Peru - Lower Piura Irrigation Rehabilitation Project

Document of The World Bank LE COPY FOR OFFICIAL USE ONLY Report No. 2539-PE PERU STAFF APPRAISAL REPORT OF THE LOWER PIURA IRRIGATION REHABILITATION PROJECT October 15, 1979 Regional Projects Department Latin America and the Caribbean Regional Office 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.  Currency Equivalents (At February 1979 Exchange Rate) US$1 = Peruvian S/.$205.0 S/.$100 = US$ 0.49 S/.$1 million = US$4,900.0 Weights and Measures 2 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km ) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.2 pounds 1 liter (1) = 0.26 gallons 1 metric ton (mt) 3 = 1,000 kg = 0.98 long ton 1 million cubic meter (Mm ) = 264.18 million gallons Abbreviations ACCHP: Asociacion de Consultores Proyecto Chira-Piura The Chira-Piura Consultants Association BAP: Banco Agrario del Peru Peruvian Agricultural Bank CAP: Cooperativa Agraria de Produccion Agrarian Production Cooperative CENCIRA: Centro Nacional de Capacitacion para la Reforma Agraria National Training Center for Agrarian Reform CNP: Consejo Nacional de Produccion National Production Council CRIA: Centro Regional de Investigacion Agropecuaria Regional Center of Agricultural Research DDA: Direccion de Desarrollo Agropecuario de DEPECHP Agriculture and Livestock Directorate of DEPECHP DEO: Direccion de Estudios y Obras de DEPECHP Studies and Works Directorate of DEPECHP DEPECHP: Direccion Proyecto Especial Chira-Piura Chira-Piura Special Project DEPERTC: Direccion Proyecto Especial de Rehabilitacion de Tierras Costeras Special Project for Rehabilitation of Coastal Lands DGAC: Direccion General de Agricultura y Crianzas General Directorate of Agriculture and Livestock DGAS: Direccion General de Aguas y Suelos General Directorate of Water and Soil DGC: Direccion General de Comercializacion General Directorate of Marketing DGFF: Direccion General de Silvicultura y Fauna General Directorate of Forestry and Wildlife DGRA: Direccion General de Reforma Agraria General Directorate of Agrarian Reform  FOR OFFICIAL USE ONLY DOM: Direccion de Operacion y Mantenimiento de DEPECHP Operation and Maintenance Directorate of DEPECHP DRT: Direccion de Rehabilitacion de Tierras de DEPECHP Land Reclamation Directorate of DEPECHP ENCI: Empresa Nacional de Comercializacion de Insumos National Marketing Company EPSA: Empresa Publica de Servicios Agropecuarios Public Company of Agricultural Services FAO: Food and Agricultural Organization FUNDEAL: Fundacion para el Desarrollo del Algodon Cotton Development Foundation ICB: International Competitive Bidding IDB: Banco Interamericano de Desarrollo Interamerican Development Bank IECO: International Engineering Company INIA: Instituto Nacional de Investigacion Agricola National Agricultural Research Institute LCB: Local Competitive Bidding MAA: Ministerio de Agricultura y Alimentacion Ministry of Agriculture and Food UNP: Universidad Nacional de Piura National University of Piura 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.   PERU LOWER PIURA IRRIGATION REHABILITATION PROJECT Table of Contents Page No. I. THE AGRICULTURAL SECTOR ..... ....................... 1 A. General ............................... 1 The Resource Base ...... ........................ 1 The Coastal Zone ...... ....................... 1 The Sierra ........ ........................... 2 The Selva ........ ............................ 2 Agrarian Reform ....... ......................... 2 Other Policy Measures and Current Trends ........ 3 B. Irrigation and Drainage Subsector .... .......... 4 C. Previous Bank Involvement and Proposed Strategy for the Sector ............................... 5 D. Institutional Framework ........................ 6 II. THE PROJECT AREA ................................... 7 Location ....................................... 7 Climate ... 8 Soils, Topography and Drainage .............. ... 8 Existing Infrastructure ..... ................... 9 Land Use ....................................... 9 Population and Employment ................... ... 10 Land Tenure and Farmer Organizations ........... 10 Agricultural Services ...... .................... 11 Extension .................................... 11 Research ..................................... 11 Agricultural Credit ...... .................... 11 Marketing ... ................................... 12 This report is based on the findings of an appraisal mission consisting of Messrs. J. Roman, E. Brook, M. Raczynski, and D. van der Sluijs (Bank), and Messrs. A. Kogan and C. Bower (consultants) that visited Peru in November 1978 and a follow-up mission consisting of Messrs. J. Roman, E. Brook, and D. van der Sluijs (Bank) and W. Johnston (consultant) in February 1979.  Table of Contents (Continued) Page No. III. THE PROJECT ......................................... 12 Project Origin ................ . 12 Project Description ............................ 12 Detailed Features .............................. 13 Irrigation Works ............................. 13 Flood Protection Works ....................... 14 Drainage Works ............................... 14 On-farm Investments - Development Credit ..... 14 Equipment .................................... 14 Technical Services .......................14 Consultants' Services ........................ 14 Status of Project Preparation .................. 15 Water Supply and Demand ........................ 15 Water Quality .................................. 16 International Waters ........................... 16 Implementation Schedule ........................ 16 Cost Estimates ................................. 16 Financing ......... ............................. 17 Procurement .......... 18 Disbursement ................................... 19 IV. PROJECT ORGANIZATION AND MANAGEMENT ................ 20 Executing Agency ............................... 20 Engineering and Construction of Civil Works .... 20 Land Reclamation, Drainage and On-farm Works ... 20 Operation and Maintenance ...................... 21 Agricultural Extension and Research .... ........ 21 Development Credit ............................. 22 Consultants' Services .......................... 23 Monitoring and Evaluation ...................... 23 Accounts and Audits ............................ 23 V. PRODUCTION, MARKETS, PRICES, BENEFICIARIES AND COST RECOVERY .................................... 24 Future Land Use and Cropping Pattern-- Yield, Production ............................ 24 Market Prospects and Prices .................... 25 Beneficiaries .................................. 25 Water Charges .................................. 26 VI. BENEFITS AND JUSTIFICATION ......................... 27 Benefits ....................................... 27 Risk and Sensitivity ........................... 27 Environmental Impact ........................... 28 VII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION .................................. 29  Table of Contents (Continued) ANNEXES 1. Supporting Tables and Charts 1 Volume of Agricultural Production 2 Climatic Data 3 Land Reclamation Service - Cost Estimates 4 Agricultural Extension Service - Cost Estimates 5 Maintenance Equipment - CIF Peruvian Port 6 Irrigation Water Requirements 7 Water Balance - Medium and Lower Piura Valley 8 Project Cost 9 Schedule of Expenditures 10 Financing Plan 11 Estimated Schedule of Disbursement 12 With and Without Project, Area Development and Cropping Pattern 13 Yields Per Hectare and Volume of Production With and Without Project 14 Producer Prices at Farmgate Level 15 Agricultural Labor Requirement 16 Crops Production Cost per Ha - 1.8-ha Farm Model 17 Crops Production Cost per Ha - 15-ha and 1,000-ha Farm Model 18 1.8-ha Farm Model 19 15-ha Farm Model 20 1,000-ha Farm Model 21 Annual Operation and Maintenance Cost (Civil Works) - O&M 22 Rent and Cost Recovery 23 Project Production Benefits 24 Rate of Return Streams 25 Rate of Return and Sensitivity Analysis Chart No. 20376 Implementation Schedule Chart No. 20375 Organization Chart 2. List of Selected Documents and Data Available in the Project File MAPS IBRD 14158 - Chira-Piura-San Lorenzo System IBRD 14159 - Lower Piura Irrigation Rehabilitation II Project   PERU LOWER PIURA IRRIGATION REHABILITATION II PROJECT I. THE AGRICULTURAL SECTOR A. General 1/ 1.01 Agriculture contributes about 13% to Peru's GDP, but it occupies more than 42% of the labor force and accounts for about 22% of total merchan- dise exports. Food processing employs an additional 4% of the labor force and contributes about 9% of the GDP. The value of food production at constant prices increased only at an average of 1% per annum from the mid-1960s to the mid-1970s, while, during the same period, population increased by an average of 2.9% per annum. Consequently, the country's dependence on imported food- stuffs has grown substantially, mainly in dairy products, pulses, vegetable oils and grains such as wheat and maize. At the same time, the volume of agricultural exports declined and by 1975/76 was only about 60% of its 1962/63 level. As a result, the value of agricultural imports as a percentage of agri- cultural exports has increased significantly during the last decade. Improvement of the performance of the agricultural sector has now become critical to the country's economic progress and to the well-being of the rural population. Annex 1, Table 1 shows agricultural production during the period 1961/78. The Resource Base 1.02 In comparison to other Latin American countries, Peru has a rela- tively limited natural resource base. While the total area of the country is 128.5 million ha, only about 3.7 million ha, or 2.9%, are cultivable and another 22 million ha (17%) are natural pastureland. Most of the soils suit- able for intensive agriculture are already cultivated, but additional land could be developed either in the Ceja de Selva (lower slopes of the Andes), which would be expensive because of the lack of access and basic infrastruc- ture and services, or in the coastal zone, also requiring substantial invest- ments to improve presently unproductive land. The ratio of cropland actually harvested to rural population is 0.34, but figures vary according to the three main ecological regions into which Peru can be divided--the Coastal Zone, the Sierra and the Selva. 1.03 The Coastal Zone. The Coastal Zone in the west of the country, consists mainly of flat desert plains, sand dunes and the dry, heavily eroded Andean foothills. It is a narrow 3,000-km-long belt, covering about 13 million ha (10.2% of the total land area), where about 46% of the country's 1/ An Agricultural Sector Survey Updating Report was issued in September 1977. The findings of that report are incorporated in Peru: Long-Term Develop- ment Issues (2204-PE) of April 16, 1979.  -2- population lives. Coastal agriculture is limited to the river valleys where irrigation is possible; these valleys produce over 40% of the country's gross value of crop production, including sugar, rice, cotton, maize, potatoes, citrus, olives and grapes. The region enjoys relatively close proximity to the urban markets and a good transportation network and other infrastructure and is relatively prosperous. 1.04 The Sierra. The Sierra, or Andean highland region, covers over 33.2 million ha (26% of the total land area) and accounts for about 44% of the population. It consists of steep mountains reaching over 5,000 m and high valleys located between the mountain ranges. Some 2.3 million ha in the Sierra are cropped and about 17.3 million ha are used for grazing, mostly under marginal conditions because of steep slopes and high altitudes. Severe topography, erratic rainfall and extreme changes in temperature make farming difficult and limited to a short season, leading to low agricultural produc- tivity. While there is little scope for putting new land into production, there is potential for improving livestock productivity. 1.05 The Selva. The Selva, or jungle region, east of the Andes mountains, covers about 81.6 million ha (63.8% of the total land area) and accounts for 10% of total population. ONERN, the Government's Natural Resource Evaluation Agency, has classified most soils in the lower Selva as marginal and suitable for grazing and forestry. Soils in the foothills between the Andes and the lower Selva, called Ceja de Selva, are generally of better quality, and agriculture there is concentrated primarily in four river valleys. Fruits, coffee and tea are the main crops in the Ceja de Selva, and livestock produc- tion is being developed in some areas. Despite the relatively low soil quality, the Selva region has been gaining importance economically because of oil exploitation and construction of two Trans-Andean Highway projects, one financed by the Bank and the other by the Inter-American Development Bank. It is likely that these projects will give impetus to further agricultural development in the region. Agrarian Reform 1.06 In June 1969, the Government approved a new land reform law that was aimed at (a) expropriation of 14,500 estates covering 43% of the country's gross farm area (10.3 million ha) by the end of 1977; and (b) adjudication of 10.6 million ha, including 430,000 ha of state land to agricultural workers, small farmers and Indian communities. These targets were by and large reached by the end of 1978. Altogether, 434,000 rural families, out of a total of 1.8 million families, gained access to land through this law. 1.07 A typical feature of the agrarian reform in the initial stage, which has been achieved, is that it did not result in the parceling up of large landholdings among individual farmers, but, rather, left intact large estates (cotton and sugar estates in the Costa, cattle and sheep holdings in the Sierra), which are now run on a commercial basis under various forms of cooperative associations (without individual holdings). By and large, these associations are working fairly well in situations where a large-scale  -3- organization for production already existed and the workers, now members of the cooperative, were acquainted with the technologies used. The main problems still encountered are (a) that a large number of technicians and administrators previously working on private estates left and had to be replaced by less qualified staff; and (b) cooperative members push for increased wages and fringe benefits and purchase of labor-saving machinery, which has resulted in a difficult financial situation. On the other hand, Government's efforts to get small farmers, landless workers and Indian communities to work together in production and service cooperatives has had little success in spite of generous financial backing; and most farmers continue to farm their plots individually. 1.08 Another important feature is that some 78% of the rural population, 65% of them landless workers or farmers with less than 2 ha, were left untouched by the agrarian reform. In a sense, these groups are now worse off than before; for the landless workers, employment opportunities on the large cooperative farms have now become more scarce, and Government has channelled its agricultural support services almost exclusively to the cooperatives. Other Policy Measures and Current Trends 1.09 Concurrent with implementation of the agrarian reform, Government adopted other policies which have tended to greatly increase its influence in the production and marketing of agricultural commodities. In 1975, it created a National Production System (SPA) under which production targets for all priority commodities are proposed by a National Production Council (CNP). They are then relayed to regional and local authorities and finally to produc- tion nuclei, which are groupings of farmers with at least 3 ha of land, for comments. Final production targets are then set by CNP after consideration of the comments. Individual producers must comply with the production plan of their nuclei; otherwise, no credit, fertilizer or irrigation water will be provided. The Government has also (a) enforced price control by setting prices at the producer and wholesale and consumer levels and by fixing marketing margins; (b) set up a series of Government organizations to enforce price controls and control marketing mechanisms and to carry out all marketing of agricultural exports and all imports of basic foodstuffs; and (c) set up a complex system of transport licenses and controls to regulate the movement of produce between farms and consumers. 1.10 To an important, although not wholly quantifiable, extent, the Government policies regarding production and prices have braked the expansion of output. From 1968 to 1977 agricultural output increased by only 8%, while per capita food production fell by 10%. Output performance appears to have been especially poor since 1972. Between the various products, the trends have been disparate, e.g., rice and livestock output has increased, potato production has stagnated; and sugar declined.  - 4 - 1.11 In order to increase production, reduce agricultural imports and improve producers' returns, the Government has been revising its price control and marketing policies. In 1978, producer prices were substantially increased; cotton prices are now based on world market levels and restric- tions on production were relaxed; and consumer subsidies on some food products were discontinued. B. Irrigation and Drainage Subsector 1.12 Of the total 3.7 million ha of cropland in Peru, about one-third, or 1 million ha, are irrigated. Peru has abundant water resources, which, however, are poorly distributed geographically: most of the more important river systems flow from the Andes mountains to the east, into the Amazonian basin, while Peru's better agricultural lands are located west of the Andes. Some 50 rivers, flowing to the west through the coastal region into the Pacific, provide the bulk of irrigation water for about 770,000 ha in the Costa and for six of the 10 largest cities. 1.13 The coastal valleys where water is available have conditions that are generally favorable for high crop production due to potentially good soils and near optimal solar radiation and temperatures. Maximum river flows occur between December and March (summer), when average daily temperatures along the coast are above 20 0C. This is the cropping season for the main annual crops such as cotton, maize, sorghum, rice and vegetables. Sugarcane is grown in the northern coastal areas. 1.14 Prior to the land reform in the late 1960s, most of the construction and maintenance of the irrigation and drainage infrastructure was taken care of by the private sector, with hardly any Government support. However, the systems were developed on a piecemeal basis because large-scale irrigation investments and management on a regional basis were beyond the capacity of the private sector to handle. As a result, irrigation systems are too old and inadequate to achieve efficient water management and optimum use of land and water resources. Moreover, as drainage facilities are largely lacking, water- logging and salinization has increasingly become a problem: it is estimated that a total of 250,000 ha of irrigated lands are now affected to varying degrees, and the affected areas are increasing. Since the salts are generally non-alkali and soils are generally light to medium textured, the land can be reclaimed by leaching and construction of proper drainage. In facing the problem of scarce land resources, a rapidly growing population and growing dependency on imported foods, the Government, in 1977, decided to initiate a program for the rehabilitation of coastal lands as a more quickly maturing and less costly alternative to large new irrigation schemes. The first stage of this plan is Irrigation Rehabilitation Project I, which, with Bank finance (Loan 1403-PE), aims at the rehabilitation of six coastal valleys, thereby reclaiming and putting into agricultural production some 19,000 ha. The project is in the early stage of implementation, with the first year devoted mainly to establishing the executing agency and preparing final engineering designs; construction is slightly behind schedule.  1.15 Water rights and management are governed by the General Water Law of July 24, 1969. All waters from whatever source are the property of the state, and previous private water rights have been cancelled. Responsibility for control and use of the water rests with the Ministry of Agriculture and Food (MAA), which allocates it in consultation with the farmers' water users' associations. 1.16 Under the law, farmers should, in accordance with their capacity, pay water charges, tarifas, to cover full operation and maintenance, plus a reasonable amount of the investment costs of the works. The General Direc- torate of Water and Soil of MAA is responsible for establishing water rates and reviewing them annually. However, water charges are nominal, collection rates are only about 40%, and receipts do not cover O&M costs. Moreover, the monies that are collected go to the national treasurer and not to the irrigation districts where farmers could see a return for the fees they paid. In practice, maintenance is carried out by the water users' associations, which are authorized to impose charges, and quotas, to pay for the work. C. Previous Bank Involvement and Proposed Strategy for the Sector 1.17 The Bank has made some 10 agricultural loans to Peru. Five of them, in the period 1954-73, totalling US$55.0 million, were for agricultural credit and were channelled through the Peruvian Agricultural Bank (BAP) (105-PE, 162-PE, 257-PE, 415-PE and 933-PE). In general, BAP performance has been good; disbursements of the last loan (933-PE) have been completed and pre- paration of a sixth loan is underway. Two other loans (67-PE of 1952 and 98-PE of 1954), totalling US$3 million, were for farm machinery imports and the other three for irrigation. Loans 114-PE of 1955 and 418-PE of 1965, total- ling US$24.5 million, financed irrigation works and land settlement in the San Lorenzo area within the Chira-Piura basins. Owing to managerial problems, inadequate counterpart funding and shortage of water, the second of these loans encountered considerable difficulties and took 11 years to disburse but nevertheless achieved its basic goals and produced important benefits (Project Performance Audit Report, SECM-48 of January, 1978). The third irrigation project, Loan 1403-PE signed in 1977, was referred to in paragraph 1.14. 1.18 It is anticipated that the Bank will intensify its lending operations in the agricultural sector in the coming years in support of the Government's policy initiatives and investment programs. Further large-scale irrigation rehabilitation and drainage projects on the Coast are a distinct possibility as the Government further strengthens its implementation capabilities in this area. Financing of small-scale irrigation construction and improvement subprojects carried out under the aegis of a national program in both the Coast and the Sierra is to be further examined with the authorities. The Bank has appraised a small integrated rural development project in the Southern Altiplano (Puno) and the experience to be gained in its execution should pro- vide the basis for future projects of that type in the Sierra. There are considerable possibilities for promoting tropical tree crop and livestock development and rural infrastructure in the Ceja de la Selva, while efforts should be made to identify development possibilities for the lower Selva.  6- Finally, among the projects with national scope would be those that included term lending for crop, livestock and agro-industrial development through BAP (building on the experience of five previous loans); provision of marketing and storage infrastructure; and strengthening of the agricultural research and extension services. Such an approach would make a direct impact on the productive capacities and quality of life of the low-income rural population. D. Institutional Framework 1.19 Since 1978, MAA has been responsible for all policies and opera- tions in the agricultural sector. At the central level, under the Minister, MAA operates through two Director Superiors and five General Directorates: Agrarian Reform (DGRA); Water and Soil (DGAS); Forestry and Wildlife (DGFF); Agriculture and Livestock (DGAC); and Marketing (DGC). The Director Superiors and general directorates are responsible for formulating policy and monitoring operations, assisted by 10 general offices (Oficinas Generales) that provide technical, legal and administrative support. Operations at field level are carried out by 13 regional offices (Agrarian Regions), subdivided, in turn, into 24 zonal offices (Agrarian Zones). The Chira-Piura area is under the jurisdiction of Agrarian Region 1, Piura zone. 1.20 Generally, MAA, at both the central and local levels, has suffered from budgetary limitations and administrative red tape and, because of low salaries, has difficulties in retaining qualified personnel, thus limiting its coverage and effectiveness. Compounding the situation, a considerable number of qualified technicians have left because of the economic difficulties the country has faced. To strengthen the operational capacity of the sector, the Government should make efforts to attract qualified and experienced technicians to key managerial positions. 1.21 To overcome the problems facing regional offices, the Ministry has set up a number of so-called Special Projects, which are semi-autonomous offices, reporting directly to one of the Director Superiors. The special projects are responsible for implementing large projects or programs. Among them are the Chira-Piura Special Project (DEPECHP) and the Special Project for the Rehabilitation of Coastal Lands (DEPERTC). 1.22 DEPECHP, since its creation in 1969, has been responsible mainly for construction of the Poechos dam, the Chira-Piura diversion canal and the Lower Piura main drainage network (para 3.01) and for carrying out feasibility studies for agricultural development of the Chira-Piura region. It has also carried out some small resettlement projects for people displaced by the Poechos reservoir. DEPECHP's main strength therefore is in construction, but it has also developed good project managerial capabilities and is gradually becoming involved in agricultural development. DEPERTC was created in 1977 and its main responsibility has been the implementation of the Bank-financed Irrigation Rehabilitation I Project (Loan 1403-PE).  -7- 1.23 Other departments and government agencies under MAA are: the National Training Center for Agrarian Reform (CENCIRA); the Public Company of Agricultural Services (EPSA) in charge of marketing basic agricultural products; the National Marketing Company (ENCI) in charge of supply of agri- cultural inputs and marketing of cotton; and the National Agricultural Research Institute (INIA). 1/ 1.24 BAP is a government-owned institution with 18 branch offices, 54 agencies and 34 field offices. It has executed five agricultural credit loans (para 1.17), acts as banking agent for the on-farm development credit component of the ongoing Irrigation Rehabilitation I Project (para 1.14) and would provide short- and long-term credit under the project. BAP provides about 85% of institutional credit, 10% is provided by commercial banks and the rest by other development banks and direct Government allocations. About 90% of BAP's annual lending is short-term production credit, mainly to associative enter- prises. Its larger source of short-term resources is the Central Bank through its discount facilities and preferential interest rates. Long-term loans have generally been made using external sources such as Bank or IDB loans. BAP's lending operations have grown in recent years owing to its lending to associa- tive enterprises and decreasing participation of private banks. In the period 1970 to 1975 lending operations increased by about one-third in real terms. However, the volume of long-term development credit has increased to a lesser degree because of lack of resources and reduced willingness to invest by farmers. Although a high level of overdues has been a problem in recent years, an examination of the cash receipts and payments shows a steady continuing improvement in the collection of short-term loans, which account for the greatest part of BAP's lending. II. THE PROJECT AREA Location 2.01 The lower Piura Valley project area is part of the contiguous Chira-Piura plains covering, altogether, some 167,000 ha of potential arable land, of which some 137,000 are presently under irrigation with surface and groundwater. The plains are located about 1,000 km north of Lima near the border with Ecuador. The Chira River, with its tributaries, the Quiroz and Chipillico, and the Piura River are the main surface water sources (IBRD Map No. 14158). However, water resources are unevenly distributed with regard to land availability, and the Chira River flow is more abundant and regular than that of the Piura River. Past Government efforts have therefore concentrated on storing and diverting water from the Chira to San Lorenzo plains and to the Piura Valley. 1/ INIA was created in February 1979 but had not yet become operational. It will be responsible for all basic and applied research in the sector and will take over the functions of the four existing regional centers of agricultural research (CRIAs).  - 8 - 2.02 In the 1950s and 1960s, partially with Bank finance (Loans 114-PE and 118-PE), the Government developed the San Lorenzo project consisting of diversion works to transfer water from the Quiroz to the Piura and Chipillico Rivers, the San Lorenzo dam on the latter river (260 Mm3) and the Sa. 1C;-nzo irrigation system. Construction of these works brought additional areas under irrigation and alleviated water shortages in the middle and lower Piura Valleys, but did not solve the problem entirely. Therefore, the next stage was construction of the Poechos reservoir (930 Mm3) and of the Chira-Piura diversion canal, both of which were completed in 1976 with financing from the Yugoslavian firm, ENERGOPROJEKT, ensuring permanent water supply from the regulated Chira River to the middle and lower Piura Valley. 2.03 The lower Piura Valley, with 34,700 net irrigable ha, extends southward from the city of Piura to the Laguna Ramon. The area is served by good communication facilities. The Pan-American highway connects it with Lima, the rest of the country and Ecuador, and commercial airlines have daily flights from Lima to Piura. Cotton production from the area is exported through the port of Paita. Climate 2.04 The climate is desertic, with an average annual rainfall of only 62 mm, most of it from January through March. Rainfall patterns are erratic, and, while there are years with virtually no rainfall, daily precipitation as high as 53 mm has also been recorded. Average annual evaporation is 1,840 mm. Monthly average temperature ranges from 21.3 in August to 26.50 in January. Average relative humidity varies from 55% in February to 71% in July (for details, see Annex 1, Table 2). Soils, Topography and Drainage 2.05 The lower Piura area consists of a layer of predominantly coarse textured alluvium 5 to 40 m thick, underlain by fine, impermeable, semi- consolidated marine sediments. Based upon the USBR classification, about 70% of the land is classified as Classes I and II; about 25%, Class III; and the remainder 5%, Classes IV and V. Soils are sands and loamy sands (24%), sandy loams and loams (40%), silt loams (28%), and clay loams and clays (8%). Topography is quite flat, except for some scattered dunes, with slopes from 0.3 to 0.5 m/km in the north-south direction and 0.3 m/km across the valley and away from the Piura River. Elevation above sea level ranges from 24 m at the city of Piura to 3 m at Sechura. The Piura riverbed is slightly higher than the valley and does not have an open outlet to the sea (it ends in the Laguna Ramon). As a result, drainage is deficient and percolation of irrigation water has led to high groundwater levels: less than 1 meter below surface over about 25% of the project area and less than 2 meters below surface over about 60% during the main irrigation months.  -9 - 2.06 The combination of deficient drainage, low rainfall, high evaporation and shortage of irrigation water in the past has resulted in salt accumulation over the entire project area. About 27,400 ha (78% of the project area) are affected by salinity and the remaining 7,300 ha (22% of the project area) are highly salinized and out of production. However, with water now available from the Poechos reservoir, the non-clay saline soils can be reclaimed by leaching if better drainage is provided. 2.07 Peak erratic high discharges of the Piura River spill over the perched riverbed, flooding the flat project area at intervals of between six and 10 years. To prevent the floods, 12.3 km of protection dikes have been built, but additional ones would be required to protect the works and produc- tion to be developed under the proposed project. Existing Infrastructure 2.08 About 31,900 ha in the lower Piura Valley are at present dominated by a series of irrigation subsystems, each with its own intake in the Piura River, constructed early in this century by former landowners of the then- existing large farms. The overall system comprises 276 km of canals and is in poor operating condition. At the intakes, river water is raised by temporary weirs, which are washed out once or twice a year by high flows. Canal gradients are low and their conveyance capacity is reduced as a result of inadequate maintenance. Because of this, water flow is slow, making timely irrigation impossible: it is estimated that, in about 70% of the area, inter- vals between irrigations are 25% longer than necessary, which adversely affects crop development and production. Another effect of low gradients is that the water head is often insufficient to irrigate by gravity, making pumping from the canals necessary; about 9,400 ha are at present served by a combination of gravity and pumping. Low conveyance efficiencies cause water losses of an estimated 300 Mm3 per year, further raising already high groundwater levels. In addition to surface irrigation, there are in the valley 87 deep wells, which, with a 3.2 m3/sec-installed capacity, provide supplementary water to some farms in dry years. 2.09 The Government completed construction of two main collector drains, Sechura (67 km), discharging directly into the sea, and DS 13.04 (49 km), and a network of 338 km of secondary open drains in 1978. The drains are capable of evacuating all percolated water from irrigation but require a network of collector and field drains to feed them. Maintenance of the drains has so far been inadequate and their water carrying capacity is being reduced by aquatic vegetation and sand from moving dunes. Land Use 2.10 Of the 34,700 ha of net cultivable land in the project area, only some 27,400 ha are now under cultivation with a cropping intensity of 106%. Long staple, high quality Pima cotton is the major crop, covering 21,000 ha; grains (corn, sorghum and some rice) occupy about 3,300 ha, and pasture and subsistence crops cover 4,700 ha. Due to the poor condition of irrigation  - 10 - infrastructure, inadequate technical assistance and reduced production credit, average yields per hectare are low: 1.5 tons for cotton, 2.0 for corn, and 2.8 for sorghum. Livestock consists of some 3,600 dairy cows, about 50% of which belong to small farmers, and a large goat population belonging to small farmers and landless peasants. Population and Employment 2.11 Population in the department of Piura is about 1 million, of which some 360,000 live in the city of Piura and about 120,000 in the project area. Of the latter, about 70,000 live in the towns of Catacaos (30,000), La Union (25,000) and Sechura (15,000), while the remaining 50,000 are on farms or in small villages. Population growth is estimated at 2.5%. About 12,700 families, with an estimated active population of 2.5 persons per family, derive their income from agriculture; of these, 11,800 own land and the other 900 are laborers. 2.12 Employment varies according to land tenure. Members of the agrarian production cooperatives are permanently employed and are paid minimum wages. Minifundistas, 1/ however, with farms averaging 1.8 ha, need to use only about 20% of their potential 6.7 million man-days in labor on their own farms and, therefore, have to seek employment for the remaining 5.4 million man-days off the farm. As only some 10% can be absorbed in agriculture by the cooperatives and larger farmers and an estimated 40% in other sectors in the area, seasonal unemployment is a problem. 2.13 Annual income per family is estimated to be Si. 367,700 (US$1,784) for cooperative members, almost all of it from on-farm work, and S/. 260,800 (US$1,272) for minifundistas; of the latter's income, about S/. 150,000 (US$732) is provided by off-farm employment. Land Tenure and Farmer Organizations 2.14 Land reform was carried out in the project area in the early 1970s. Farms over 50 ha, covering about 57.9% of the project area were expropriated and converted into agrarian reform enterprises, mainly Agrarian Production Cooperatives (CAPs). The present land tenure situation is as follows: Average Area Category Farm Size Area Families per Family (ha) (ha) (%) (No.) (%) Agrarian production cooperatives 880-1,820 17,450 50.3 2,790 23.7 6.25 Communal cooperatives n.a. 2,200 6.3 1,230 10.4 1.80 Peasant groups n.a. 450 1.3 170 1.4 2.66 Minifundistas 0-5 13,000 37.5 7,500 63.6 1.73 Small farmers 5-15 680 1.9 80 0.7 8.50 Medium-size farmers 15-50 920 2.7 30 0.2 30.70 34,700 100.0 11,800 100.0 2.94 1/ Minifundista: Farmers who have such small areas for cropping that income derived from farming is equal to or less than minimum consumption levels.  - 11 - 2.15 The 12 CAPs in the project area have overcome the critical period of establishment and reached a reasonable level of organization. They all farm the land collectively, and, as required by law, have their own technical managers who are helping them to improve farm management, agricultural prac- tices, and overall performance. As a result, their financial situation is sound and none of them had in arrears debts with BAP at the end of 1978. Members of communal cooperatives and peasant groups, on the other hand, farm the land individually. These farmers as well as the minifundistas, altogether occupying 45% of the area, have little access to agricultural services and are not organized for production, constituting, therefore, the proposed project's main target population. 1/ Agricultural Services 2.16 Extension. The "Agrarian Zone" in Piura, the regional office of the MAA, has four agriculturalists and three medium-level technicians who advise farmers on production techniques for cotton and grains in the project area. The Zona Agraria technicians deal almost exclusively with cooperatives, while small private farmers have practically no access to them. Also, the Cotton Development Foundation (FUNDEAL) gives limited assistance, mainly in phytosanitary control, providing three agronomists for the entire Chira-Piura region. In addition, CENCIRA has a regional office in Piura which provides audio visual extension programs in agriculture. In general, existing exten- sion services are not well coordinated, reach only a small percentage of farmers, and are inadequately staffed. 2.17 Research. Isolated research efforts are undertaken by a number of entities. CRIA-II (para 1.23), with its headquarters in Chiclayo, conducts 'work on adaptation of varieties and development of technological packages for cotton and rice at its Chira station. DEPECHP, partly through agreements with the National University of Piura (UNP), has been carrying out field experi- ments and research on drainage and salinity in the Montegrande and Pedregal pilot areas. FUNDEAL, which receives its budgetary funds from a special tax paid by the producers, 2/ provides financial assistance to CRIA in its cotton- related work. In general, production-oriented research is weak as is the link between research and extension. 2.18 Agricultural Credit. BAP (para 1.24) provides 95% of the institu- tional credit for agriculture in the project area. About 96% of the resources are devoted to short-term production credit, mainly for cotton. Of the total about 80% goes to the cooperatives, 15% to medium-size farmers and only 5% to small farmers and minifundistas. Recently, long-term funds for farm investment and machinery have been made available to cooperatives from an IDB loan, which has nationwide coverage. Development of the project area would require addi- tional financial resources for short-term production credit and long-term on-farm investment credit, mainly for small farmers. 1/ The term "minifundistas" will henceforth be meant to include members of communal cooperatives and of peasant groups. 2/ The equivalent of US$1 per bale of cotton weighing 217 kg.  - 12 - 2.19 BAP operates in the area through its Piura branch office, which has a staff of 15 professionals and 45 auxiliaries and an agency in La UIion T-7th four professionals and seven auxiliaries. These offices, with a moderate increase in staff and technical support from DEPECHP (para 4.05), would be able to handle the proposed project's incremental credit requirements. Marketing 2.20 ENCI has the monopoly for distributing inputs and marketing of major commodities, including cotton. It operates in the project area through an agency in Piura and licensed agents in Catacaos, Castilla and La Union. Cotton ginning is carried out by five privately owned gins that have a combined ginning capacity of 6 m tons/hour and 7,000 m tons of storage. EPSA, with storage capacity of 5,000 m tons, markets rice and regulates grain prices. Since rice production in the lower Piura is marginal, the milling facilities, which are private, are located in the Chira Valley, mainly at Sullana, some 70 km north of Piura. With moderate expansion of their working shifts, the existing marketing facilities would be capable of handling expected incremental production generated by the project. III. THE PROJECT Project Origin 3.01 The International Engineering Co. (IECO), USA, with Bank finance (Loan 418-PE), carried out a feasibility study of the Chira-Piura Valleys in 1968, the outcome of which was a plan to improve water availability to the lower Piura Valley and to rehabilitate the Chira and lower Piura irrigation schemes. The first stage of the plan was construction of the Poechos dam, the Chira-Piura diversion canal and the main and secondary drainage networks of the lower Piura Valley (paras 2.02 and 2.09). The proposed project would be the second stage of the plan and would consist of the rehabilitation of irrigation works and reclamation of salinized lands in the lower Piura Valley. Feasibility studies of the project were prepared by the consortium, Chira-Piura Consultants' Association (ACCHP), assisted by the FAO-IBRD Cooperative Program. Bank missions visited Peru to appraise the project in November 1978 and February 1979. Project Description 3.02 The objective of the proposed project would be to increase agricul- tural production and productivity on 34,700 ha and raise the incomes of about 11,800 cooperative members and smallholder families. This would be accomp- lished through rehabilitation of irrigation facilities, completion of drainage networks, reclamation of saline soils, protection against floods and provision of technical assistance and equipment (see IBRD Map No. 14159).  - 13 - 3.03 The project would consist of: (a) irrigation works, including (i) construction of a diversion dam on the Piura River; (ii) construction and lining of a main irrigation canal 40 km long; (iii) rehabilitation and lining of 112.1 km of secondary and 77.9 km of tertiary canals and rehabilitation of 1,170 km of lateral and sublateral canals; (iv) construction of administrative buildings for the irrigation district; and (v) consulting services for engineering and supervision of these works; (b) drainage works, including construction of 15 km of main drains, 415 km of collector drains and 1,070 km of field drains; (c) flood protection works, including improvement of 12.3 km of flood protection dikes, construction of 54.1 km of new dikes along both banks of the Piura River, and realignment of some stretches of the river; (d) development credit for land levelling, irrigation ditches, soil leaching and improvements and other on-farm investments; (e) equipment; (f) technical services, including (i) strengthening of the agricultural extension service, with special emphasis on assistance to small- holders; (ii) establishment of a land reclamation service; and (iii) training of Peruvian technicians abroad; and (g) consultant services to (i) assist the project executing authority in project implementation; and (ii) carry out feasibility studies for subsequent rehabilitation projects. Detailed Features 3.04 Irrigation Works. A diversion dam and main irrigation canal would be constructed to replace the Piura River as a water carrier and, therefore, make construction of provisional weirs and pumping unnecessary for most of the project area. Sand traps would be built at the offtake of the main canals to remove silt during high river flows. Ninety percent of secondary and tertiary canals would be totally reconstructed and, in general, would follow existing alignments but would be elevated to provide sufficient water-head. Unlined lateral and sublateral canals would be rehabilitated or constructed on about 50% of the cooperatives' land (8,730 ha) and on practically the entire small farmer area (17,200 ha). The embankments of the main and secondary canals would double for service roads. 3.05 The project would also finance construction of 2,900 m2 of buildings to serve as headquarters for the irrigation district and for the agricultural extension and land reclamation services.  - 14 - 3.06 Flood Protection Works. Existing dikes would be improved and new ones would be constructed to confine the Piura River between two embankments, 500 to 600 m apart, running from Puente Piura to Laguna Ramon (24.4 km) along the right bank and from Puente Piura to Ventura (26.5 km) along the left bank. Dikes would be designed to protect against maximum peak discharges occurring once every 25 years. 3.07 Drainage Works. Fifteen km of main drains and a network of collec- tor drains would be built to complete the basic drainage network for the 34,700-ha project area. Main drains would be 3 m deep and would be built in a small part of the area not currently served by existing drains. Collector drains would be open, 2 to 2.2 m deep and spaced between 400 to 600 m over all the project area. Field drains would be mostly tile pipes of 6-inch diameter buried about 1.5 m deep. If economically and technically feasible, plastic pipes may be used instead of tile. 3.08 On-farm Investments - Development Credit. Land levelling and con- struction of irrigation ditches would be carried out on most small farmers' and minifundio land (15,600 ha) and on about 5,270 ha of land held by medium- size farmers and cooperatives; soils would be leached in the entire project area and gypsum would be applied on some 1,000 ha of alkali soils. 1/ Other investments would include farm constructions and dairy livestock for selected small farmers on a trial basis. Up to 90% of on-farm investments would be financed under the project through long-term development credit channelled through BAP (para 4.11). 3.09 Equipment. The project would make funds available for purchase of tilelayer machines, maintenance equipment, vehicles for the use of the land reclamation and extension services, a laboratory for soil and water analysis, and topographical and office equipment (Annex 1, Tables 3, 4 and 5). 3.10 Technical Services. The project would provide for: (a) salaries of incremental agricultural extension service staff and their operating expenses (10 professionals, 34 medium-level technicians and 10 clerical staff) (para 4.08); (b) salaries for staff of the land reclamation service and their operating expenses (12 professionals, 35 medium-level technicians, clerical staff and laborers) (para 4.03); and (c) short courses and field training assignments of up to six months abroad in irrigation, drainage, land reclamation, operation and maintenance, farm management and other project-related matters for MAA technicians. The project would provide funds for travel expenses, tuition and living allowances. 3.11 Consultants' Services. The project would include: (a) seventy-five man-months of individual consultants to assist the executing agency in the implementation of the various project components; and 1/ Gypsum requirements would be estimated based on laboratory procedures agreed upon at appraisal.  - 15 - (b) consulting services for basic and feasibility studies for a third irrigation rehabilitation project. Status of Project Preparation 3.12 ENERGOPROJEKT prepared preliminary designs and will complete by the end of March 1980 final designs for the diversion dam, main irrigation canal and flood protection works. ACCHP prepared preliminary designs for the remaining irrigation and drainage works, which are sound. Final designs would be completed by the end of 1980. Designs for field drains and farm works would be done during the project implementation period as land is being incorporated. The Bank would review and comment on final designs of all project works. Water Supply and Demand 3.13 The project would derive its water from the Poechos reservoir, the Piura River and the underground aquifer. Annual flows range from 1,200 to 8,000 Mm3 in the Chira River and from 50 to 3,200 Mm3 in the Piura River. Existing wells yield a maximum of only 40 Mm3/year. Irrigation water require- ments, calculated with the Blaney-Criddle formula, disregarding rainfall and assuming conveyance, field and overall efficiencies of 80%, 60% and 50%, respectively, are estimated at 662 Mm3 (Annex 1, Table 6). Other demands from Poechos considered in the water balance are: Ecuadorian water rights upstream of the dam (181 Mm3) irrigation of the Chira Valley (1,109.3 Mm3) and the middle Piura Valley (723.9 Mm3), municipal supply (71.6 Mm3) and a future industrial complex at Bayovar (73.8 Mm3). Future rehabilitation of the Chira Valley irrigation system would bring about savings of about 300 Mm3/year. 3.14 Consultants analyzed the water balance using a model, which, based upon 39 years of hydrological records, simulated operation of the Poechos reservoir and of the overall Chira-Piura system for a 25-year period, disre- garding future savings in the Chira Valley. The model and the input data used adequately covers the cyclical drought periods and provides reasonable infor- mation to judge the project's water balance. The results of the analysis, presented in Annex 1, Table 7, show that, for the main season, over 25 years, demand would be fully satisfied in 18 years (72%); moderate shortages (between 13 and 37%) would occur in six years (24%) and a serious shortage in one year (4%). For the second season, out of 25 years, demand would be fully satisfied in 13 years (52%); there would be shortages of between 20% and 50% in four years and no water would be available in eight years (32%). According to these results in the dry years, the area could be fully cultivated only during the main season with yield reductions, and the area cropped would have to be reduced in the second season in proportion to water availability. These constraints have been taken into account in estimating average yields and cropping intensity projections in the economic analysis (para 6.02).  - 16 - Water Quality 3.15 The quality of water to be used in the project is excellent for irrigation. Weighted salinity of the Poechos and Piura River water will not exceed 325 ppm. The water contains no toxic or harmful elements, and there is no evidence of water-borne diseases. International Waters 3.16 The Chira-Piura River has its head waters in Ecuadorian territory (Catamayo River). In 1971, Peru and Ecuador signed an international agreement for joint development of the Puyango-Tumbes and Catamayo-Chira River basins. The Poechos dam, the main water source for the project, was constructed and operates under the framework of this agreement. Water in the reservoir is now maintained at a level that does not cause flooding in Ecuadorian territory and the reservoir will be capable of continuing to supply existing water require- ments in the valley without raising the water level. Thus the issues involved will continue to be covered by appropriate arrangements between the two coun- tries. Implementation Schedule 3.17 The project would be implemented over a period of five years. Construction of the diversion dam, main irrigation canal and flood protection works would begin in early 1980 and would take about three years. Construc- tion of the remaining civil and on-farm works would begin in mid-1980 and would take until the end of 1984. Supporting services would be provided during the whole five-year implementation period beginning in early 1980. For details, see Chart 20376. Cost Estimates 3.18 Total project costs amount to US$178.8 million, including a foreign exchange component of US$102.5 million, or 58%. Base costs, totalling US$124.7 million, are expressed in February 1979 prices. For the main irrigation and flood control works, they are based upon updated unit costs incurred by ENERGOPROJEKT in a previous contract in the area; for other works, they are based upon a cost analysis carried out by ACCHP and updated by DEPECHP. Cost of civil works to be carried out by contractors includes 3% tax amounting to US$1.4 million. Costs of imported equipment are CIF Paita, excluding import taxes which Government agencies do not pay. Average consulting fees were estimated at US$8,000 per man-month including: salaries, travel and living expenses, and overhead. Physical contingencies, estimated at 15% for all civil engineering works and 10% for equipment, salaries and other operational expenses, total US$18.5 million. Price contingencies, amounting to US$35.6 million, were calculated at 6% per year for equipment and 7% per year for civil works. It has been assumed that deviations between international and internal inflation would be compensated for by changes in the exchange rate as has been the Government's policy in the past few years. Project costs are detailed in Annex 1, Table 8 and summarized below. Annex 1, Table 9 shows the expected schedule of expenditures.  - 17 - Foreign Local Foreign Total Local Foreign Total Exchange S/. Million ----- -----US$ Million----- % Main Irrigation and Flood Control Works 5,057 8,382 13,439 24.7 40.9 65.6 62 Irrigation and Drainage Networks 4,656 4,336 8,992 22.7 21.2 43.9 49 On-farm Investments 632 976 1,608 3.1 4.7 7.8 61 Equipment - 781 781 - 3.8 3.8 100 Technical Services and Consultants 554 176 730 2.7 0.9 3.6 20 Total Base Cost 10,900 14,651 25,551 53.2 71.5 124.7 58 Physical Contingencies 1,578 2,179 3,757 7.9 10.6 18.5 58 Price Contingencies - - - 15.1 20.5 35.6 58 Total Project Cost 76.2 102.6 178.8 Financing 3.19 Project investments would be financed by ENERGOPROJEKT, the Govern- ment, the beneficiaries and the Bank. ENERGOPROJEKT would finance 50% of the construction and design costs of main irrigation and flood control works, esti- mated at US$46.4 million equivalent, including contingencies. The Bank loan of US$56.0 million equivalent, or 31.3% of the total project cost, would cover the full foreign exchange cost (US$46.0 million) and US$10.0 million of the local currency cost of the remaining investments. The Government, through annual budgetary allocations, would provide counterpart funds equivalent to US$74.5 million, or 41.6%, and the beneficiaries would contribute US$1.9 million, or 1.1%, of the total project cost. The proposed financing plan is shown in Annex 1, Table 10 and summarized below: ENERGOPROJEKT Government 1/ Bank Total Item US$M % US$M % US$M % US$M _% Main Irrigation and Flood Control Works 32.8 50.0 32.8 50.0 65.6 37.0 Irrigation and Drainage Networks 16.9 38.5 27.0 61.5 43.9 24.2 On-farm Investments 2.8 35.4 5.1 64.6 7.8 4.4 Equipment 3.8 100.0 3.8 2.1 Technical Services and Consultants 0.7 27.8 2.8 72.2 3.6 2.0 Contingencies 13.6 25.1 23.2 42.9 17.3 32.0 54.1 30.3 TOTAL 46.4 26.0 76.4 42.7 56.0 31.3 178.8 100.0 1/ Includes about a US$1.9 million contribution of the beneficiaries for con- struction of field drains and on-farm investments.  - 18 - 3.20 The Bank loan would be made to the Government of Peru for 17 years, including four years' grace. Government would transfer to BAP US$5.9 million of the proceeds of the Bank loan and US$2.5 million of its own allocation to the project to enable BAP to finance the medium- and long-term credit require- ments for on-farm investments. The transfer would be made to BAP in the form of an increase of its capital. The Government and ENERGOPROJEKT have signed the financing agreement and completed negotiation of the construction contract. Execution of the construction contract will be a condition of loan effectiveness. Procurement 3.21 ENERGOPROJEKT, under special arrangements with the Government, would carry out construction of the works it finances (diversion dam, main irrigation canal and flood protection works) estimated at US$92.8 million, inclusive of physical and price contingencies. Contracts for construction of secondary and tertiary lined canals and main and complementary drains, totalling US$40.4 million, would be let through International Competitive Bidding (ICB) in accordance with Bank guidelines. Owing to the scope of the works involved, prequalification of contractors is recommended for ICB. Maintenance equipment totalling US$4.7 million, would also be procured under ICB; for bid evaluation, a 15% margin of preference or the prevailing custom duties, if lower, would be allowed for equipment produced in Peru. Contracts for construction of unlined lateral and sublateral canals and buildings, totalling US$6.7 million, would be let following Local Competitive Bidding (LCB) procedures in accordance with Bank guidelines. LCB is recommended in this case because lateral and sublateral canals would be constructed under labor-intensive methods. Pipes for field drains, totalling US$3.3 million, would be locally produced and therefore procured through LCB. Foreign contractors and suppliers would not be precluded from participating in LCB. Construction of field drains (supply of pipes excluded), totalling US$3.4 million, would need to be carried out at irregular intervals as the project advances and therefore would be undertaken by force account or negotiated contracts. On-farm works financed through development credit and totalling US$11.4 million would be done under negotiated contracts between farmers and local contractors. Vehicles and other equipment, totalling US$0.60 million, would be purchased in small amounts and, therefore, procured under LCB. 3.22 Peruvian law requires that foreign contractors enter into joint ventures with local contractors, which is inconsistent with the Bank procure- ment guidelines, but this requirement has been waived for construction contracts to be financed by the Bank under the project.  - 19 - Disbursement 3.23 The proposed Bank loan would be disbursed as follows: Amount of Category Item Disbursements (US$ Million) I Civil works, engineering and supervision: 65% of total cost 29.6 II Subloans made by BAP to finance on-farm investments: 70% of total amount of subloans 5.9 III Equipment and pipes: 100% of foreign expenditures of internationally procured items or 80% of locally procured items 5.6 IV Salaries of incremental staff and operating expenses of the land reclamation and agricultural extension services: 65% of total cost 2.1 V Consultant services, other than engineering and super- vision, and training program: 100% of total cost 0.9 VI Unallocated 11.9 TOTAL LOAN 56.0 Disbursements would be made against normal documentation except for works carried out by force account, subloans made by BAP, and salaries and operating expenses of the extension and land reclamation services, which would be dis- bursed against statements of expenditures duly certified by the implementing agency. Statements of expenditures would be audited as indicated in paragraph 4.14. Supporting documentation for statements of expenditure would not be submitted to the Bank but would be retained by the executing agencies for inspection by Bank missions. Disbursement applications based on statements of expenditures would be accompanied by an annex showing a breakdown of (a) sala- ries and wages of incremental staff based on positions incremental to the staff list on June 30, 1979; (b) materials (construction materials, agricul- tural inputs, office supplies, gasoline, oil and such); (c) general services (third-party payments covering short-term contracts and such; and (d) various operating expenses. The Bank loan is expected to be disbursed over a period of five years according to the schedule of disbursement shown in Annex 1, Table 11.  - 20- IV. PROJECT ORGANIZATION AND MANAGEMENT Executing Agency 4.01 MAA would have overall responsibility for the project, while DEPECHP, a special project of MAA (para 1.21) with headquarters in Piura, would be directly responsible for project implementation. The latter would supervise, with the help of consultants, design and construction of the irrigation and drainage works and carry out all force account works. It would also assume responsibility for agricultural extension, land reclamation and maintenance of the irrigation and drainage systems in the project area. Operation of these systems would continue to be the responsibility of the Agrarian Zone through the Irrigation District, which the Government would strengthen and provide with all necessary funds and facilities as required. Assurances to this effect were obtained at negotiations. Other agencies participating in the project would be DEPERTC, BAP, the Agrarian Zone of Piura, CENCIRA and INIA (paras 1.19 to 1.23 and Chart 20375). Engineering and Construction of Civil Works 4.02 The Studies and Works Directorate (DEO) of DEPECHP would have overall responsibility for design and construction of civil works. ENERGOPROJEKT, under the supervision of DEO, would make final designs and construct the diver- sion dam, main irrigation canal and flood protection works. Consultants under DEO would prepare final designs for the remaining civil works and would super- vise construction contracts of all project works. At negotiations, assurances were obtained that DEPECHP would employ consultants, acceptable to the Bank, to make final designs of Bank-financed works and to supervise construction of all project works. Government policy calls for increasing use of manual labor in construction to ease unemployment in rural areas. Therefore, the project would encourage construction contractors to use labor-intensive methods for excavating drains and lateral and sublateral canals, provided that such methods were economically competitive and the implementation schedule would not be adversely affected. Land Reclamation, Drainage and On-farm Works 4.03 The Land Reclamation Directorate (DRT) of DEPECHP would, assisted by DEPERTC, operate the land reclamation service to be established under the project. The service would: (a) monitor the effect of drainage on the water table; (b) design and construct field drains; and (c) design and supervise construction of on-farm development works. The service would be staffed by Peruvian technicians assisted by individual consultants in irrigation, drainage and land reclamation (para 4.12) and would work in close collaboration with DEPERTC. This collaboration would include exchange of technical staff, consultation on drainage and land reclamation problems, selection of consul- tants and training of technical staff. 4.04 Monitoring of the watertable and of the effectiveness of the drainage network would be done by: (a) reconditioning and completing the existing network of observation wells and making monthly observations of the ground- water depth; and (b) measuring drainage water flow and quality at selected points of the drainage system. Based upon the results of these observations  - 21 - and permeability tests, DRT would decide on the spacing and design and would construct field drains by force account; where tile drainage is necessary, DRT would install pipes with a tilelayer machine which would be purchased under the project. The farmers under the supervision of DRT would fill in the trenches at their own expense. The pipes would very likely be clay and locally produced. However, technical and economical feasibility of importing plastic pipes would be explored. DRT would also prepare farm works designs and land reclamation plans which the farmers would present to BAP for financing (para 4.11). Upon procurement of finance, DRT would assist the farmers in contracting and supervising construction of the works. Operation and Maintenance 4.05 The Operation and Maintenance Directorate (DOM) of DEPECHP operates the Poechos reservoir, the Chira-Piura canal and the existing drainage network of the project. Under the project, DEPECHP would also assume responsibility for maintenance of the project irrigation and drainage systems. The Agrarian Zone would continue to operate the irrigation works through the irrigation district authority, prepare cropping plans with the active participation of the users' associations and of the irrigators' commissions and decide on water allocations accordingly. 4.06 Assurances were obtained that: (i) not later than June 30, 1980, DEPECHP, assisted by consultants, would prepare and put into implementation a maintenance plan for the irrigation and drainage network acceptable to the Bank. The plan would give special attention to removing weeds from the drains and to solving the sand dunes problem; and (ii) the diversion dam and dikes included in the project as well as the existing Poechos dam would be periodically inspected and maintained in accordance with sound engineering practices. Agricultural Extension and Research 4.07 The Agriculture and Livestock Directorate (DDA) of DEPECHP would be responsible for extension services under the general guidance of the Agrarian Zone. DDA would primarily assist small farmers but would also provide guidance to the managerial and technical staff of the cooperatives. Jointly with DRT, it would also assist the farmers in preparing farm development plans and in presenting corresponding credit applications to BAP, and monitor and evaluate the impact of the project on agricultural production (para 4.13). 4.08 The extension service would have its headquarters in the town of La Union and its procedures would be similar to the training and visit system 1/ which has been supported in a number of Bank-financed projects. It would be headed by a senior agriculturalist, assisted by four technicians, who would provide guidance to the field offices and serve as a link with INIA, CENCIRA and FUNDEAL. DDA would reach small farmers by establishing five agencies, 1/ Agricultural Extension: The training and visit system, by D. Benor and J.Q. Harrison, May 1977.  - 22 - each covering about 2,000 farmers, or 3,400 ha. Each agency would be staffed with an agronomist and six medium-level technicians, five agriculturalists and one livestock specialist. The service to the 12 associative enterprises which have professional-level managers would be provided by four experienced agriculturalists. 4.09 CENCIRA, under an operational agreement with DEPECHP, would establish a program to train project extension agents. CENCIRA, which has long expe- rience in this field, would develop and implement the training program in collaboration with the General Directorate of Agriculture and Livestock of MAA, and INIA, FUNDEAL, UNP and DEPECHP. At negotiations, assurances were obtained that the above-mentioned agreement would be signed and that the Government would adequately fund CENCIRA to implement it. 4.10 INIA, under operational agreement with DEPECHP, would intensify its applied research in the Chira research station to develop and improve production technical packages for the several project crops and to assist the project in irrigation and drainage research. The extension service would test on a commercial scale the technological packages developed by INIA and disseminate them to the farmers when adopted. DEPECHP would retain visiting scientists to help INIA to design and conduct its work at the Chira station, and the project would provide the funds to finance them (para 4.12). At negotiations, assur- ances were obtained that the above-mentioned agreement would be signed and that the Government would adequately fund INIA to implement it. Development Credit 4.11 On-farm investments to be carried out under the project (para 3.08) would be financed by medium- and long-term subloans to individual farmers, groups of farmers or associative enterprises. BAP would grant subloans on the basis of development plans prepared by DEPECHP (para 4.04) for up to 90% of the value of the investment plan with the remainder to be contributed by the beneficiaries. The repayment terms of the subloans would be in accordance with the financial situation of the farmers/enterprises receiving credit; subloans would be for periods of up to 15 years, consistent with the antici- pated calendar for attaining full productivity increases from the investments and would include grace periods of up to five years for the repayment of principal. The annual interest rate for these loans would be equal to the one BAP charges for loans for capital investments (Prestamos de Capitalizacion), currently 31% plus 2% commission charge: assurances were obtained during negotiations that the Government would periodically revise the lending rates in consultation with the Bank to take account of relevant changes in the rate of inflation and in the capital market conditions; and that, except as the Bank and the Government otherwise agree, the lending rate would not be lower than 33% per year, commissions included. While this lending rate is at present negative in real terms, it is expected that, during the application of the current Government economic recovery program, it would be raised to positive levels or close to them during the period of project implementation. Inflation has been 75% in 1978, and it is projected to be about 60% and 40% in 1979, and 1980, respectively. BAP with its own resources, would also provide incremental short-term production credit to all project beneficiaries. MAA would enter into a legally binding agreement with BAP, acceptable to the Bank,  - 23 - for provision of short-term production credit and for channelling the project funds for on-farm investments to make subloans to farmers/enterprises on terms and conditions as set out in this paragraph. The signing of the agreement would he a condition of loan effectiveness. Consultants' Services 4.12 In addition to the consultants mentioned in paragraph 4.02, DEPECHP would retain individual consultants, with qualifications and under terms and conditions acceptable to the Bank, to: (a) assist DRT in planning, designing, and constructing field drains and on-farm development works and monitoring the effects of the drainage system (36 man-months) (para 4.03); (b) assist DOM in developing a plan for optimal utilization of the Chira-Piura water resources and defining operating rules for the Poechos reservoir (six man- months); (c) assist DOM in developing and putting into operation a maintenance plan for the irrigation and drainage network (six man-months) (para 4.06); and (d) assist DDA in establishing the extension service and developing crop production packages (27 man-months). DEPECHP, in collaboration with DEPERTC, would also retain a consulting firm to carry out feasibility studies for the rehabilitation of the Chira Valley irrigation system. Terms of reference for these studies, satisfactory to the Bank, would be prepared not later than December 31, 1980. Assurances to this effect were obtained during negotiations. Monitoring and Evaluation 4.13 DEPECHP would consistently monitor and evaluate the impact of the project on groundwater levels, soil salinity, land reclamation, cropped areas, irrigation and drainage practices, use of agricultural inputs, yields, produc- tion, prices, marketing and income. Data collected by DRT and DDA would be integrated and analyzed by the Programming Office of DEPECHP, which would also evaluate the overall impact of the project. This office would submit periodical progress reports of the project and project completion report according to Bank guidelines. To undertake this task, the Programming Office would be staffed with at least three additional professionals with relevant experience in the field. Assurances were obtained that DEPECHP would: (a) monitor and evaluate the impact of the project; (b) submit to the Bank progress reports; and (c) prepare a project completion report for submission to the Bank no later than six months after the closing date. Accounts and Audits 4,14 DEPECHP would maintain separate accounts which would record expendi- tures made under the different project categories. BAP would also maintain separate accounts of subloans for investments in on-farm works. Assurances were obtained that (a) project expenditures made by DEPECHP would be verified and controlled in accordance with sound auditing principles consistently applied; (b) such audit reports would include a separate opinion as to whether the procedures and controls relating to statements of expenditures were properly prepared and in accordance with the legal project requirements; (c) BAP's accounts of subloans to participating farm enterprises would be audited annually by independent auditors acceptable to the Bank; and (d) MAA would send to the Bank certified copies of each year's project accounts within four months after the close of each financial year.  - 24 - V. PRODUCTION, MARKETS, PRICES, BENEFICIARIES AND COST RECOVERY Future Land Use and Cropping Pattern - Yield, Production 5.01 With the project, the physical area under cultivation would increase from 27,470 ha to 34,720 ha and cropping intensities from 106% to 135%. Thus, the cropped area would increase from 29,100 ha to 47,000 ha at full development. No basic changes are foreseen in the crops grown. Cotton is expected to continue as the major crop, occupying 22,000 ha, while the area under grains (corn, sorghum and rice) would go up from 3,285 ha to 18,400 ha and the area under pulses, from 550 ha to 2,000 ha, mainly as a result of double cropping. With better drainage, salinity control, timely and improved irrigation practices, and agricultural services, projected yields are expected to rise from 50% to 120% above without project levels. In light of current farmer experience and given that, under the project, farmers for the first time would have ready access to essential inputs, full development credit and adequate technical assistance, the above increases in productivity are considered reasonable within a specified time frame of seven years. Furthermore, once the problem of salinity has been resolved, growing conditions in the area for irrigated crops are almost ideal, particularly with respect to light/temperature relations and the absence of serious pests and diseases. Cropping patterns, yields and production are summarized below and shown in more detail in Annex 1, Tables 12 and 13. -----Without Project----- ---With Project at Full Development--- Cropped Cropped Incremental Area Yield Production Area Yield Production Production Crop ha mt/ha '000 tons ha mt/ha '000 tons '000 tons Cotton 21,140 1.5 31.7 22,000 2.4 52.8 21.1 Corn 1,215 2.0 2.4 8,200 4.5 36.9 34.5 Sorghum 1,210 2.8 3.4 8,200 5.1 41.8 38.4 Rice 860 4.0 3.4 2,000 6.0 12.0 8.6 Pulses 550 0.95 0.5 2,000 1.8 3.6 3.1 Garden Crops 680 6.0 4.1 1,500 12.0 18.0 13.9 Other Annuals 2,949 6.2 18.3 1,000 12.0 12.0 (6.3) Green Fodder 485 65.0 31.5 2,100 80.0 168.0 136.5 Total Cropped Area 29,089 47,000 Physical Area Cultivated 27,469 34,720 Cropping Intensity 106% 135%  - 25 - Market Prospects and Prices 5.02 No marketing problems are foreseen for the crops produced under the project. Cotton has the advantage of being of the long staple Pima variety. The only other countries that produce it are Egypt and Sudan, and the USA, and it receives premium prices in the world market. Since annual incremental production of cotton fiber resulting from the project (about 6,300 tons) would be quite insignificant in terms of worldwide availabilities, it is not likely to have an adverse impact on the world price; but it would make a significant contribution to the Peruvian exports of cotton, which have been substantially reduced from about 70,000 tons in 1966 to about 20,000 in 1978. Additional corn, sorghum and rice production would permit a reduction of grain imports, while increased production of vegetables would help satisfy the increasing demand for such products in the cities near the project area. The additional supply of alfalfa hay would be used by farmers raising feeder cattle, an activity that is increasing in the Piura area and neighboring departments. 5.03 In accordance with Government policy, ENCI would be solely respon- sible for marketing and exporting cotton, which would account for about 75% of the total net value of production of the project at full development. Existing private gins would be able to carry out ginning without having to increase capacity (para 2.20) by merely extending the ginning season. ENCI has gained expertise in dealing with cotton exports and has done good work in collecting and grading samples of cotton as a basis for establishing the price to be paid to growers. However, cotton growers complain of delays in receiving their money, usually waiting about five months. As a result, some small growers are forced to deal with intermediaries who pay cash but at much lower rates. The Government is aware of the problem and has promised to try to shorten the period of reimbursement by, among other things, providing inputs in lieu of cash. However, further dialogue between the Bank and the Government would be required to work out a workable solution to the problem. EPSA would market all rice production, which would be milled privately. 5.04 Current prevailing farmgate prices were used in the analysis of farm models while international prices converted to farmgate level were used in the economic analysis. World market prices were projected to increase in the period 1979-90 at real annual rates of 2% for cotton, 1.3% for rice, 3.2% for maize and 2.7% for sorghum. These price increases are based on the Bank's Commodities Division projections. Farmgate and economic prices are shown in Annex 1, Table 14. Beneficiaries 5.05 The proposed project would, through increased production, benefit directly 11,800 families, mostly minifundistas and members of cooperatives (para 2.14). It would also reduce farm underemployment by the creation of about 1.4 million man-days of labor per year at full development (Annex 1, Table 15). Family incomes have been analyzed with three farm models of 1.8 ha (minifundistas), 1,000 ha (cooperatives) and 15 ha (small- to medium- size farmers). Physical and financial development of the models are presented in Annex 1, Tables 16, 17, 18, 19 and 20. According to the models, the bene- ficiaries' farm income would develop as follows:  - 26 - Small- and Cooperative Medium-size Minifundistas Members Farmers 1/ Average Land per Family (ha) 1.80 6.25 15.00 Area Covered (ha) 15,650 17,450 1,600 Number of Families 8,900 2,790 110 Farm Income per Family Before Project Charges (US$): Without Project 1,272 1,780 2,780 With Project at Full Development 2,229 4,207 9,430 Water Charges 5.06 Although the water law states that beneficiaries should pay fully for operation and maintenance of the irrigation works and a reasonable propor- tion of the investments, only nominal O&M charges are actually imposed and there are no cost recovery charges. However, it is currently MAA's policy to enforce the law and to return the proceeds of O&M charges to the irrigation districts. Therefore, assurances were obtained that the Government would: (a) increase O&M water charges to a level of actual O&M costs; (b) no later than December 31, 1983, return to the irrigation district the total amount of O&M fees collected; (c) recover as much as possible of the investment costs, in accordance with the farmers' payment capacity and in a period of not more than 50 years; and (d) not later than December 31, 1982 and at least once every two years thereafter: (i) review the level and structure of water charges taking into account the effect of inflation and the ability of the farmers to pay; and (ii) adjust the water charges accordingly. 5.07 In order to estimate future project charges and arrive at the rent and cost recovery index, it has been assumed that (a) minifundistas would not repay any capital costs because, even with the project, their incomes at full development would be below the estimated US$2,792 relative poverty level per family in Peru at that time; (b) cooperatives and medium-size farmers would repay investment costs over a 50-year period without interest, which would bring the total level of charges for these farm categories to about 10% of their net value of production; and (c) the level of project charges would be adjusted annually for all farmers to account for inflation. Expected operation and maintenance costs are calculated in Annex 1, Table 21. The rent and cost recovery indexes are summarized below and calculations presented in Table 22: Small- and Medium-size Cooperatives Farmers Minifundistas (1,000 ha) (15 ha) 1/ Incremental annual project charges at full development in 1979 prices: O&M - US$/ha/year 62.3 62.3 62.3 Capital Recovery - US$/ha/year - 70.4 70.4 Rent Recovery Index 26.6 50.3 55.6 Cost Recovery Index 40.3 53.7 51.5 1/ About 80 families with holdings between 5 ha and 15 ha and 30 families with holdings between 15 ha and 50 ha are expected to participate.  - 27 - VI. BENEFITS AND JUSTIFICATION Besef its 6.01 Execution of the project would bring about a significant increase in agricultural production and improve living conditions for the beneficiaries. Rehabilitation of the irrigation works and completion of the drainage network would improve the production potential of 27,400 ha now suffering from salinity and high watertables and would reclaim some additional 7,300 ha now out of production altogether. Improved irrigation water distribution and management and provision of agricultural extension and marketing services would further lead to more intensive cultivation and production, particularly by the poorest farmners in the project area (Annex 1, Table 23). Incremental production of cotton would, at full development, increase agricultural exports by about US$16.7 million, and export taxes would rise by about US$3.7 million per year. In addition, increased production of grains would decrease imports by abotut US$7.0 million per year. The project would also contribute significantly to the consolidation of the agrarian reform process by: (a) improving organi- zation of the existinig production cooperatives involving some 2,800 farmers and 17,400 ha, and (b) providing access to the agricultural services and incorporating in the economy some 8,900 minifundistas and members of Grupos Campesinos holding 15,718 ha. 6.02 The economic rate of return of the project has been estimated at 15% (Annex 1, Table 24) and was derived under the following assumptions: (a) agri- cultural production was estimated based upon the incorporation of land and yields projected in Tables 12 and 13 of Annex 1, with reductions in cropped area and yields to account for dry years as projected in the water balance (para 3.14); (b) economic prices for cotton, maize, sorghum and rice as projected by the Bank were converted to farmgate level as specified in para- graph 5.04; for other products, prevailing farmgate prices were used (Annex 1, Table 14); (c) production costs were priced at local market prices (Annex 1, Tables 16 and 17); (d) investment costs include all project works, equipment, support and consulting services; (e) to reflect, underemployment in the area, hired and family-supplied labor were shadow-priced at 70% of the financial cost; and (f) a standard conversion factor of 0.87 was used to impute the foreign exchange component of the project costs and the benefits from exported (cotton) and imported substituting commodities (corn, sorghum and rice). Risk and Sensitivity 6.03 Execution of the project does not present major risks. DEPECHP has good experience in constructing works of the type included in the project. Additional irrigation water already available from Poechos insures sufficient water for leaching saline lands and increasing cropping intensity. Farmers have substantial experience in growing the project crops and are open to advice from extension workers. The agrarian production cooperatives have passed the critical stage of establishment and organization, and recent performance is sound, making it likely that they would be responsive to project objectives. Establishment of the land reclamation and extension  - 28 - services and provision of short- and long-term credit should effectively help to bring about agricultural production in minifundio areas. Possible risks involved would be: (a) construction delays owing to difficulties in negotia- ting rights-of-way with minifundistas, maintaining irrigation service during construction, and concentration of activities in the area; and (b) failure . the executing agency to offer adequate salaries to retain qualified staff for the agricultural extension and land reclamation offices, which would seriously impair delivery of services to farmers and therefore adversely affect expected increases in productivity. During supervision, the Government and the Bank should ensure that the project is adequately managed and funds are allocated in a timely manner. 6.04 A sensitivity analysis was performed using the following situations to determine which variables would be most crucial to the success of the project: (a) Changes in Benefits and Cost Streams. The expected economic rate of return (ERR) would range between 10% and 15% under various assumptions in which benefits and investment cost streams would increase, be delayed, or go in opposite directions (benefits decreased and investment costs increased). Also, a sensitivity test was carried out to determine the impact of cotton prices on the ERR. For details, see Annex 1, Table 25. (b) Switching Values. The switching value test indicates how much the particular value tested must be changed to cause the ERR to drop below the estimated opportunity cost of capital in the country. The results of this test show that project benefits can decrease by 17%, or the capital cost increase by 23% or the operating costs by 156% to yield an ERR of 12%, which is the estimated opportunity cost of money in Peru (Annex 1, Table 25). Environmental Impact 6.05 The project would not adversely affect the environment. Reduction of salinity and improved operation maintenance and irrigation practices would in fact upgrade environmental conditions in the lower Piura Valley. There is no evidence that drainage discharge into the ocean is in any way affecting plant or animal life. Also, monitoring of the watertable would permit timely action to prevent possible waterlogging in the future. There are no water-borne diseases in the project area and none are expected to develop as a result of project implementation.  - 29 - VII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations, assurances were obtained that Government would: (a) cause MAA to: (i) make DEPECHP responsible for agricultural extension, land reclamation and maintenance of the irrigation and drainage systems in the project area; and (ii) strengthen the Irrigation District of the Agrarian Zone and provide il with the necessary funds and facilities to operate the irrigation and drainage systems (para 4.01); (b) cause DEPECHP to employ consultants, acceptable to the Bank, to make final designs of Bank-financed works and to supervise construction of all project works (para 4.02); (c) insure that DEPECHP, would: (i) not later than June 30, 1980, prepare and put into implementation a maintenance plan for the irrigation and drainage works acceptable to the Bank; the plan would give special attention to removing weeds from the drains and to solving the sand dunes problem; and (ii) the diversion dam and dikes included in the project as well as the existing Poechos dam would be periodically inspected and maintained in accordance with sound engineering practices (para 4.06); (d) cause DEPECHP to enter into operational agreements with and adequately fund: (i) CENCIRA to establish a program for training of the extension service staff (para 4.09); and (ii) INIA to develop production technological packages for the several project crops and assist the project in irrigation and drainage research (para 4.10); (e) periodically revise the lending rate for subloans in consulta- tion with the Bank to take account of relevant changes in the rate of inflation, and that except as the Bank and the Government otherwise agree, the lending rate would not be lower than 33%, commission included (para 4.11); (f) cause DEPECHP to retain consultants, under terms and conditions and with qualifications acceptable to the Bank, to assist it in: (i) planning, designing, and constructing field drains and on-farm development works, and monitoring the effects of the drainage system; (ii) developing a plan for optimal utilization of the Chira-Piura water resources and defining operating rules for the Poechos reservoir; (iii) developing and putting into operation a maintenance plan for the project area irrigation and drainage network; (iv) establishing the extension service and developing technical packages for crop production; and (v) carrying out feasi- bility studies for the rehabilitation of the Chira Valley irrigation system; teIis of reference satisfactory to the Bank would be prepared for these studies before December 31, 1980 (para 4.12);  - 30 - (g) cause DEPECHP to: (i) monitor and evaluate the impact of the project; (ii) submit to the Bank progress reports; and (iii) prepare a project completion report to be submitted to the Bank within six months after the closing date (para 4.13); and (h) ensure that: (i) project expenditures made by DEPECHP would be verified and controlled in accordance with sound auditing principles consistently applied; (ii) such audit reports would include a separate opinion as to whether the procedures and controls relating to statement of expenditures were properly prepared and in accordance with the legal project requirements; (iii) BAP's accounts of subloans to participating farm enterprises would be audited annually by independent auditors acceptable to the Bank; and (iv) MAA would send to the Bank certified copies of each year's project accounts within four months after the close of each financial year (para 4.14). (i) ensure that: O&M water charges be increased to a level of actual O&M costs; (b) no later than December 31, 1983, the total amount of O&M fees collected be returned to the irrigation district; (c) as much as possible of the investment costs be recovered, in accordance with the farmers' payment capacity and in a period of not more than 50 years; and (d) not later than December 31, 1982, and at least once every two years thereafter: (i) the level and structure of water charges be reviewed taking into account the effect of inflation and the ability of the farmers to pay; and (ii) the water charges be adjusted accordingly (para 5.06). 7.02 A condition of loan effectiveness would be that (a) MAA and BAP had signed an agreement for channelling project funds for on-farm investments and for making subloans to farmers/enterprises on terms and conditions as set out in paragraph 4.11; and (b) the Government and ENERGOPROJEKT had executed the construction contract for the construction of the main irrigation and flood control works. 7.03 With the above assurances and condition, the proposed project is suitable for a Bank loan of US$56 million equivalent on standard terms and conditions. October 15, 1979  PERU LOWER PIURA IRRIGATION REHABILITATION II PROJECT Volume of Agricultural Production in Peru"/ 1961 - 1978 Commodity Average Average 1961-65 1968-72 1973 1974 1975 1976 1977 1978 ------------------------------------