP PER CAPITA (USS) 310.0 520.0 610.0 640.0 760.0 1560.0 POPULATION AND VITAL STATISTICa ---------------------- POPULATION ( - MILLION) 13.1 13.3 15.4 9.7 50.4 33.6 POPULATION DENSI TV PER SQUARE KN. 8.0 10.0 12.0 13.0 26.0 61.0 PER So. KM. AGRICULTURAL LAND 4 0.0& 1b1 .- 52.0 97.0 VITAL STATISTICS AVERAGE SIRTH RATE C/THOU) W5 42.9 41.0 12.9 43.8 21.0 AVERAGE DEATH RATE C/THOU) 21.2 14.1 11.9 11.0 10.2 8.6 INFANT KORTALITY RATE (ITHOUI 9 3.2L 65. 9 5 27.9 LIFE EXPECTANCY AT BIRTH (INS) 48-5 5. 57 06 6L.0 70.6 GROSS REPRODUCTION RATE 3. 2.9 2-8 2.2 3.1 1.4 POPULATION GROWTH RATE (ZI TOTAL 2.1 2.8 2.9 2.4 3.4 1.1 URBAN 3i-T 7 La 4 a L-5 3.0 4.a 2.0 JA4N POPULATION (I OF TOTALI 47. 52.5 55-3 76.0 56.1 59.1 AGE STIUCTURE (PERCENT) 0 TO 14 YEARS 43. 45.0 5 39 46.2 27.8 ST 64 YEARS625 TASERS3 3.1 ~ 36 . 3.1 9.7 65 YEARS AND OVER3*a"i AGE DEPENDENCY RATIO D:9 0.9 0'96 0 1.0 0.6 ECONOMIC DEPENDENCY RATIO 1 1.9 id I-qLa 1.6 2 1.1 FAMILY PLANNING ACCEPTORS (CUMULATIVEv THOU) 403.5 55.5 USERS tZ OF MARRIED WOMEN) EMPLOY MENT TUTAL LABOR FORCE (THOUSAND) 3 . 00 2600.0 13000.0 11900.0 LAdOR FORCE IN AGRICULTURE (Z) so0t 4050 hl1.0 a. 21.0 40.0 24.6 UNEMPLOYEa CS OF LABOR FORCE) 3.0 5.0 5.0 Z Ola INCOME DISTRIBUTION % OF PqtVATE INCOME RECND BY- HIGHEST 5Z OF HOUSEHOLDS 39.0 /k 31.0 37.8 HIGHEST 268 OF HOUSEHOLDS 64.47k . s 55.4 63.2 LOWEST 20Z OF HOUSEHOLDS 2.57k- 3. 4.8 4.2 L3WEST 40X OF HOUSEHOLDS 8.O z . 9.5 13.0 10.2 DISIRIBUTIOM OF LAND OWNERSHIP Z OWNED BY TOP 10% OF OWNERS 93.0 37.1 I OWNED BY SMALLEST 101 OWNERS 0.1 0.3 HEALTH AND NUTRITION P4PULATION PER PHYSICIAN Z20.0/i 1920.0 15OD'/ 10.O/ 1440.0 r5O.0/ POPULATION PER NURSING PERSO 3620.0A 3200.0 2870. 532om 1570.0 1430.0 PuP%LATIOA PER HOSPITAL ED 900 470.0 50D.0 2s0.0 930.0 220.0 PER CAPITA SUPPLY OF - CALORIES (Z OF REQUIREMENTS) v7.0 98.0 99-0 101.0 110.0 107.0 PROTEIN (GRAMS PER OAT) 61.0 62.0 60.oZi 71.0 65.0 81.0 -OF WHICH ANIMAL AND PULSE ZS.OL 24.0 32.0 za.q 40.0 DLATH RATE (/THOU) AGES 1-4 6.2Lo 3.9 9.6 0.9 EDUCATION AUJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 87.0 107O0 332 Wc.h 103:n/- 106.0 /b 131:0 SECONDARY SCHOOL 18.011 35.0 6 36.0r, 23 0/! 5. YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 11.0 12.0 10.0 12.0 12.0 13.0 VOCATI)NAL ENROLLMENT (% OF SECONDARY) zo 19.0& 23O/> 33.0 Z4.0 20.0 ADULT LITERACY RATE (Z) 61:0a 72.01L 90.0 16.0 94.0 HOU4IMG PZRSONS PER ROOM (AVERAGE) 2.0 1.3 2.2 OCCUPIED DWELLINGS WITHOUT PIPED WATER (Z) 40.0 ACCESS TO ELECTRICITY (K OF ALL DWELLINGS) 26.0 59.0 RuRAL DWELLINGS CONNECTED TO ELECTRICITT (%) 4.0 28.0 COPD OSoPTIEON RADIO RECEIVERS (PER THOU POP) 101.0 134.0 10.0 143.0 27.0 214.0 PASSENGER CARS (PER THOU POP) 8.0 10.0 12 18.0 24.0 67.0 ELECTRICITY (KUN/YR PER CAP), 265.0 40.0 3g9.0 *06.0 567.0 1627.0 NEWSPRINT (KG/YR PER CAP) 1*7 3.6 108 4.8 3.2 5.8 SEE IOTES AND DEFINITIONS ON hEVERSE ANNEX I NOTES Page 2 of 4 pages Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 between 1968 and 1970, and for Most Recent Estimate between 1973 and 1975. ** Spain has been selected as an objective country because its economic achievements could serve as a goal for Peru. PERU 1960 /a Excluding Indian jungle population; lb 1960-65 average; /c 1956-61; /d 1964; Le 1962; /1 1%0-62; /& 6-11 and 12-16 years of age respectively; /b Including evening schools; / 17 years and over; fl Inside only; k Personal income within labor force. 1970 /a 1966; /b Excluding Indian jungle population; c 1961-70; d Ratio of population under 15 and 65 and over to total labor force; /s Urban only; f Including evening schools; /a 6-11 and 12-17 years of age respectively. MOST RECENT ESTIMATE: /a 1971; /b Excluding Indian jungle population; /c 1972; /d 15 years and over; /e Urban only; If 1971-72i 1969-71 average; lb 7-11 and 12-16 years of age respectively. CHILE 1970 1s Gran Santiago; Lb Personnel in government services only; /c 6-13 and 14-17 years of age respectively. MEXICO 1970 la 1964-66; /b 6-11 and 12-17 years of age respectively; /c Inside only. SPAIN 1970 Is Registered unemployed; b Registered, not all practicing in the country; Is 6-10 and 11-16 years of age respectively. RS, November 2, 1976 DEFINITIONS OF SOCIAL INDICATORS Land Area (thou be2) Popolation per oursklog pe2sn - Population divided by nmber of practicing Total - Total surface area comprising land area and inland waters. male and female graduate nure., "trained" or "certiffed" nrses, ad gic.- Most recent estimate of agricultural area used temporarily or auxiliary personnel with training or experience. permanently for crops, pastures, market & kitchen gardens or to lie Population per hospital bed - Population divided by nomber of hospital be fallow. available in public and private general and specialised hospital a GNP per capita (US$) - GNP per capita estimates at current market prices, custoilan pente care ,calculated by the same conversion method as World Bank Atlas (1973-75 csoiladpyoi cm calclatd bytheose conerson etho asworl Sah Alas 197-75 Per capita supply of calories (7. of requiremense) - Computed from energy basis); 1960, 1970 and 1975 data. equivalent of net fond oupplies available in country per capita per day; available supplies comprise domestic production, imports less exports, Population and vital statistics and chsnge in stork; net supplies exclude animal feed, seeds, quasti- Population (mid-yr. million) - As of July first: if not available, ties ued in food processing and losses In distribution; requftememts averages of two end-year estimates; 1960, 1970 and 1975 data. were estimated by PAO based on physiological seeds for normal activi and heakth consiMeting environmestal temperature, body weights, age sod Population density - per square km - Mid-year population per equare kilo- sea distributions of population, sod allowing 10% for waste at house- mater (100 hectares) of total area. hold level. Population density - per square km of agric. land - Computed as above for Per capita supply of protein (crams pet day) - Protein contest of per agricultural land only. captia set supply of fond per day; net supply of food is defined as above ; requirements for all countries establisbed by USDA Economic Vital statistics Research Services provide for a minimum allowance of 60 grams of total Crude birth rate per thousand - Annual live births per thousand of mid- protein per day, sod 20 gram of animal and pulse protein, of which year population; ten-year arithmetic averages ending in 1960 and 1970, 10 grams should ho animal protein; these standsrds ar lower than those and five-year average ending in 1975 for most recent estimate. of 75 grams of total protein and 23 gram of animal protein as an Crude death rate per thousand - Annual deaths per thousand of mid-year sverage for the world, proposed by FAO in the Third World,Poed krvey. population; ten-year arithmetic averages ending in 1960 and 1970, and Pet capita protein supply frm animal and pulse - Proteis supply of food five-year average ending in 1975 for most recent estimate. derived from animals sod pulses in gram par day. Infant mortality rate (Ithou) - Annual deaths of infants under one vear of Death rare f/thou) sees 1-4 - Annual deaths per th-and in ge group age per thousand live births. 1-4 years, to children in this age group; suggested as an indicator of Life expectancy at birth (yrs) - Average number of years of life remaining malnurilion. at birth; usually five-year averages ending in 1960, 1970 and 1975 for developing countries. Education Gross reproduction rate - Average number of live daughters a woman will Adjusted enrollment ratio - primary school - Entollment of all ages as bear in her normal reproductive period if she experiences present age- percentage of primary school-age population; includes children aged specific fertility rates; usually five-year averages ending in 1960, 6-11 years but adjusted for different lengths of primaty education; 1970 and 1975 for developing countries. for countries with universal education, enrolment may exceed 1007 Population growth rate (%) - total - Compound annual growth rates of mid- since some pupils are below or above the official school age. year population for 1950-60, 1960-70, and 1970-75. Adjusted enrellment ratic-seconday school - Computed as shove; Population growth rate (%) - urban - Computed like growth rate of total secondaty education requires at least four years of approved primary population; different definitions of urban areas may affect compara- instruction; provides general, vocational or teacher training bility of data among countries. instructions for pupils of 12 to 17 years of age; correspondence urban population (% of, total) - Ratio of urban to total population; courses are generally ecluded. different definitions of urban areas may affect comparability of data Yearn of schooling provided (first and second level) - Total years of among countries. schooling; at secondary level, vocational Instruction my be par- Age structure (percent) - Children (0-14 years), working-age (15-64 years), tially or completely excluded. and retired (65 years and over) as percentages of mid-year population. Vocational enrollment (% of secondary) - Vocational institutions Age dependency ratio - Ratio of population under 15 and 65 and over to include technical, industrial or other programs which operate those of ages 15 through 64. independently or as departments of secondary institutions. Economic dependency ratio - Ratio of population under 15 and 65 and over Adult literacy rate C7) - Literate adults (skis to read and write) an to the labor force in age group of 15-64 years. percentage of total adult populatien aged 15 years and over. Family planning - acceptors (cumulative, thou) - Cumulative number of acceptors of birth-control devices under auspices of national family Nousims planning program since inception. Persons per roo (average) - Average number of persons per roo in Family planning - users (% of married women) - Percentages of married occupied conventional dwellings in urban areas; dwellings exclude women of child-bearing age (15-44 years) who use birth-control devices non-permanent structures and unoccupied parts. to all married women in same age group. Occupied dwellings without piped water (%) - Occupied conventional dwellings in urban and rural areas without inside or outside piped Employment water facilities as percentage of all occupied dwellings. Total labor force (thousand) - Economically active persons, including Access to electricity (% of all dwellings) - Conventional dwellings armed forces and uneuployed but excluding housewives, students, etc.; with electricity in living quarters as percent of total dwellings in definitions in various countries are not comparable. urban and rural areas. Labor force in agriculture (%) - Agricultural labor force (in farming, Rural dwellings connected to electricity (%) - Computed as above for forestry, hunting and fishing) as percentage of total Sabor force. ral dwellings only. Unemployed (% of labor force) - Unemployed are usually defined as persons who are able and willing to take a job, out of a job on a given day, Consumption remained out of a job, and seeking work for a specified minimum period Radio receivers (per thou pop) - All types of receivers for radio bread- not exceeding one week; may not be comparable between countries due to casts to general public pet thousand of population; ecludes different definitions of unemployed and source of data, e.g., employ- unlicensed receivers in countries add in yeats when registration of ment office statistics, sample surveys, compulsory unemployment insurance. radio sets was in effect; data for recent years may not he comparable sic aot contries abolished licens Ing. Income distribution - Percentage of private income (both in cash and kind) Pasegrocarc thou pop) - Passenger ear comprise moto car received by richest 5%, richest 20%, poorest 20%, and poorest 40% of seating less than eight persons; excludes ambulances, hearses ad households. ilitary vehicles. Electricity (kwh/yr ser cap) - Annual consumption of imdustrial, com- DAtribution of land ownership - Percentages of land owned by wealthiest mercial, public ad private electricity is kilowatt hours per capita, 10% and poorest 10% of land owners, generally based on production data, without allowance for losses in dgrids but allowing for Imports and eparts of electricity. lao trim Newsprint (i/h n per cay) PPer capita annual conuption is kilygrum Pomulioo ear Physician - Population divided by somber of practicing estimated from dnstic producti on plus net imparts of newsprint. physicians qualified from a medical schol at university level. ANNEX I Page 3 of 4 pages ECONOMIC DEVELOPMENT DATA (Amounts in millions of U.S. dollars) Actual Prel. Projected 1961- 1971-- 1976- 1981- 1960 1970 1974 1975 JMg 1985 1970 1975 1980 1985 1970 1985 NATIONAL ACCOUNTS Constant 1963 Prices Average Annual Growth Rates As Percent of GDY Gross Domestic Product 2389 4285 5534 5674 6863 9842 6.0 5.8 3.9 7.5 94 92 Gains from Terms of Trade (+) 14 288 296 194 575 824 - - - - 6 8 Gross Domestic Income 2403 4573 5830 5868 7438 10666 6.6 5.1 4.8 7.5 100 100 Imports (including NFS) -466 -973 -1306 -1561 -1456 -2135 7.6 9.9 -1.2 8.0 21 20 Export (import capacity) 522 1101 985 857 1601 2189 7.7 -4.9 9.1 6.4 24 21 Resource balance 56 128 -321 -704 146 -54 - - - - 3 Consumption Expenditure 1837 3762 4980 5193 5796 8398 7.4 6.7 2.3 7.7 82 79 Investment Expenditure (includ- ing stocks) 510 683 1172 1378 1496 2214 3.0 15.1 1.7 8.2 15 21 Gross Domestic Savings 566 812 881 674 1642 2268 3.7 -3.7 22.0 6.7 18 21 Gross National Savings 496 677 759 553 1503 2166 3.2 -4.0 19.5 7.6 15 20 MERCHANDISE TRADE Annual Data at Current Prices As Percent of Total Imports Wheat 31 43 144 155 216 362 3.3 29.2 6.9 10.9 5 5 Petroleum and derivatives 16 27 197 256 173 705 5.4 56.8 -7.5 32.4 4 10 Capital Goods 128 224 691 803 1169 2409 5.8 29.1 7.8 15.6 29 33 Other goods 214 482 995 1452 1860 3819 8.5 24.7 5.1 15.5 62 52 Total Merch. Imports (cif) 389 776 2027 2666 3418 7295 7.1 28.0 5.1 16.4 100.0 100.0 Exports Mining products 194 488 743 626 2084 3763 9.7 5.1 27.2 12.5 47 51 Fish products 50 347 265 218 763 1659 21.4 -8.9 28.5 16.8 34 23 Agricultural products 159 170 358 407 454 692 11.2 19.1 2.2 8.8 16 9 Manufactured products 3 16 105 77 273 936 18.2 36.9 28.8 27.9 2 13 Petroleum and derivatives 18 7 28 37 157 219 -9.0 39.5 33.5 6.9 1 3 Other goods 16 7 7 14 25 44 -7.9 14.9 11.4 12.0 1 1 Total Merch. Exports (fob) 444 1034 1506 1378 3755 7313 8.8 5.9 22.2 14.3 100.0 100.0 Merchandise Trade Indices 1963 = 100 Export Price Index 97.2 149.1 267.5 264.0 439.5 651.4 4.4 12.1 10.7 8.2 Import Price Index 94.6 110.1 187.0 200.0 281.8 406.2 1.5 12.7 8.5 7.6 Terms of Trade Index 102.7 135.4 143.0 132.0 156.0 160.4 2.8 -0.5 3.4 0.6 Export Volume Index 82.1 117.3 91.7 85.9 142.3 182.6 4.8 -4.0 10.6 5.1 VALUE ADDED BY SECTOR Constant 1963 Prices Average Anstual Growth Rates As percent of Total Primary 1/ 709 924 940 910 1240 1466 2.7 -0,3 5.9 3.4 22 15 Secondary 2! 496 950 1319 1430 1772 2855 6.7 9;0 3.9 10.0 23 29 Other 1114 2278 3183 3217 3698 5407 7.4 741 2.8 7.9 55 56 Total (GNP) 2319 4150 5442 5557 6710 9728 6.0 6.0 3.9 7.7 100 100 Current Prices As Percent of GDP PUBLIC PINANCE 1970 1974 1975 1970 1975 (Central Government) Current Receipts 11017 1772 1953 16.4 16.0 Current Expenditures 856 1614 2012 13.8 16.5 Savings 161 158 -59 2.6 -0.5 Other Public Sector 3/ 130 109 -58 2.1 -0.4 Public Sector Capital Expenditures 340 1065 1157 5.5 9.5 CENTRAL GOVERNMENT CURRENT DETAIL ON PUBLIC SECTOR Current Prices EXPENDITURES 1965 1970 1974 INVESTMENT PROGRAM 1971-75 1968-75 Education 33 27 27 In US$ mill. %.of total Other Social Services 14 9 8 Petroleum 1282 32 Agriculture 2 4 3 Agriculture 463 12 Other Economic Sectors 4 4 4 Other Economic Sectors 515 12 Other 47 56 58 Transportation 684 17 Total 100 100 100 Power 342 9 Social Sectors 365 9 Other 363 9 SELECTED INDICATORS 1965-73 1973-75 1975-80 1980-85 Total 4014 100 ICOR 3.58 3.43 5.53 2.95 Import Elasticity 0.82 1.47 0.77 1.02 Marginal Savings Ratio 0.11 -0.34 1.62 0.20 LABOR FORCE AND OUTPUT PER WORKER Total Labor Force G N P per Worker (1963 Prices) In Millions As % of Total 1961-1970 In US Dollars Percent of Average 1961-1970 1961 1970 1961 1970 Growth Rate 1961 1970 1961 1970 Growth Rate Primary sectors 1/ 1.7 2.0 52 47 1.8 442 462 54 48 0.5 Secondary sectors 2/ 0.5 0.7 17 18 3.8 1116 1357 137 141 2.2 Other 1.1 1.6 31 35 4.3 1162 1359 142 141 1.8 3.3 4.3 100 100 3.0 8.6 965 100 100 1.9 1/ Agriculture, fisheries and mining. 2/ Manufacturing and construction. 3/ Includes capital revenues. ANNEX I Page_4of 4 pages BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (amounts in millions of U. S. dollars at current prices) Actual Prel. Est Projected 1970 1974 1975 l96L 197? 1978 1979 I8 18 SUMARY BALANCE OF PAYMENTS Exports (incl. NFS) 1212.4 1842.3 1751.5 1815.7 2744.4 3428.3 3925.4 4512.1 8888.9 Imporsincl. NS) 960.7 2442.9 3122.9 26 , 3047.6 236.9 3601.7 4102.0 8671.3 RREBalance (X - M) 251.7 Z -1571.4 -7 7 .6 -303.3 191. 323.7 17 Interest (net) -84.9 -168.3 -249. 268 -387.5 -454.3 -485.0 -488.1 -509.8 Direct Investment Income -85.6 -42.7 -26. -60.0 -80.0 -8o.o -80.0 -114.9 Current Transfers (net) 81.6 47.9 44. 57.9 42.0 42.0 43.0 44.0 0 Balance on Current Account IMF -724.9 - 9 - -22.2 PrLvate Direct Investment -79.2 132.6 315.7 150.0 95.0 90.0 100.0 110.0 200.0 Official Capital Grants 17.5 17.7 17.9 17.1 11.8 7.9 4.9 3.3 - Puolc M & LT Loans Disbursement 167.6 947.1 L2 853.0 824.9 921.1 ?56.8 904.9 928.1 1491.4 -Repayments -122.1 -34.2 L2 2243 -30.6 3.2 572.8 773.0 842.6 821.3 set Disbursements 72 59W 49.6 184. 131.9 Capital Transactions n.e.i. 88.8 237.7 52.6 -317.9 Change in Net Resources (- = increase)-257.4 -275.3 553.0 655.8 DEBT AND DEBT SERVICE Actuala Est. L GRANT AND LOAN COMMITM0TS 1970 1974 197, 1976 Official grant 35.2 9.7 7.3 .. Public Debt Out.& Disbursed 897.9 2072.8 2670.2 3264.5 Public M & IT Loans IBRD 30.0 26.o - 174.1 Interest on Public Debt 45.9 113.9 178.2 217.8 IDA - - - - Repayments on Public Debt 122.1 334.9 2 224.2 230.6 Other multilateral 14.8 25.9 40.0 111:9 3 Ttal Public Debt Service 168.o 448.8 402.4 448.4 Governments 62.7 548.2 213.7 1 Debt Service (net) 68.2 99.8 179.3 Suppliers 14.8 42.0 34.2 161.0 Total Debt Service (net) 236.2 548.6 L2 581.7 Financial Institutions 66.9 521.9 475.8 636.o Public Debts n.e.i. - - 11.9 - Burden on Export Earnings Total Public M & LT Loans 189.2 1164.o 775.6 1236.0 L4 De t erisg (.) Public Debt Service 13.9 24.4 23.0 24.7 ETERNAL DEBT Debt Outstanding Dec. 31, 1975 Total Debt Service 19.5 29.8 33.2 Disb ed Only Percent TDS + Direct Invest. Incl. 26.5 32.1 34.8 37.3 I3RD 137.8 5.2 IDA - Average Terms of Public Debt Other Multilateral 19.3 0.7 Governments 792.3 29.7 Int. as % Prior Year DOD 5.4 7.9 8.7 8.2 Suppliers 317.4 11.9 Amort. as % Prior Year DOD 14.3 23.2 11.0 8.6 Financial Institutions 1401.o 52.5 Public Debts n.e.i. 2.4 - IBRD Debt Out. & Disbursed 122.4 131.7 137.8 168.5 Total Public M + IT Debt 2670.2 100.0 IBRD as % Public Debt 0 + D 13.6 6.4 5.2 5.2 IBRD as % Public Debt Service 8.8 3.9 4.6 Cher N + LT Debt 602.7 2. Preliminary estimate. Includes pre-payments of loans in 1974 ($ 115.4 million). t Includes loans repayable in local currency. 7 Includes loans repayable in local currency and excludes unclassified loans. ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATIONS IN PERU A. STATEMENT OF BANK LOANS (as at February 28, 1977) Loan or US$ million Credit Amount (less cancellations) Humber Year Borrower Purpose Bank Undisbursed 23 loans fully disbursed 213.2 706 1970 Republic of Peru Roads 30.0 3.6 933 1973 Banco de Fomento Agropecuario Agriculture 25.0 9.8 949 1973 Republic of Peru Education 24.0 23.3 1025 1974 Republic of Peru Roads 26.0 20.7 1196 1975 Republic of Peru Transport 76.5 76.4 1215 1976 Republic of Peru Power 36.0 35.3 1283 1976 Banco Vivienda Urban Dev. 21.6 21.6 1285 1976 CENTROMIN 1/ Mining 40.0 40.0 1358 1976 COFIDE 1/ Industry 35.0 35.0 Total 527.3 of which has been repaid 130.9 Total now outstanding 396.4 Amount sold 18.3 of which has been repaid 18.3 - Total now held by Bank 2/ 396.4 Total undisbursed 265.7 Note: No IDA credits have been made to Peru. 1/ Not yet effective. 2/ Prior to exchange adjustments. ANNEX II Page 2 of 4 B. STATEMENT OF IFC INVESTMENTS (as at February 28, 1977) Type of Amount in US$ million Year Obligor Business Loan Equity Total 1960 Industrias Reunidas, S.A. Home 0.3 0.3 Appliances 1960 Luren S.A. and Bricks 0.3 0.3 Ladrillos Calcareos, S.A. 1960 Durisol del Peru, S.A. Building 0.3 0.3 Materials 1960;1962 Fertilizantes Sinteticos, S.A. Fertilizers 4.1 4.1 1962;1968 Cemento Andino, S.A. Cement 2.2 0.2 2.4 1964;1967 Cia. de Cemento Pacasmayo Cement 1.1 0.5 1.6 1975 Southern Peru Copper Corp. Mining 15.0 15.0 Total gross commitments 23.3 0.7 24.0 less cancellations, terminations, repayments and sales 8.3 0.4 8.7 Total commitments now held by IFC 15.0 0.3 15.3 Total Undisbursed _ _ _ C. PROJECTS IN EXECUTION 1/ Loan 706-PE: Road Reconstruction Project: US$30.0 million Loan of September 14, 1970; Effective Date: October 26, 1970; Closing Date: March 31, 1977 This Loan was signed only three and a half months after the earthquake in the Callejon de Huaylas. However, the identification, feasibility study and final engineering of the roads to be improved have taken much longer than expected because of a too optimistic assessment at the time of appraisal, because of administrative and coordination difficulties in connection with the on-going decentralization of the Central Government, and because of problems with the consultants engaged to study and supervise the project. These problems were over- come and the project is near completion. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 3 of 4 Loan 933-PE: Agricultural Credit Project; US$25.0 million Loan of September 12, 1973; Effective Date: December 12, 1973; Closing Date: December 31, 1977 The Loan was signed in September 1973 and became effective on December 12, 1973. Although the project had a slow start, progress is now satisfactory. Disbursements are slightly behind schedule, but they are expected to be completed by the original Closing Date of the Loan. Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973; Effective Date: March 5, 1974; Closing Date: June 30, 1979 This Loan became effective on March 5, 1974. Serious initial delays were caused by administrative difficulties with the Project Unit and late appointment of counterpart staff to the consultants who were to define curricula for the ESEPs (Escuelas Superiores de Ensefanza Profesional). The change of status of the Project Unit which has been upgraded to the rank of Directorate General and the strengthened management of the project have markedly improved the prospects for efficient implementation of the project. At present 24 basic cycle school designs have been approved by the Bank and construction contracts are being bid. ESEPs are now being designed and are expected to be contracted during 1977. Loan 1025-PE: Sixth Highway Project; US$26.0 million Loan of July 1, 1974; Effective Date: August 21, 1974; Closing Date: June 30, 1978 Bids for construction works were invited in October 1974, on the basis of the official cost estimates, but contractors failed to respond. After an upward revision of the cost estimates new invitations to bid were issued in March 1975. Contractors response this time has been positive and bids for all sections have been submitted and contracts were awarded in August 1975. Project implementation is about one year behind schedule. Loan 1196-PE: Lima-Amazon Transport Corridor Project; US$76.5 million Loan of May 27, 1976; Effective Date: August 18, 1976; Closing Date: December 31, 1980 The road component of the project is about six months behind schedule. Following recent supervision missions it is expected that project implementa- tion will be accelerated to the projected pace. Loan 1215-PE: Fifth Power Project; US$36.0 million Loan of September 20, 1976; Effective Date: November 18, 1976; Closing Date: December 31, 1979 Beneficiary initiated bidding procedures immediately after signature, and project implementation is substantially on schedule. ANNEX II Page 4 of 4 Loan 1283-PE: Urban Sites and Services Development Project; US$21.6 million Loan of October 12, 1976; Effective Date: January 10, 1977; Closing Date: June 30, 1980 Project implementation activities started immediately after Loan approval and it is expected that project implementation will proceed on schedule. Loan 1285-PE: Centromin Mining Project; US$40.0 million Loan of December 6, 1976; Effective Date: not yet effective; Closing Date: December 31, 1980 The Loan is expected to become effective before the end of April 1977. Loan 1358-PE: Industrial Credit Project; US$35.0 million Loan of January 28, 1977; Effective Date: not yet effective; Closing Date: June 30, 1981 The Loan is expected to become effective before April 11, 1977. ANNEX III Page 1 of 2 PERU IRRIGATION REHABILITATION PROJECT LOAN AND PROJECT SUMNARY Borrower: Republic of Peru Amount: US$25.0 million Terms: Amortization in 17 years, including 3-1/2 years of grace with interest at8.5% per annum. Project Description: The project will include: a) reclamation of about 19,000 ha of land, now seriously affected by salinity, in six coastal valleys of the country; b) rehabilitation and/or construction of main and secondary irrigation and drainage systems for about 33,000 ha in those valleys; c) improvement of the operation and maintenance services in the whole irrigated area in the six valleys (about 68,300 ha); d) improvement of agricultural supporting services; e) preparation of feasibility studies for similar projects in other coastal valleys. Estimated Cost: US$ Million Local Foreign Total Project Works 6.5 2.3 8.8 On-farm Development 3.6 1.6 5.2 Equipment 1.1 5.2 6.3 Management and Technical Services 5.8 1.2 7.0 Total Base Cost 17.0 10.3 27.3 Physical Contingencies 1.7 1.0 2.7 Price Escalation 6.9 4.o 10.9 Total.Project Cost 25.6 15.3 Financing Plan: The Bank loan would finance $25.0 million (including $10.4 million of local currency costs), the Kingdom of Netherlands $1.0 million (of which $0.3 million of local currency costs) and the balance of $14.9 million would be financed by the Peruvian Government from budgetary allocations. ANNEX III Page 2 of 2 Estimated Disbursements: US$ Million Calendar Year Yearly Cumulative 1978 0.3 0.3 1979 4.6 4.9 1980 4.8 9.7 1981 4.0 13.7 1982 6.0 19.7 1983 5.3 25.0 Procurement Arrangements: Civil works and equipment will be procured under international competitive bidding except for buildings for service centers, contracts for drainage pipe or tile and minor items of technical or office equipment which camot be grouped in packages of over $50,000 worth. Local manufactures will enjoy a margin of preference of 15% or customs duties, whichever is less. Consultants: Consultants to assist with investigations, design and construction of drainage systems will be provided under a technical cooperation agreement with the Kingdom of the Netherlands. In addition about 7 man-years of consultant services to assist in operation and maintenance, land reclamation, groundwater investigation and extension organization and training will be provided under the project. Economic Rate of Return: 18% Appraisal Report: Staff Project Report No. 1189a-PE ANNEX IV PERU IRRIGATION REHABILITATION PROJECT Supplementary Project Data Sheet I. Timetable of Key Events (a) Time taken by Government to prepare project: About 18 months starting May 1974. (b) The Direcci6n General de Aguas of the Ministry of Agriculture has been responsible for project preparation. It received assistance from FAO/IBRD CP. (c) Project concept was first discussed with Bank in March 1974. In May 1974 a first FAO/IBRD CP mission visited the country to help preparation of project. (d) Departure of Appraisal Mission: December 1, 1975 (e) Completion of Negotiations: March 15, 1977 (f) Planned Effectiveness: June 30, 1977 II. Special Bank Implementation Actions None III. Special Conditions (a) Agrarian reform process will be completed in the Project Area along lines enunciated in current legislation by December 31, 1982 (para. 30). (b) Water charges sufficient to cover operation and maintenance costs and to assure a reasonable recovery of investment costs will be established (para. 43). (c) Operation and maintenance and extension services will be improved and expanded (para. 35). b a 之讓‘ 一