Peru - Petroleum Refineries Engineering Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3230-PE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOP? TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PETROLEOS DEL PERU WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR A PETROLEUM REFINERIES ENGINEERING PROJECT March 3, 1982 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 The exchange rate is being adjusted daily roughly in line with the difference between domestic and international inflation. The exchange rate and currency equivalent in 1981 and as of February 15, 1982 were as follows: Currrency Unit - Sol (SI.) Calendar 1981 February 15, 1982 US$1 = SI. 426.60 S/. 540.66 S/. 1 = US$0.0023 US$0.0018 S/.-1,000 = US$2.34 US$1.85 FISCAL YEAR January 1 - December 31 ABBREVIATIONS bpd - Barrels per day COFIDE - Corporacion Financiera de Desarrollo (State Development Finance Corporation) ERP - Economic Recovery Program IDB - Inter-American Development Bank IPC - International Petroleum Company MEM - Ministry of Energy and Mines MW - Megawatt (1,000 kilowatts) PETROPERU - Petroleos del Peru (National Petroleum Company) toe - Tons of oil equivalent tpd - Tons per day typ - Tons per year USAID - United States Agency for International Development  FOR OFFICIAL USE ONLY PERU PETROLEUM REFINERIES ENGINEERING PROJECT LOAN AND PROJECT SUMMARY Borrower: Petroleos del Peru (PETROPERU). In accordance with Peruvian law, the Corporacion Financiera de Desarrollo (COFIDE) would act as PETROPERU's financial agent. Guarantor: Republic of Peru Amount: US$5.3 million Terms: Repayable in 17 years, including four years of grace, at 11.6 percent interest per annum. The loan includes a capitalized front-end fee of US$78,000. roject Description: The objectives of the project would be to carry out studies, and prepare possible investment projects to: (i) reduce energy consumption in Peru's largest energy-intensive industry -- oil refining; (ii) improve the overall efficiency of refining and other PETROPERU industrial oper- ations; and (iii) strengthen planning for PETROPERU's industrial operations. The project would consist of: (i) preparation of a program to reduce operating costs through the introduction of equipment and techniques for energy saving, process optimization, and pollution and corrosion control; (ii) development of a maintenance program and reorganization of the maintenance system for industrial plants; (iii) training for the staff of the Technical Department which is responsible for PETROPERU's industrial operations; and (iv) other studies to improve industrial operations and project planning. Special Risks: The project poses no environmental risks. It also involves no special technical or managerial risks. PETROPERU's Technical Department, which would be responsible for project execution, has capable staff and would be strengthened to insure adequate counterpart personnel and support for the foreign specialists to be hired in connection with this operation. The risk of PETROPERU's losing experienced professionals, a problem in the past, has been reduced since the company was recently granted authority by the Government to pay salaries competitive with those offered by the private sector. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs: Local Foreign Total --------US$ millions-------- Studies and Programs (i) Energy savings, efficiency improvements and pollution and corrosion control, including testing equipment 0.8 2.1 2.9 (ii) Maintenance Program 0.2 0.6 0.8 (iii) Training Program 0.4 1.2 1.6 (iv) Other Studies 0.3 0.6 0.9 Base Cost 1.7 4.5 6.2 Contingencies 0.3 0.722 1.022 Front-end fee on Bank Loan - 0.078 0.078 Total Cost 2.0 5.3 7.3 Financing Plan: Local Foreign Total ------US$ millions-- ----- Bank 5.3 5.3 PETROPERU 2.0 - 2.0 Total 2.0 5.3 7.3 Disbursement Estimates: Bank FY 1982 1983 1984 1985 -------US$ millions------ Annual 0.3 2.0 1.8 1.2 Cumulative 0.3 2.3 4.1 5.3 Rate of Return: Not applicable Staff Apppraisal Report: None  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PETROLEOS DEL PERU WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR A PETROLEUM REFINERIES ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed loan to Petroleos del Peru (PETROPERU) with the guarantee of the Republic of Peru for the equivalent of US$5.3 million to help finance a Petroleum Refineries Engineering Project. The loan, which includes a capitalized front-end fee of 1.5 percent, would have a term of 17 years, including 4 years of grace, with interest at 11.6 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Peru-Major Development Policy Issues and Recommendations" (Report No. 3438-PE) was distributed to the Executive Directors on May 4, 1981. This part is based on the report's findings and on those of economic missions to Peru in June and September 1981. Country data sheets are attached as Annex I. Natural and Human Resources 3. Peru, the fourth largest country in Latin America, is divided by the Andes mountains into three distinct regions: the coastal region (Costa), with 46 percent of the population and most of the country's modern economic activity; the mountain region (Sierra) with 44 percent of the country's population; and the sparsely populated tropical rain forests east of the Andes (Selva). The country's rugged topography limits trade between the three regions. 4. Peru's natural resources include large deposits of minerals-- particularly copper, iron, silver, and zinc-located mainly in the Sierra and the southern Costa. There are also large phosphate deposits located in the northern Costa. Petroleum resources found in the jungle areas and offshore are also substantial, but their full extent has not yet been ascertained. Another major natural resource is the large fishing potential in coastal waters, although the magnitude of the catch is subject to sharp fluctua- tions. Only a small portion of Peru's total land area is arable, and most of the soils suitable for intensive agriculture are already being farmed. 5. Although Peru's energy resource base is relatively diverse, with scope for expanding hydro- and coal-based power generation, petroleum is expected to remain the major energy source in Peru through the rest of this century. Peru increased domestic oil production almost threefold between 1976 and 1979 to about 190,000 barrels per day and became a net exporter of about 60,000 barrels per day. To enable Peru to remain a net petroleum exporter, the Government has embarked on a strategy of accelerated secondary recovery and exploration efforts to increase production and of rational pricing policies to contain demand growth. Prices for domestically consumed petroleum products have been increased at regular intervals. In addition,  - 2 - new legislation was enacted offering special tax incentives to domestic and foreign investors (see para. 18), and response has been positive. The Government strategy is already bearing fruit with petroleum output expected to increase in 1982 to an average level of 207,000 barrels per day. 6. As a result of three decades of rapidly falling mortality rates, Peru's population groluth accelerated during the 1930-1960 period. Since the early 1960s, birth rates have fallen gradually, mainly caused by the urbanization process and improved education. But with declining death rates, population has continued to grow at about 2.6 percent p.a. and is currently estimated at about 17 million. It is expected that population growth will fall only slight.y to about 2.4 percent p.a. over the next 20 years, unless an effective population control policy is adopted. The Government is conscious of the need to slow down Peru's demographic growth rate and is now developing a primary health care program which would contain a family planning component. The urban population is increasing at 4.3 percent p.a., and about a quarter of all Peruvians live in the Lima area. Given the structure of Peru's population, the labor force is expected to grow in excess of 3 percent per year during the next 20 years. Past Development Policies and Performance (1968-78) 7.o 9-tac snessive Hilitary Governments, in office from October 1968 untitl July 1980 followed a develo?ment strategy aimed at promoting economic g-rowth and improving distributi:on of income and wealth, not only between irndi.viduals but also between regions. The pattern of asset ownership in the economy changed drastically through nationalizations and a sweeping land reform. The Government took direct control of key economic sectors and imposed complex legislation to control the private sector.. Many of the policies carried out after 1968 hacd an excessive cost and their implementatic:n ias inefficient. 3. > c~-Ln;\-4een 1968 and 1977, Peru's Governments followed expansionary fiscal and credi' polI4 cies. As a result, aggregate demand considerably exceeded aggregate supply resulting in strong inflationary pressures and widening external gaps. Inflation accelerated from 5 percent per year in 1970 to 38 percent in 1977. Interest rates, however, remained substantially negative in real terms, discouraging financial savings and stimulating capital flight. Moreover, the exchange rate remained practically constant between 1968 and 1975, thus contributing to the overall disequilibrium. 9. Tihe gra -ir ing disequilibrium was reflected in the balance of pay- ments. The current account deficit averaged US$1.1 billion per year in 1974-77, equivalent to nearly 9 percent of GNP. To finance this deficit, Peru accumulated a massive external debt, which at year-end 1977 stood at almost US$8.4 billion (including short-term indebtedness), equivalent to two-thirds of GDP and almost four times annual exports of goods and non- factor services. 10. Following the 1968-74 period of rapid expansion during which GDP grew by more than 6 percent per year, the growth rate dropped progressively and became negative in 1977 and 1978. In this two-year period, GDP per capita dropped by over 6 percent and unemployment and underemployment rose to almost 60 percent of the labor force, up from less than 50 percent during the early 1970s.  - 3 - Stabilization Policies and the Economic Recovery Program (1978-80) II. From 1975 on, several unsuccessful attempts were made to cope with Peru's deteriorating economic situation. By mid-1978 the economic crisis had reached grave proportions, with a drop in real GDP and inflation approaching 100 percent on an annual basis. Moreover, the private sector was finding it increasingly difficult to open letters of credit for new imports and the banking system's net international reserves had dropped to a negative level of US$800 million. 12. Beginning in May 1978, the Government adopted a number of important measures aimed at strengthening public finances, improving the balance of payments and curbing inflation. The Government also negotiated a stand-by arrangement with the IMF in support of the stabilization program. Peru's debt outstanding to the IMF as of December 31, 1981 amounted to SDR 578.9 million. 13. Major debt-relief operations carried out through the Paris Club and with the Soviet Union and commercial banks in 1978 enabled Peru to reduce the debt service burden for 1979 and 1980 by postponing repayment of about US$1 billion to the 1982-1986 period. In view of the strong balance of payments performance in 1979 and 1980 (para. 15), the Government decided to forego parts of the rescheduling options in exchange for slightly better conditions for new loans from commercial sources. 14. To overcome the economic recession, in late 1978 the Government adopted a comprehensive Economic Recovery Program (ERP), which, in addition to the above-mentioned stablization actions, included measures to open up the economy, promote non-traditional exports, strengthen the tax system by broadening its base, and generally improve the efficiency of resource allocation in the private and public sectors. These policy changes -- together with a declining domestic market because of the recession resulted in a major reorientation of industrial development, with a large increase in the value of manufactured exports from US$200 million in 1977 to the US$750-800 million range in 1980-81 (equivalent to about 8 percent of output). The Government also drew up a public sector investment program that aimed at redirecting investment towards projects of clear economic priority and with positive effects on production and employment. In support of the ERP, the Bank approved a US$115 million Program Loan in May 1979. 15. The Government's stabilization-cum-economic recovery program resulted in a strong improvement in public sector finances in 1979. Public v sector current account savings rose from -0.5 percent of GDP in 1978 to about 3.7 percent of GDP in 1979, and the overall deficit was reduced from 5.7 per- cent of GDP in 1978 to 1.7 percent in 1979. In spite of Peru's improved fiscal performance, inflationary pressures remained strong with consumer price increases of 67 percent in 1979 and of 59 percent in 1980. The more careful management of public finances also had a positive impact on the balance of payments. Moreover, an increase in petroleum exports and a substantial improvement of Peru's terms of trade contributed to high overall surpluses of the balance of payments in 1979 and 1980. At year-end 1980, the net reserve position had improved to about US$1.3 billion, equivalent to about 4 months of imports. Peru also made greater use of assistance from official bilateral and international sources thus improving the structure of its external debt. Real GDP growth rebounded to 3.7 percent in 1979; in 1980, growth dropped to 3.1 percent owing, in part, to a drought which affected the agricultural sector.  -4- Recent Developments and Outlook 16. In July 1979, the militairy Government promulgated a new constitu- tion, written by a popularly elected constituent assembly. Elections were held in May 1980 and, following hLs electoral victory, President Fernando Belaunde was inaugurated on July 28, 1980. His Government faced a challen- ging economic and social situation including a number of acute problems which had been disguised by the apparently solid financial situation. These included: high levels of under- and unemployment, particularly in urban areas; higher underlying inflation than had been reported because of price controls and deferred price adjustments for public goods and services; a public sector deficit that had been reduced by freezing expenditures for economic and social services (including education, health and housing), combined with a rigid expenditure structure which did not leave much margin for any significant reallocation of funds to these and other high priority areas; a balance of payments situation which showed a substantial surplus, but which was partly due to high commodity prices and to the fact that import levels were depressed; and, finally, deteriorated income distribution over the previous several years resulting in increased social unrest. 17. The Government named an experienced economic team committed to economic efficiency, decontrol of the economy (including divestiture of some of the State-owned enterprises), promotion of the private sector (including foreign investment), and policies aiming at a more equitable sharing of the benefits of development through job creation and specifically targeted social programs. A major difference between the present Government's philosophy and economic program is its reliance on, and promotion of, private initia- tive. 18. The Government has made important headway in a number of areas. It was successful in accelerating import liberalization by eliminating non- tariff barriers and lowering tariffs. At the same time, export incentives were streamlined and revised to eliminate abuse and make the system more responsive to exports of products with high manufactured content. The Government also enacted new legislation for the agricultural, mining and petroleum sectors offering greater financial incentives to investors. Finally, it made significant institutional changes in the financial sector, revised the interest rate structure through substantial upward adjustments, and is preparing a new banking law which would allow further rationalization and liberalization of the financial system. 19. In an effort to improve resource use, the Government made progress in correcting major price distortions. Food subsidies were greatly reduced and most controlled agricultural prices were adjusted to international levels. The marketing of agricultural products was liberalized, and public utility and petroleum prices were adjusted at regular intervals. Moreover, the Government endeavored to rationalize public investment and its financing -- an effort that was supported by a Bank sponsorerd Consultative Group meeting in May 1981. 20. The above efforts were complemented by measures to strengthen public sector institutions. The important public enterprise sector, for example, was granted greater autonomy by transforming most public enter- prises into State-owned limited liability corporations operating under  -5- private law. This measure gives these companies, inter alia, greater freedom in fixing staff compensation and, thus, helps them to recruit or retain capable personnel. Many of the above measures have already had positive short-term effects and have laid the ground for medium-term structural adjustments of the Peruvian economy. 21. In spite of the above policy initiatives, economic performance in 1981 lagged behind expectations. GDP grew only at about 4 percent and employment generation was also sluggish. The balance of payments deterio- rated substantially as a result of declining export prices, high interest rates on the country's debt with commercial banks, and a rapid expansion of import-s. The loss in net reserves is estimated to have amounted to over US$700 million, equivalent to about 3 percent of GDP. A major factor in the deterioration of the balance of payments was the large public sector deficit, which is estimated to have reached about 8 percent of GDP. On the positive side, some progress was achieved on inflation during May-December 1981 which decelerated to an annual rate of about 50 percent, mostly because of the openness of the economy and the price dampening effects of an increase in imports. The Government is aware that this level is still too high, however, and is following actions which it expects will result in a further drop in inflation in 1982. 22. Reducing the public sector deficit has, once again, become the major challenge facing Peru's economic managers. While the deteriorated export situation has had a negative impact on tax revenues, the deficit is mostly the result of steep increases in expenditures and somewhat lagging adjustments of petroleum and rice prices. Excess expenditures over initial budget allocations were incurred mostly for investment projects of lesser priority. To tackle the difficult public finance situation, the Government is drawing up a restrictive financial program for 1982 with tight credit ceilings and limits to foreign indebtedness. It is also expected that the Government will trim the public investment program in line with its invest- ment priorities. The Bank has an ongoing and frank dialogue with the Peruvian Government on these issues. 23. Based on cautiously optimistic assumptions with regard to economic management, through the medium term the country is expected to have economic growth of about 4-5 percent per year and a manageable balance of payments situation. Peru's balance of payments could, however, become precarious, if the exportable surplus of oil declines. While measures are being undertaken to speed up petroleum exploration and to increase manufactured exports, the results of these endeavors may not come in time to countervail the potential foreign exchange shortfalls. Against this background, there is a continuing need for official development assistance. Taking the above factors into account, considering an expected debt service ratio hovering around the 30 percent mark and assuming that the Authorities continue the initiated course of economic policies, Peru is creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN PERU 1/ 24. The Bank has approved 45 loans to Peru for a total amount of US$1,053.4 million, net of cancellations. About 35 percent of the Bank's lending to Peru has been for transportation (mainly highways and ports), 17 percent for agriculture, 16 percent for the energy sector, 17 percent for 1/ This part is an updated version of Part II from the Peru Eighth Highway Project President's Report of January 25, 1982 (Report No. P-3193-PE).  -6- mining and industry, about 4 percent for education and urban development and 11 percent for a program loan in support of the ERP in 1979. 25. As of September 30, 1981, US$ 360.9 million was undisbursed on Bank loans currently in execution. (Annex II contains a summary statement of Bank loans as of September 30, 1981 and notes on the execution of on-going projects.) Disbursements on Bank-financed projects moved slowly in the mid- and-late 1970s, primarily because of weak project execution capacity and a shortage of counterpart funds that worsened as the economy deteriorated during this period. In an effort to improve disbursements: (i) the Bank opened a resident mission in Peru and restructured a number of slow moving projects; (ii) the Government toolk steps to provide adequate counterpart funds for Bank financed projects; and (iii) the Government also set up a special commission to monitor loan execution and resolve administrative problems. These actions are bear:Lng fruit. About US$44.0 million was disbursed on project loans in FY1980 and US$70.5 million during FY1981. This compares with average yearly disbursements of US$27.5 million during FY1977-79. 26. The main objectives of Bank lending to Peru are to assist in (i) the creation of the physical infrastructure needed to sustain and foster economic development; (ii) the expansion of productive capacity in crucial sectors, i.e., petroleum, agriculture and mining; (iii) the strengthening, through technical assistance loans and regular operations, of local capacity to prepare, implement and operate projects effectively; and (iv) the improvement of living conditions for the urban and rural poor. In the past, Bank lending concentrated on infrastructure in the transportation and power sectors. More recently, the Bank's emphasis has shifted to more directly productive fields -- mining, petrcleum, agriculture and industry -- to help Peru to strengthen its balance of payments. Lending for social projects has also grown. As part of its assistance strategy, the Bank convened a Consultative Group Meeting for Peru on May 25-26, 1981 to help the Government arrange financing for its public investment program. The next operations that would be ready for the Executive Directors' consideration include projects in power, agricultural research and extension, water supply and petroleum production. These would be later followed by projects in rural development, health, education and housing. The Bank is also considering a technical assistance loan to lhelp strengthen public sector management. 27. Bank loans constituted an estimated 5.8 percent of Peru's total public external debt outstanding and disbursed at the end of 1980, and absorbed about 2.6 percent of the country's external debt service in 1980. Assuming increased recourse to long-term bilateral and multilateral aid by Peru, the Bank's share in the country's outstanding public foreign debt by 1985 could reach about 10 percent, and its share of debt service would be around 4.5 percent. 28. IFC commitments as of September 30, 1981 were US$38.3 million (including US$15 million to the Southern Peru Copper Corporation for the Cuajone Copper Mining Project) of which US$15.9 million were held by the Corporation. A summary statement of IFC investments as of September 30, 1981 is presented in Annex II. The IFC is now considering assistance for a palm oil venture.  -7- 29. The other principal lending agencies active in Peru are the Inter-American Development Bank (IDB) and the United States Agency for International Development (USAID). Total loan commitments as of December 31, 1980 by IDB and USAID were US$652.4 million and US$348.6 million, respec- tively, and their shares of debt service as of end-1980 were estimated at 0.6 percent and 0.5 percent, respectively. In its future lending, IDB is expected to emphasize lending for agriculture, industry, mining, roads, and small scale irrigation. USAID is expected to stress rural development and health. PART III - THE ENERGY AND PETROLEUM SECTORS The Energy Resource Base and Balance 30. Peru has large, diverse energy resources consisting of hydroelectric power, oil, coal, natural gas, some geothermal power, and renewable resources such as firewood and bagasse. However, in spite of the recent acceleration of exploration and production activities, Peru's energy resources are relatively untapped. The country's economically viable hydroelectric potential, for example, is estimated at 60,000 MW of which only about 1,650 MW are currently being exploited. Estimates of total oil, coal and natural gas reserves vary from 970 to 3,500 million tons of oil equivalent (TOE), and the current annual rate of energy consumption is estimated at 12 million TOE. 31. Known (proven and probable) oil reserves are estimated at about 110 million TOE or 800 million barrels. Some coal deposits suitable for thermal power generation or for metallurgical coke have been identified but most of the country has not been adequately explored. The Government has recently formed a coal exploration company to stimulate coal exploration efforts. Further, there are some natural gas reserves and substantial geothermal potential which the Government is now beginning to study systematically. 32. Peru's gross energy balance in 1980 was estimated to be as follows: Primary Energy Source 2 Share End Use % Shlare Oil 60.0 Industry and Agriculture 36.3 Firewood and Dung 26.0 Residential and Commercial 36.2 Hydropower 6.2 Transportation 21.4 Natural Gas 4.7 Public Sector 3.0 Bagasse 2.5 Other 3.1 Coal 0.6 100.0 100.0 Source: MEM - National Energy Balance, 1980 33. As is evident from the preceding table, the country depends heavily on petroleum to meet its energy needs. Oil accounted for about 60 percent of the country's energy consumption and about 80 percent of commercial energy requirements. Even with the accelerated exploitation of hydroelectric power and coal resources, oil will continue to be the most important source of energy during the next two decades, and its share in total energy consumption  -8- is expected to be around 50 percent by the end of this century. The second major source of energy in Peru is firewood, principally in the rural areas. About 60 percent of Peru's land surface is covered by natural and cultivated forests. However, measures to pr,event deforestation and the continued shift of population from rural to urban areas will tend to decrease, in the long term, the share of this resource in total energy consumption. Energy Sector Organization and Planning 34. Operational responsibility for the various energy subsectors in Peru is divided among several autonomous Government entities. PETROPERU, the national petroleum company, has principal responsibility for all phases of production, refining and distribution of petroleum products. International petroleum companies (such as Occidental and Belco) explore for, and produce, petroleum under contracts with PETROPERU. Primary responsibility for power generation lies with the national power company, ELECTROPERU, and various local State-owned companies handle distribution in the larger cities. Coal exploration and development are matinly undertaken by the state mining company, MINEROPERU. Development and conservation of forestry resources is under the aegis of the Ministry of Agriculture. 35. The Ministry of Energy and Mines (MEM) is responsible for overall planning and policy making in the energy sector and for initiating pricing actions, which must be approved by the Minister of Economy and Finance. In recent years, MEM has received considerable technical assistance for energy planning. This has included an energy balance study (completed in 1976 by UNDP) and an assessment of energy resources and energy planning efforts (done in 1979 by a team composed of U.S. Government and Peruvian officials). The German Government financed a survey of hydroelectric potential in 1979 and has, together with the Bank under the Fifth Power Loan (Ln. 1215-PE of 1976), financed a power sector master plan (completed in 1980) in order to develop a least-cost investment program for the sector. HEM thus has sufficient knowledge of the country's energy situation -- except in the areas of coal resources and geothermal potential -- to develop a comprehensive resource development program. The Government is now considering the establishment of a national energy council to develop such a program and coordinate sector policies. Government Energy Sector Strategy 36. The principal objectives of Government policy in the energy sector are to increase hydroelectric capacity and expand petroleum production to continue to satisfy domestic requirements and maintain oil exports, while reducing the growth of demand through adequate pricing and other demand management measures. 37. Currently, installed hydroelectric generating capacity accounts for less than three percent of Peru's estimated 60,000 MW of economically viable hydro potential. The failure of previous Governments to develop this poten- tial in a timely manner has put Peru in the position of having to install at least one, and perhaps more, thermal plants to meet growing power demand. In order to minimize costly investment in thermal plants, the Government has adopted an ambitious hydro power development program, which calls for the expenditure of about US$500 million per year through the late 1980s. The Bank's recent US$25 million Power Engineering Loan (Ln. 2018-PE of June 1981) will finance the preparation of 12 hydroelectric projects. The construction of most of these would begin in thie next two to four years. The high cost of  -9- this program, which is in large measure a result of the location of most hydroelectric sites on the eastern side of the Andes mountains far from population centers, will require a substantial increase in power tariffs. Toward the end of 1980, the Government initiated a program of monthly power tariff increases, which are now averaging close to three percent per month in real terms. The objective of these increases is to enable the sector to finance one-third of the cost of its investment program from internally generated resources. 38. As a result of petroleum exploration and development in Peru's northern jungle, which began in the early 1970s, the country had become self-sufficient by mid-1978. Total oil production in 1981 -- primarily from Occidental and PETROPERU -- reached 70 million barrels, of which about 19 million barrels, or 27 percent was exported. Nevertheless, because of low levels of petroleum exploration and development in the second half of the seventies and growing domestic demand, Peru faces the possible need to import petroleum in the late 1980s. To avoid this, the Government has adopted a strategy of promoting investment by foreign companies, under production-sharing arrangements with PETROPERU. To attract foreign companies, the Government put into effect a reinvestment tax credit and eliminated restrictions on their participation in secondary recovery projects. On this basis, Occidental and Belco have increased their investment programs. Exploration contracts for northern and southern jungle areas have been signed with Shell and Superior Oil and discussions are underway with a number of other firms. PETROPERU would restrict its operations to two jungle blocks and the coastal area, and the company is being strengthened so it can more effectively exploit these traditional areas. Its administration, staff and operations are being upgraded with support from the Bank's US$32.5 million Petroleum Rehabilitation Loan (La. 1806-PE of 1980). This support would be continued under the engineering loan recommended in this report and a petroleum production enhancement project under preparation. 39. In order to induce energy conservation and make PETROPERU finan- cially viable, the Government has been periodically raising domestic petrol- eum prices. In 1981, prices were increased 25 percent in real terms, and the Government's objective is to continue a program of regular price increases so as to gradually reach international levels for average petroleum product prices in the medium term. More recent action on domestic prices is summarized in para. 48. Attention is also being given to reducing demand by improving energy efficiency in industry and, where feasible, by electrifying urban transport systems. The proposed engineering project would help in this effort by preparing a project for the reduction of energy consumption in oil refineries -- Peru's largest energy-intensive industry. The Petroleum Sector 40. Production Prospects. Peru has four major geological zones, each of which contains sedimentary basins with hydrocarbon potential: (i) the Costa, particularly around Talara in the north where, until the 1970s, almost all of Peru's oil production was concentrated; (ii) the Selva region - the  - 10 - low jungle plain east of the Andes mountains -- currently the source of most production and the area with the largest potential reserves; (iii) the offshore regions lying between the Peru_-Chile trench and the coastline where four basins have already been detected; and (iv) the Sierra, where the like- lihood of finding commercially attractive oil deposits appears low. Peru was one of the world's first oil producing countries and was self-sufficient in petroleum for many years. During the 1950's, however, with domestic prices for petroleum products as well as producers' margins at low levels, domestic consumption began to out-strip lagging production. As a result, Peru became increasingly dependent on crude oil imports in the 1960s and during most of the 1970s. As noted in para. 38, in the late 1970s-following the discovery I of oil in the Selva--Peru became once again self-sufficient in petroleum and began to export. 41. Based on increased production from the Occidental-Bridas secondary recovery project on the coast and the incorporation of new reserves recently discovered by PETROPERU in its jungle area, petroleum production is expected to increase to about 75 million barrels per year in 1982, of which 25 million barrels would be exported. Not taking into account the possible results of new exploration now being undertaken by private companies and PETROPERU, the outlook is for total production in Peru to remain above 73 million barrels per year through the end of the 1980s. With demand expected to grow at a rate of five percent p.a., Peru would again become a net importer by the late 1980s unless the new explorat:Lon 1program is successful. 42. PETROPERU. The State-owned national petroleum company, PETROPERU, was established in 1969 following the nationalization of the International Petroleum Company (IPC), a subsidLary of Exxon. PETROPERU incorporated the assets of IPC, and those of a sma:Ll Government-owned oil company and several other privately owned oil firms. Currently, PETROPERU's own operations account for 22 percent of the country's crude oil production, 100 percent of refinery capacity and 98 percent of the marketing of petroleum products. In addition to conducting all State exploration and production activity, it owns and operates the Transandean pipeline and produces petrochemicals and fertilizer. Although the Government's strategy calls for foreign companies to continue to be the major petroleum producers, PETROPERU is expected to retain its dominant position fn petroleum refining and distribution. 43. PETROPERU is the largest: public sector corporation in Peru and employs about 8,700 staff. It has a Board of Directors of 10 members. Four are appointed by the MEM, three by the Economy and Finance Ministry, one by the Armed Forces, and two are representatives of the employees of PETROPERU. The Company's President, who is also Chairman of the Board, has broad management authority within the Company. PETROPERU's senior management is generally competent and has extensive experience in the petroleum industry in Peru. PETROPERU's middle management, especially in its exploration operations, on the other hand, was weakened by the loss of many of its technical and administrative personnel in 1977/78, primarily because of the limitation placed on salary levels. However, the Technical Department of PETROPERU, which is responsible for all refinery and industrial operations, was able to retain a substantial number of its capable and experienced middle managers since they had more limited opportunities in the private sector than had exploration and production personnel. In early 1981, PETROPERU was given greater autonomy to improve its salary structure (see para 20). As a consequence, its salary scales are now competitive with those of the private petroleum companies in Peru and the loss of experienced personnel has declined.  - 11 - 44. The headquarters of PETROPERU, which include the Industrial Department, are located at Lima. Diverse functions such as personnel manage- ment, training, finance and budgeting, marketing, legal, planning, research and development, engineering and project management, and procurement are controlled from headquarters. The operations of the company are divided into five units: (i) Northwest Operations including the Talara Refinery and petrochemical plants; (ii) "Selva" Operations, including the Luis F. Diaz Refinery; (iii) Pucallpa Operations; (iv) Oil Pipeline Operations; and (v) the La Pampilla and Conchan Refineries operations. Jr 45. With financing provided under the FY80 Petroleum Rehabilitation Loan, PETROPERU has appointed Price Waterhouse to review its financial management system and make recommendations for its improvement with emphasis on management information systems, financial planning and capital budgeting. In addition, PETROPERU has hired the consulting firm of Arthur D. Little to make a detailed study of its management and organization at the corporate level. There is also a need to review management and organization at the industrial plant and regional levels. PETROPERU has, therefore, agreed to expand the scope of the ongoing studies and/or carry out an additional study to include a review of industrial plant and regional level management and organization with a special emphasis on introducing improved budgetary systems and cost and inventory controls. PETROPERU has further agreed to furnish to the Bank the findings and recommendations of such studies not later than December 31, 1984 (Section 4.04 of the draft Loan Agreement). 46. PETROPERU's Financial Situation. Aside from the loss of profes- sional staff, PETROPERU's most serious problem in recent years has been financial. A number of factors resulted in a financial crisis in 1979, which required Government action to help PETROPERU avoid bankruptcy. These factors included: (i) the incurrence of US$400 million in short-term debt by the company to finance petroleum purchases which were sold domestically at subsidized prices; (ii) the contracting of almost US$800 million in loans on relatively stringent supplier and commercial terms to finance the Transandean Pipeline which, until the late 1970s, yielded no revenue; and (iii) the requirement under its production sharing contracts with foreign oil companies that PETROPERU pay all their taxes. In 1979, the Government took a series of measures to help resolve PETROPERU's financial problems and restore its creditworthiness. Further measures were taken in connection with the Petroleum Rehabilitation Loan. These actions included provision of SI. 70 billion (about US$242 million) in 1980 to strengthen PETROPERU's capital structure and SI. 30 billion (about US$65 million) in 1981 as equity to finance the company's capital investment. 47. Due primarily to the large equity contributions made by the Government, PETROPERU's financial situation improved considerably in 1980. As a result, the company complied with the financial covenants of the Petroleum Rehabilitation Loan (Ln. 1806-PE of 1980). In 1981, however, despite the substantial progress made in increasing petroleum prices (para. 39), there was again a serious deterioration in the company's financial position. The main contributing factors were: (i) the continued need to purchase oil supplies at international prices from its contractors  - 12 - for sale at subsidized prices on the domestic market; (ii) a reduction in PETROPERU's production; (iii) passage into law of a reinvestment tax credit which reduced the income tax liabilities and payments by foreign oil companies to PETROPERU; and (iv) a decrease in export earnings because of lower spot market prices. As a result, PETROPERU is estimated to have incurred losses of about US$27 million equivalent in 1981. The company covered its cash flow needs through extensive short-term borrowing, and it was not able to meet the 1.4 debt service coverage ratio agreed under Loan 1806-PE for 1981; the actual debt service coverage is estimated to have been 1.0. PETROPERU, however, was able to substantially meet all other financial covenants for 1981 under that loan. The quick ratio for the year is estimated to have reached 0.6:1 as compared to the agreed level of 0.7:1, and the debt/equity ratio is estimated at 69/31, well within the agreed level of 75/25. Financial data on PETROPERU for 1980 and 1981 are contained in Annex IV. 48. In order to help deal with PETROPERU's financial problems, in mid- December, 1981, the Peruvian Congress passed a law authorizing MEM to increase domestic prices for regular gasoline from US$0.95/gallon at the end of December 1981 up to US$1.25/gallon by June 30, 1982. The prices of other petroleum products would be raised in line with gasoline prices. The law provides for an overall increase of 25 percent in petroleum product prices in real terms for calendar year 1982. This is being achieved in monthly increases. Two consecutive increases, averaging approximately 4.5 percent in real terms, were implemented in January and February 1982. The proposed price increases would put PETROPERU's finances on a sound footing and would enable the company to substantially meet its financial covenants under Loan 1806-PE for 1982, including the 1.9 times debt service coverage ratio and the 70/30 debt/equity ratio. The quick ratio is expected to reach 0.8:1 compared to the agreed level of 0.9:1. 49. PETROPERU's Refinery Operations. PETROPERU has six refineries, with a total capacity of 178,400 bpd. Two of these--the La Pampilla Refinery, near Lima, with a capacity of 100,000 bpd and the refinery at Talara, 1,000 km northwest of Lima, with a capacity of 65,000 bpd together account for approximately 92 percent of the total refining capacity in Peru. The remaining four refineries are suall--their average capacity is about 3,350 bpd. Although Peru's two major refineries operate at an average rate of 90 percent of capacity, this is achieved by operating them continuously, without allowing for reasonable mainatenance. The refineries, therefore, face the risk of breakdown and consequent stoppage of production over prolonged periods. In general, the maintenance system in the refineries is weak, as inadequate attention is given to forward planning of maintenance needs and to carrying out preventive maintenance on a systematic basis. Moreover, energy consumption in the refinerieis is high since they were built at a time when energy was cheap and the main emphasis was on keeping capital costs low. As a result, inadequate attention was paid to energy saving. The proposed engineering loan would help PETROPERU carry out studies and develop programs for overhauling the maintenance system, achieving energy saving and improving the operational efficiency of its refineries.  - 13 - 50. Supply/Demand Balance for Refinery Products. Consumption of petroleum products grew at an annual average rate of 6.2 percent during 1960-75, reaching 1.78 billion gallons in 1975. During 1975-80, however, consumption grew at only 2.3 percent a year mainly because of the economic crisis and increases in petroleum prices. The consumption of light and middle distillates -- such as gasoline, diesel, kerosene and jet fuel - account for nearly 70 percent of total consumption. 51. Although Peru had a surplus of some petroleum products in 1980, by 1990 it will have to import most refined products except gasoline unless the country's refinery capacity is expanded. This is based on the assumptions that the demand for refinery products would grow by about five percent during 1980-90, as the economy resumes growth, and that only the new plants/ expansions currently firmly planned and/or underway would be completed during the 1980s (see para. 52). These projections indicate a need for additional capacity during this decade. The size and configuration of additional facilities required will depend largely on the demand for individual products which, in turn, will depend on overall energy demand growth and the success of conservation and inter-fuel substitution efforts. It is, therefore, important that future refinery investments be based on careful planning and on an analysis of alternatives. The planning assistance proposed under the project would improve PETROPERU's capabilities for carrying out such an assessment. 52. Expansion Plans. Currently, PETROPERU has only one major indus- trial project under execution--a 10,500 bpd new refinery at Iquitos (sched- uled for completion in 1984) to replace the existing small, old refinery which serves the remote selva region. Furthermore, the company has decided to carry out some minor refinery expansions at Talara at a total cost of about US$15 million to more closely adjust the product mix to demand. The company is now doing feasibility studies for: (i) an 80,000 bpd refinery at a location yet to be decided, and (ii) a new fluid catalytic cracker at the existing refinery complex at La Pampilla. 53. Other Industrial Operations. In addition to refineries, PETROPERU also operates an ammonia/urea complex, an isopropyl alcohol plant, an acetone plant and a carbon black plant, all located at Talara. The ammonia/urea complex consists of a 300-ton per day (tpd) ammonia plant and a 510 tpd urea plant. The production of ammonia is based on associated natural gas obtained from oil production in and around Talara. Ammonia is used as an intermediate product to produce urea, a high-nutrient fertilizer for use in Peru. The isopropyl alcohol plant has a capacity of 10,000 tons per year (tpy) of which 5,000 tpy is for the production of acetone in an adjacent plant and the rest is for outside sale to local chemical enterprises. Acetone is used in the production of methyl methacrylate, an input for the manufacture of certain plastic goods. It is currently in short supply in the world. The carbon black plant has a capacity of 7,700 tpy and uses low-value residual oil from the nearby Talara Refinery to produce carbon black, which is used mostly in the production of rubber products.  - 14 - 54. The ammonia/urea complex commenced operation in February 1975 and its capacity utilization increased gradually to about 75 percent in 1980 but will probably decline to 63 percent by 1985 unless the maintenance system is improved. The isopropyl alcohol and the acetone plants were commissioned on January 1, 1980 and their capacity utilization in that year was 29 percent and 15 percent, respectively. The low capacity utilization rates in these two plants are due to process and (design defects. It is unlikely that their capacity utilization could be increased beyond 45 percent and 30 percent, respectively, unless bottlenecks in the production processes are eliminated, technical deficiencies are overcome and maintenance work is improved. The carbon black plant was commissioned in March 1976 and its capacity utiliza- tion gradually increased to 71 percent in 1980. In the first part of 1981, however, its capacity utilization declined to about 50 percent, partly because of lack of proper maintenance and other technical problems. The proposed project would finance studies to determine whether their continued operation is economic, if so, what improvements are necessary to increase their capacity utilization from present levels. Previous Bank Energy Lending and Strategy 55. The Bank began supporting the development of Peru's petroleum sector through a loan of US$32.5 million made in February 1980 (Ln 1806-PE). This operation aimed at helping PE1ROPERU to finance rehabilitation of its existing producing wells, reactivate temporarily abandoned wells, and develop new production potential through seismic and reservoir studies and preparation of a secondary recovery project. After getting off to a slow start, satisfactory progress has been achieved in recent months. Bids for most equipment are either now being evaluated or invitations will be issued in the second quarter of CY 1982 and seismic and reservoir studies are now well underway. Disbursements currently stand at about US$4 million, but should increase substantially in coming months. 56. The Bank's lending strategy in the petroleum sector is to continue to help strengthen PETROPERU's ability to effectively carry out the role assigned to it, to support the Government's petroleum pricing policy, and to assist its efforts to attract foreign investment to the sector. Substantial institution building would be a major feature of the proposed engineering loan and of follow-up operations in the sector. This would help upgrade the company's management systems, staff quality, financial administration, and exploration, production and industrial operations. In addition, the Bank would give special attention to putting PETROPERU on a sound financial foot- ing. The Bank's participation in the petroleum sector would also continue to provide a vehicle for a dialogue on a rational domestic pricing policy for hydrocarbons. Finally, as in the p.ast, the Bank would support an increased role for foreign investment in petroleum exploration and development. Through lending to the sector, the Bank has been in a position to provide the Government with an objective assesstment of PETROPERU's capabilities. Such an evaluation has helped the Governmenl: define an important but limited role for the company consistent with its operating capacity. Bank staff have also helped the Government in the design of incentives to attract foreign investors. The Bank would continue to support these objectives in Peru through the proposed engineering loan and the upcoming petroleum production enhancement loan for PETROPERU.  - 15 - PART IV - THE PROJECT 57. The project was identified by a Bank mission which visited Peru in May 1981 and it was appraised in September 1981. Negotiations took place in Washington from January 28 to February 3, 1982, and the Peruvian delegation was headed by Mr. Jorge Fernandez Cornejo, Manager of the Technical Department of PETROPERU. Because this is an engineering loan, there is no separate appraisal report. Supplementary project data are contained in Annex III. Objectives and Project Description 58. The proposed project, developed by PETROPERU in close consultation with the Bank, would complement the Bank's effort under Loan 1806-PE to strengthen PETROPERU's petroleum production operations by providing consul- tant and technical services and training to improve the company's industrial operations. This project represents the first effort by the Government to plan for conservation in its largest energy-intensive industry--oil refining--and to improve the overall efficiency of PETROPERU's refinery oper- ations, as well as its other industrial plants, with particular attention to maintenance, organization and management. 59. The studies and programs to be developed under the project are technically complex and PETROPERU is counting on Bank experience and support in their execution. Furthermore, the Bank's continuing technical assistance would be available to back PETROPERU's management as it undertakes institu- tional improvements with respect to its industrial operations. Bank involve- ment in the technical assistance project would also make it possible for the Bank to ensure that the designs of the follow-up projects are sound, thus improving subsequent financing prospects for them. The follow-up projects are expected to increase substantially the production of refinery products and industrial chemicals. The project also affords the Bank an opportunity to continue a dialogue with the Government regarding petroleum product prices and rehabilitation of PETROPERU's finances. Terms of reference for the studies and programs under the project are contained in Annex V. 60. The project would consist of the following four components: (i) consulting services and procurement of related laboratory equipment and instruments to carry out studies of energy saving, efficiency improvement and corrosion and pollution control investments for the La Pampilla and Talara refineries and other PETROPERU industrial plants; (ii) consulting services to develop a maintenance program and reorganize the maintenance systems for the La Pampilla and Talara refineries and other PETROPERU industrial plants; (iii) consulting services to develop and implement a training program for PETROPERU's industrial staff. Specialized overseas training for about 40 staff members would also be provided; and  - 16 - (iv) consulting services to strengthen PETROPERU's Technical Department to carry out industrial project planning, studies of possible improvements in PETROPERU's chemical plants, and to develop a program to improve product quality in its grease and lubricating oil plants. These four components are discussed in detail in paragraphs 61-64 below. 61. Development of Energy Saving, Efficiency Improvement and Corrosion and Pollution Control Programs. There is substantial scope for saving energy in the Talara and La Pampilla refineries through such techniques as: (i) waste heat recovery from refinery heaters and gas turbines; (ii) energy recovery from regeneration of flue gases of the fluid catalytic crackers; (iii) co-generation of power and steam; and (iv) use of improved instrumen- tation and process analyzers to mLnimize energy requirements. Under this component, a proposed investment program and basic engineering would be. prepared to apply these techniques, taking into consideration their technical and economic feasibility. Studies and basic engineering would also be included for possible process optiLmization, efficiency improvement and pollu- tion control investments in the refineries and other industrial plants. Further, the existing engineering and construction standards used by PETROPERU would be reviewed in order to modify them in line with modern prac- tices. In addition, PETROPERU would establish a computerized system for reliably estimating construction and operating costs for its future indus- trial projects. Finally, the project would include provision for the pro- curement of instrumentation and laboratory equipment, which is critical for carrying out the necessary studies. This component would require 112 man- months of consultants' services arnd represents about 46 percent of total project costs. 62. Development of a Maintenance Program. PETROPERU's maintenance system is weak, and its capacity for forward planning of maintenance needs and for carrying out preventive maintenance on a systematic basis has not been developed. Under this component, the maintenance needs of the refin- eries and industrial plants at Talara and La Pampilla would be analyzed, a modern maintenance program would be developed, and the maintenance systems would be reorganized. Development of the maintenance program would require 54 man-months of consulting services. It would account for about 13 percent of total project costs. 63. Development and Implementation 6f Training Program. PETROPERU's industrial operations employ over 3,000 people. Development and implementa- tion of an effective training program is needed to improve the operation, maintenance and management of its industrial plants. Under the project, training needs--including necessary training equipment--would be identified and a comprehensive program would be prepared to meet those needs. The project would also include implementation of the training program over a 12-month period following its development. Experts in different fields would be hired to train PETROPERU staff and about 40 selected staff members would be sent abroad for specialized training. This project component calls for 75 man-months of consultants' services and it represents about 26 percent of the total project cost. 64. Other Studies. PETROPERIU's Project Division in the Technical Department would receive technical assistance to improve its capability to conduct feasibility studies and carry out industrial planning. This assis- tance would emphasize the use of modern planning tools such as cost benefit analysis and linear programming. In addition, techno-economic reviews of PETROPERU's carbon black, isopropyl alcohol and acetone plants would be carried out to find out what modif:ications are required to improve their  - 17 - efficiency and capacity utilization, how much the modifications would cost and whether it is economical to make the additional investments. Finally, PETROPERU has grease and lubricating oil plants, but the specifications and quality of the products they manufacture are not satisfactory. Studies to determine the measures necessary to improve their quality are included in the project. The planning, industrial techno-economic reviews and grease/oil studies would require 34 man-months of consultants' services and would represent about 15 percent of the total project cost. Project Execution 65. The project would be executed over a period of about 30 months. It would be carried out by the Technical Department of PETROPERU with the help of foreign experts. Consultants provided under the project would have qualifications satisfactory to the Bank and would be selected and hired under conditions and terms acceptable to the Bank (Section 3.02(a) of the draft Loan Agreement). The Department currently has 11 competent professionals but needs strengthening to handle the increased responsibilities envisaged under this project. PETROPERU has agreed to assign seven additional local profes- sionals to this Division (one maintenance specialist, three energy saving specialists, one training specialist, one financial/economic analyst and one linear programming specialist) to provide adequate counterpart support for the foreign specialists to be financed under the proposed loan. These addi- tional staff, who would be satisfactory to the Bank, would be provided partly by reassignment from within PETROPERU and partly by hiring from outside by July 1, 1982. (Section 3.02 (b) of the draft Loan Agreement). Project Cost and Financing Plan 66. Total project costs, exclusive of taxes and duties, are estimated at US$7.3 million, of which US$5.3 million, or 72 percent, represents foreign exchange. The US$5.3 million loan recommended in this report would cover the project's estimated foreign exchange component, including contingencies and a capitalized front-end fee of US$78,000. Local costs of US$2.0 million equiv- alent would be covered by PETROPERU. The project's principal foreign exchange cost component would consist of 275 staff months of consulting and technical services, whose cost is estimated at about US$13,000 per. staff/ month, which is reasonable for this sector for this kind of work. Consultant and technical services, including contingencies, represent about three- quarters of total foreign exchange costs. The balance of the foreign exchange cost would be for equipment.. 67. Retroactive financing of up to US$200,000 is proposed for downpay- ments made after October 1, 1981 on services and instrumentation equipment needed to facilitate the studies on energy saving, process optimization, efficiency improvement and pollution control. Procurement and Disbursement 68. On the basis of need for early delivery of instrumentation equip- ment, the equipment's specialized nature and limited availability, and because of the small estimated cost of the individual items, as well as the impossibility of their useful grouping, limited competitive tendering proced- ures would be used for procurement of all goods. Their estimated total cost, including contingencies, is expected to come to about US$1.3 million. Under these limited procedures, the equipment would be procured through the solici- tation of price quotations from suppliers from not less than three different  - 18 - eligible countries. These procedures are acceptable to the Bank. Loan disbursement is expected to take about two and a half years running from mid 1982 through end-1984. The Bank loan would be disbursed against 100 percent of the foreign expenditures for services and training, and 100 percent of foreign expenditures and 100 percent of local expenditures (ex-factory) on equipment and materials. Economic Benefits 69. The studies to be carried out under the project represent the first concerted effort by Peru to reduce energy consumption in a major energy- intensive industry. One of the important benefits from the project is that it would help prevent deterioration in the performance of the existing indus- trial facilities at Talara and La Pampilla by improving maintenance prac- tices. The project would also have a strong impact on institution building through improvements in the organLzation, management and planning of the industrial operations of PETROPERIJ. 70. The studies and programs to be carried out under the project are expected to result in projects for energy saving and efficiency improvement that are expected to yield high economic rates of return. Taking into con- sideration the deterioration in capacity utilization that is likely to take place if the current maintenance system is not overhauled, the incremental production that is likely to take place in 1985 is substantial. Expected incremental production would be of the order of 10-20 percent in the refin- eries and 30 percent in the fertilizer plant. In the case of the carbon black, isopropyl alcohol and acetone plants, the expected incremental production would be of the order o, 70 to 75 percent, if their continued operation is found to be viable. 71. The project does not face any major risk, as the Technical Depart- ment of PETROPERU consists of capable professionals and would be strengthened with foreign technical assistance. The risk of PETROPERU's losing expe- rienced professionals has been greatly reduced since 1980 with the flexibil- ity granted to the company by the Government to hire qualified professionals at salaries competitive with the private sector (paras 20 and 43). 72. The project poses no environmental risks. Studies of the indus- trial plants of PETROPERU would examine environmental aspects and recommend measures to control pollution. PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The (i) draft Loan Agreement between PETROPERU, COFIDE (which under Peruvian law must be a party to all agreements providing for external loans for public enterprises) and the Bank; (ii) draft Guarantee Agreement between the Republic of Peru and the Bank; and (iii) Report and Recommendations of the Committee provided for in Article III, Section 4 (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors sepa- rately. 74. These draft agreements conform to the normal pattern for loans for engineering projects. The main features of the draft Loan and Guarantee Agreements are referred to in the text of this report and are listed in Annex III.  - 19 - 75. 1 am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 76. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President by M.A. Qureshi Attachments March 3, 1982 Washington, D.C.  -20- ANNEX I Page 1 of 5 Page I TABLE 3A PERU - SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVEMGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 1285.2 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 303.5 1960 /b 191O /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US5) 230.0 410.0 730.0 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 436.3 691.8 736.9 1324.1 2368.4 POPULATION AND VITAL STATISTICS TOPULATIUN, MID-YEAR (THOUSANDS) 10181.0 13461.0 17149.0 URBAN POPULATION (PERCENT OF TOTAL) 46.3 57.4 66.5 64.2 53.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 28.5 STATIONARY POPULATION (MILLIUNS) 55.0 YUAR STATIONARY POPULATION IS REACHED 2085 POPULATION DENSlTY PEE SQ. KM. 7.9 10.5 13.3 34.3 80.6 PEE SQ. KM. AGRICULTURAL LAND 33.0 44.1 54.6 94.5 133.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YKS. 43.6 44.3 42.8 40.7 30.1 15-64 YRS. 52.0 51.93 53.6 55.3 61.5 65 YRS. AND ABOVE 4.4 3.9 3.6 4.0 8.3 POPULATION GROWTH RATE (PERCENT) TOTAL 2.4 2.,3 2.7 2.4 1.5 URBAN 5.1 5.0 4.3 3.7 3.1 CRUDE BlRTh RATE (PER THOUSAND) 46.4 41.8 37.8 31.4 22.9 CKUDE DEATH KATE (PER THOUSAND) 19.7 14.3 11.1 8.4 9.1 GROSS REPRODUCTION RATE 3.4 3.0 2.6 2.3 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. USERS (PERCENT OF MARRIED WOMEN) .. .. FPOD AND NUTRITION INDEX OP FOOD PRODUCTION PER CAPITA (1969-71=100) 96.0 102.0 86.0 108.3 119.8 PER CAPITA SUPPLY OP CALORIES (PERCENT OP REQUIREMENTS) 95.0 99.C 97.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 62.0 61.C 59.0 65.8 92.5 OF WH1lH ANIMAL AND PULSE 27.0 25.C 24.0 34.0 39.7 IHILD (AGES 1-4) MORTALITY RATE 28.5 19.6 13.7 7.6 3.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 47.7 53.5 58.0 64.1 68.9 INPANT MORTALITY RATE (PER IHOUSAND) .. 122.0/c 86.0 70.9 25.2 ACCESS TO SANE WATEk (PERCENT OF POPULATION) TOTAL 14.6 35.0 48.3 65.7 URBAN 30.2 58.0 60.0 79.7 RURAL 0.8 8.0 25.0 43.9 ACCESS TO EXCKETA DISPOSAL (PERCENT OF PUPULATION) TOTAL .. 36.0 34.0 59.9 URBAN .. 52.0 51.0 75.7 RURAL .. 16.0 .. 30.4 POPULATION PER PHYSICIAN 2011.7 1904.9 1545.1 1728.2 973.3 POPULATION PER NURSING PERSON 2205.0/d 738.0 745.0 1288.2 896.6 PUPULATION PER HOSPITAL BED TOTAL 425.1/e 469.6 542.7 471.2 262.3 URBAN .. 524.8 430.1 558.0 191.8 RURAL .. 3055.3 5747.6 ADMISSIONS PER HOSPITAL BED .. 19.0 23.0 .. 18.2 hOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 4.9 4.8/f URBAN 4.8 4.9T ... RURAL 4.9 4.6/f . AVERAGE NUMBER oP PERSONS PER ROOM TOTAL 2.3 1.9/f URBAN 2.0 1 . f, f RURAL 2.7 2. 4 ... ACCESS TU ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 26.0 32.1/f URBAN 50.7 54.3/f KUKAL 4.2 2.7/f  -21- ANNEX I Page 2 of 5 TABLE 3A PER SAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVERA9ES - MOST, RECENT ESTIMATE) - MOST RECENT HUDDLE INCOME MIDDLE INCOME 1960 /b 1970 lb ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 83.0 103.0 112.0 101.7 105.9 MALE 95.0 111.0 116.0 103.0 109.6 FEMALE 71.0 96.0 106.0 101.5 102.2 SECONDARY: TOTAL 15.0 30.0 50.0 35.3 66.3 MALE 18.0 34.0 53.0 34.9 73.2 FEMALE 13.0 26.0 46.0 35.6 59.5 VOCATIONAL ENROL. (Z OF SECONDARY) 20.0 17.0 16.0 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 34.0 35.0 40.0 29.6 26.8 SECONDARY 12.0 17.0 29.0 15.7 23.6 ADULT LITERACY RATE (PERCENT) 61.0 72.5/f 79.7 80.0 75.4 CONSUMPTION PASSENGER LARS PER THOUSAND POPULATION 8.0 17.1 18.5 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 108.0 135.1 135.4 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 3.2 29.3 50.8 89.0 131.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. 123.3 51.0 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.2 5.7 LANOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3193.9 3896.8 5079.7 FEMALE (PERCENT) 21.1 20.7 22.8 22.6 32.9 AGRICULTURE (PERCENT) 53.0 44.8 37.8 35.0 34.0 INDUSTRY (PERCENT) 19.0 20.1 20.0 23.2 28.7 PARTICIPATION RATE (PERCENT) TOTAL 31.4 28.9 29.6 31.8 42.3 MALE 49.6 45.8 45.6 49.0 56.5 FEMALE 13.2 12.0 13.6 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.6 1.4 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 39 .O/ HIGHEST 20 PERCENT OF HOUSEHOLDS 64.4/S 61.0/f LOWEST 20 PERCENT OF ROUSEHOLDS 2.5/7 1.9/f LOWEST 40 PERCENT OF HOUSEHOLDS 8.0/g 7.07 . POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 235.0 RURAL .. .. 180.0 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US5 PER CAPITA) URBAN .. .. 293.0 513.9 RURAL .. .. 200.0 362.2 385.1 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 49.0 RURAL .. .ot available Not applicable. NDTES Is The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 snd 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1.976 and 1979. /c 1970-75; /d 1964; /e 1962; /f 1972; j Personal income within labor force. * The updated 1980 GNP per capita to be shovwn in the 1981 Bank Atlas is $930 (at 1978-80 prices). May 1981  ANNEX I -22- Page 3 of 5 DEOOIAlTlllt 01 SocIa1. 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