Peru - Third Agricultural Credit Project

RETURN TO rEPO TS DESK RESTRICTED WITI, I N ReportN o.T.O.240a ONE WEKY This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE THIRD LOAN TO THE BANCO DE FOMENTO AGROPECUARIO DEL PERU PERU May 24, 1960 Department of Technical Operations THE T:IRD LOAN TO THE BANCO DE FOMENTO AGROPECUARIO DEL PERU TABLE OF CONTENTS Page No. Summary .......................................... i I. Introduction .................................. 1 II. The Banco's Program . .......................... 1 III. The Banco Agropecuario del Peru ................ 7 IV. Justification of the Project .......c...t...... 11 V. Conclusions and Recommendations ................ 12 ANNEXES 1. Comparative Balance Sheet - Years 1955-1959 2. Banco Lending in the Last Ten Years 3. Long-Term Credits Approved by the Banco 4. Short-Term Credits Approved by the Banco 5. Comparative Statement of Profit and Loss and Income Appropriation 6. Accumulated Reserves 7-A. Loans and Installments in Arrears B. Delinquent Loan Situation as at September 30, 1959 8. Pro Forma Balance Sheet. - i - SUMMARY i. The Government of Peru has requested a third loan of $5 million to the Banco Agropecuario to continue its program of credit for productive investment in agriculture. ii. Loans 10$-?E and 162-E, both of $5 million, provided the Banco with the foreign exchange component of credits for agricultural development amounting to $25.7 million equivalent during 1954 through 1959. Results of this credit program have included the development or improvement of more than 50,000 hectares for irrigation, the establishment of 12,000 hec- tares of permanent plantation crops, the importation of some 1,100 farm tractors plus equipment, and of some 6,500 breeding stock; the erection of over 2,000 kilometers of farm fences and the establishment of agricultural processing plants. The proposed third loan would continue this program for a further three years, with increased emphasis on development of the livestock industries and plantation crops. The total cost of this program, including the Banco's local currency resources, is estimated at $17.2 mil- lion equivalent. iii. The Banco is the only source of development credit for agricul- ture in Peru and its program has contributed significantly to increased exports of agricultural products, particularly cotton and sugar. Continua- tion of the Bancots program is essential if the production aim of the FA0/Bank Agricultural Survey Mission of 1958, which considered that agri- cultural production could and must be expanded by a further 50% during this decade, is to be met. iv. The Banco Agropecuario is well managed and financially sound. Following the rapid growth in the volume of business made possible by the two Bank loans and a steady increase of its capital, a reorganization of its structure and system of accounts was found necessaxy. The main objec- tives of the reorganization have been attained. The management of the Banco, however, recognizes the need for further improvements, which are being pursued. v. The project is sound aAd economically justified, and is suitable for a Bank loan of $5 million equivalent, with a term of eight years, in- 6luding a grace period 8f three*ybars. THE THIRD LOAN TO THE BANCO DE FOMENTO AGROPECUARIO DEL PERU I. INTRODUCTION 1. The Banco de Fomento Agropecuario del Peru (Banco) has asked the Bank for a third loan of $5 million to continue its program of medium and long-term credits to farmers for agricultural development. 2. In November 1954, the Bank made the first loan to the Banco (1-0-PE) of $5 million. This was fully committed by September 1956, and the Bank made a second loan (162-FE) of $5 million to the Banco to meet the foreign exchange requirements for a further two years of its credit program. By the end of 1958, this second loan was fully com- mitted and the Banco requested a third loan, again of $5 million. 3. Consideration of this third request was postponed pending com- pletion of a reorganization of the Bancots structure and system of accounts, which it had found necessary, in order to cope adequqtely with the increased scale of its activities. This appraisal is based on infor- mation obtained by a mission which visited Peru in November 1959. II. THE EANCOIS PROGRAM 4. The FAO/Bank Mssion of 1958 found that it was vital for Peru to increase its agricultural production during the next decade at an annual rate of 3%, representing an increase in 1970 by some 5o% over the level of recent years. The Mission considered that this target was attainable but would require a number of vigorous measures, including a considerable expansion in medium and long-term agricultural credits. The Banco has greatly increased its volume of lending during the past few years, largely as a result of the two Bank loans, but the Mission considered that more resources must be made available for improvement of faxms, purchase of equipment and clearing of new land. The Mission recommended that the capital resources of the Banco be increased and that further sums be added annually to long-term loanable funds by bor- rowing from domestic and foreign sources. - 2 - 5. The Banco's credit policy has been fairly well in line with the Bank/FA0 Mission's recommendations and is intended to remain so. 6. The lending program continues and consolidates preceding programs, taking into consideration the actual results of the operations during the past years. It proposes the lending over three years of $5 million equi- valent of a new IBRD loan (Soles 142.5 million), and of the equivalent of about $12.2 million (Soles 347.2 million) of the Bancors own resources. 7. The details of the Bancols program of developmental credits to September 30,1962 are shown in the following table, which also includes a summary of operations made during the five years up to September 30, 1959 under previous programs. (in million Soles) Program 1954-1955 Program Sept.30,1959 - Sept.30,1962 1958-1959 (Soles 28.50 = US$1.00) Soles at Current Rate-/ 1959/ 1960/ 1961/ Amount Percent 1960 1961 1962 T o t a 12/ Percent 1. Irrigation 78.3 14.5 18.2 20.0 21.8 60.0( 39.0) 12.3 2. Machinery 119.7 22.2 20.1 21.9 23.8 65.8( 64.2) 13.4 3. Betterment of 30.2 5.6 11.3 12.3 13.5 37.1( - ) 7.6 land 4. Livestock 163.2 30.3 43.8 48.1 52.7 144.6( 22.8) 29.5 5. Plantations 119.2 22.2 41.7 45.9 50.4 138.0( 1.2) 28.2 6. Fencing 8.0 1.5 3.4 3.7 4.0 11.1( 9.0 2,3 material 7..Miscellaneous 20.2 3.7 10.1 11.0 12.0 33.1( 6.3) 6.7 Total 538.8 l000 148.6 162.9 178.2 489.7(142.5) 100.0 From the Banco's 298.3 55.3 104.9 115.4 126.9 347.2 70.9 own resources IBRD loan 240.5 44.7 43.7 47.5 51.3 142.5 29.1 The rate of execution of the program is based on the average demand during the fiscal year 1958/59, with the assumption of an annual increase of about 10%. This percentage is slightly under the average increase in soles at constant value of operations during the last five years. 8. The demand by farmers for credit in foreign currency dropped markedly with the depreciation of the sol beginning January 1958 and fur- ther with the fall in world market prices for cotton, sugar, coffee and wool. The exchange risk on credits extended by the Banco under the Bank 1/ Between January 1958 and July 1959 the sol depreciated from 19 to a low of 30 to the dollar; it has recovered slightly from August 1959. 2/ Figures in brackets represent component in foreign exchange. - 3 - Loans for the production of export crops is passed on to farmers although the exchange risk on credits under the two previous loans for production of crops for domestic markets had been carried by the Government. W'hen, however, the Government lifted price controls on meat, milk and other foodstuffs in July 1959, it informed the Banco that it would not in fu- ture carry this exchange risk. Since that date farmers have been carry- ing the exchange risk on all new credits from the Banco against foreign currency. This has not further depressed the demand for credits because prices for domestic products and for the most important exports have sub- stantially improved and because the value of the sol has since stabilized. Recent indications are that there should be a progressive resurgence of demand for long-term credits in accordance with the Banco's forecasts. 9. As under the previous program, the main emphasis of the pro- posed program is on the livestock industry, which, under the items "Livestock" and "Fencing Materials" accounts for 31.8% of the total. Plantation crops, mainly for export, are next in importance with 28.2% of the total. The various sectors of the B.anco's long-term lending program are reviewed below. Irrigation 10. During the five years from 1954 to September 30, 1959, the Banco lent S/78.3 million, or 14.5% of its long-term credit, for irriga- tion. New irrigation facilities have been provided, or existing irriga- tion systems have been improved, on over 50,000 hectares of land in the Costa. The works financed have been well-drilling, leveling of land and digging and lining of canals. Loans have been generally made for small individual projects. 11. For the near future, investment priority would be given to im- proving the water supply of existing irrigated areas and the efficient use of this water, rather than construction of new projects. Improve- ments mostly involve pumps, leveling of land, work on the network of canals, provision for the storage of night-flow, change to sprinkler irrigation and drainage measures to avoid salinity problems. The aver- age cost per hectare is relatively low as compared with new development. Foreign exchange costs for imports of pumps, motors, piping and other materials would amount to about S/39 million (US$1.37 million) of the total allocation of S/60 million. Mechanization 12. Agricultural mechanization was encouraged by the machinery pools financed by Loans 67-PE and 98-PE, totalling $3 million, and has since progressed rapidly, particularly on the large farms growing cotton, sugar cane and rice on the Costa. In 1952 there were about 3,000 farm tractors in operation in Peru. A subsequent annual average increase of about 800 has brought the number of tractors in use to about 8,000 at the end of 1958. Under Loans 105-PE and 162-PE the Banco financed about 25% of the total increase in Peru's tractor fleet. The development of mechanization has resulted in an expansion of the cultivated area together with the release for other uses of some 3,000 hectares annually (pasture formerly needed to support draft animals). 13. The FAO/Bank Agricultural Survey Hission considered that there is still ample scope, particularly on the moderately sized to smaller properties of the coastal area, for a considerable further increase in the use of tractors and equipment. However, their estimate that the number of tractors in use in Peru by 1968 would be between 19,000 and 27,000 appears too high. 14. During the last two years the expansion of mechanization has been slowed down because of low farm prices and instability of the local currency. This has particularly affected the Bancots volume of loans for the purchase of tractors and equipment. The sector of the program for mechanization is, therefore, reduced and amounts to S/65.8 million. s/64.2 million (US$2.25 million) would be in foreign currency. The Banco would continue to finance the purchase of farm tractors and equip- ment imported through normal trade channels. Credits would be restricted to purchase through machinery distributing firms which maintain adequate services and supplies of spare parts. Betterment of Land 15. This sector of the program would be entirely financed in local currency and would be generally confined to the coastal area. Land and soil fertility would be improved by drainage, leveling and proper culti- vation methods and some on-farm access roads would be built. Farmers now realize the advantage of improving their land by these means and there should be firm demand for credits amounting to S/37,1 million allocated in local currency under the Bancots program. Livestock 16. During the last few years, imports of animal products accounted for about 30% of all imports of agricultural products. Animal product imports averaged 88 million tons valued at $15 million during 1951-1955; they averaged 155 million tons valued at $21 million during 1956-1958. 17. In addition to the scope for import saving, livestock husbandry is the chief and, at times, only possible activity of many regions of high elevation. It is, therefore, necessary to continue and intensify the efforts that have been made to develop the livestock industries. The Banco, with this in mind, has increased its allocation for credits for purchase of livestock to S/ 144.6 million, or nearly 30% of its program. However, the allocation of foreign exchange has been reduced by half to S/22.8 million equivalent, or US$800,000. This is because the Banco intends to follow the recommendation of the FAO/Bank Mission to encourage the local breeding of improved livestock, 18. Breeding stock, both pedigree and non-pedigree, would be im- ported at a reduced rate under the proposed program. From 1955 through 1958, imports financed with Bank funds totalled about 4,500 head of cattle and 2,000 sheep as compared with total imports of livestock not for slaugh- ter of 3,000 head of cattle and 4,500 sheep. About 25% of the financed cattle and Oo% of the sheep were pedigree stock. 19. Imports of sheep have been directed primarily at the improvement of local breeds by up-grading; partly by the use of rams bred in Peru from imported stock, and partly by artificial insemination which treated some 30,000 ewes in 1958. Since there are about 15 million criollo sheep in Peru, the impact on the national production of wool and meat is still very limited. Although the gradual improvement of breeds is only one of the measures necessary to improve sheep production, some imports of sheep breeding stock should be continued. The fencing materials item of the Bancots program is also related to improvement of the sheep industry. 20. Cattle imported under the Bank loans have been almost all milk- ing cows, of which about 25% have been pedigree stock and the balance non-pedigree, purebred cattle. Most of the latter have been imported from nearby countries. 21. The demand for milking cows has come mainly from irrigation farm- ers on the Costa who provide milk for city supply. Except for those who run pedigree cattle and breed their own producing stock, these farmers have found it cheaper to import young dairy cows than to meet high transporta- tion costs from inland areas. Since, however, current road improvement programs and road projects under consideration should substantially reduce costs of transportation to the Costa, the Banco intends to co-operate with the Ministry of Agriculture (and SCIPA) in developing a program of inland breeding of dairy cows for productive use on the Costa. The Banco would also directly encourage this development by giving priority in its loans to fencing and other land improvements and purchase of cattle, including imports of pedigree stock, for this purpose. 22. As development of local breeding is a long-term proposition, imports of non-pedigree cows of dairy breeds would continue to be necessary for some time. Disbursements against the loan for imports of non-pedigree cows of dairy breeds would, however, be limited to 4400,000, except with the agreement of the Bank. 23. Meat imports (mainly beef) amounted to about 12,000 metric tons at a value of $7.4 million equivalent in 1958. The recent abolition of subsidies on imported meat and removal of domestic price control have im- proved prospects for expansion of production. Road construction projects contemplated would also open up major areas suitable for beef cattle rais- ing. Few beef cattle were imported under previous loans but stronger de- mand is now expected. Both pedigree and non-pedigree beef cattle will be required with emphasis on bulls for grading up local herds. Permanent Crops and Plantations 24. Generally satisfactory results have been obtained from the deve- lopment of plantation crops and demand for credits under this sector has been steadily expanding. Farmers on the Costa realize the advantage of having a more diversified crop pattern, and have been establishing fruit orchards, mainly citrus. flantations of coffee, cacao, tea, rubber and - 6 - bananas are being developed in the Aontana (Eastern slopes of the Andes) and the Selva (tropical forest). Progress since 1954 in the development of prennial tree crops has been as follows: Hectares Developed in: Costa Montana and Selva Total 1954/55 77 969 1,046 1955/56 1,580 950 2,530 1956/57 1,301 1,275 2,576 1957/58 2,o44 2,020 14,064 1958/59 - - 2,000 (estimated) 25. Survey and other preliminary work on the proposed road projects to connect the Costa with Pucallpa and Yurimaguas have already encouraged in- vestment in plantations on suitable lands along the right of way. The Banco estimates that new areas planted with tree crops will increase by some 2,000 hectares annually over the next three years, bringing the area planted under the program to about 18,000 hectares by 1961/62. 26. Almost all credit requirements of the sector estimated at S/ 138 million are in local currency. A token allocation of S/ 1.2 million in foreign exchange (US$%0,000) has been made mostly to cover imports of plants. Fencing Materials 27. Fencing materials imported by the Banco have so far been used mainly by sheep breeders in the South and Central Regions of Peru. Since the incep- tion of the loan program about 1,100 kilometers of fencing have been financed in the Puna area alone. Some fencing has been done by cattle raisers in the Piura Region. 28. The FAO/Bank Mission considered that the development of good pas- tures and breeding practices had been restricted by the fragmentation of land holdings and the lack of fences, and that the erection of fencing, combined with better practices in general, could increase production by 15% to 30% over a decade. The Banco expects a continuing demand for loans for fencing material and pasture improvement as a complement to lending under the livestock sector of the program. The allocation to this sector amounts to S/ 11.1 million, of which S/9 million (US$0.32 million) would be in foreign exchange. It is comparatively higher than the corresponding allocation in the preceding programs. Miscellaneous 29. The Banco utilized most of the previous Bank loan funds in this category to finance a milk processing plant in Lima which received two loans amounting to $410,000 equivalent (S/7.8 million). The Banco also financed seven coffee de-pulping and drying plants, a coffee warehouse, improvement of a sugar factory in the South and one cacao and one grain cleaning plant. 30. During the past year the Banco has started to extend loans to fin- ance the opening of new collection centers of forest rubber in order to meet increasing domestic demand and reduce the need to import natural and synthe- tic rubber. The Banco also contemplates the financing of additional small coffee and tea processing plants in the areas of new plantations as production begins. Bank loan funds for this sector would amount to S/6.3 million (US$22l,OOO), or 19% of the total allocation made which amounts to S/33.1 million. 31. No allocations have been included in the above program for the development of the lands of the Quiroz-Piura project. The Banco feels that such development calls for a special lending program to be studied in due course. III. THE BANCO AGROPECUARIO DEL PERU Organization and Hanagement 32. The Banco is a Government owned institution, which was established in 1931, to operate in the field of crop and livestock credit, where existing facilities were inadequate. It has rapidly expanded its activities since 19)49, when certain annual tax revenues were earmarked to augment its capital. 33. It is not only a credit institution. It also provides agricultural extension services, and engages in certain commercial activities, some of which it inherited from other agencies which it absorbed. 34. In addition, the Banco undertakes special commercial operations as agent for the Government, for which it receives commissions which form an important part of its revenues. 35. The Banco thus carries out a variety of functions, which complicate its administrative problems. 36. The freedom of judgment of the Banco's Board of Directors has not been limited by political pressures, although six of its eleven members, in- cluding the chairman, are Government nominees (none of them hold public office). The other five represent respectively the Central Bank, the com- mercial banks, the Cattlemen's Association, the National Agricultural Society and the Agricultural Engineers' Association. 37. The Banco has an effective management. The present General Manager has served since 1954 (with two short absences while he was Minister of Agri- culture). 38. The head office is in Lima. There are ten branch offices, which control 36 agencies and 47 sub-agencies throughout the country. 39. The increase in the scale of the Banco's activities necessitated a reorganization in 1958, which was designed to decentralize responsibility and to improve the flow of information needed by management for more effective control and planning of operations. 40. This reorganization is not yet fully effective, and there is room for further improvement. The Kission agreed with the management and their auditors (Price Waterhouse & Peat) on various steps which would be taken to improve the definition of responsibilities, the appraisal and supervision procedures, cost accounting and the provision of information needed by the management. - 8 - Development of Financial Situation and Operations 4l. Condensed balance sheets as at the end of the last five financial years are given in Annex 1. Total resources have almost doubled in the last four years. Paid in capital (all owned by the Government) has increased from about 215 to a little over 290 million soles, as earmarked tax revenues have become available. Nearly S/200 million have been drawn from the two Bank loans. Other funds from Government sources (deposits, loans and dis- count facilities) have increased from about S/500 million to about S/750 million. Reserves have risen from S/30 to nearly S/ 100 million. 42. During the same period, the loan portfolio has risen from about S/670 million to S/ 1,200 million. These figures include respectively S/381 and S/425 million of loans made on behalf and at the risk of the Government. 43. The growth in the volume of the Banco's transactions can be seen from Annex 2, which covers the last ten years, and Annexes 3 and 4, which analyze the long and short-term credits granted since the first Bank loan in 1954. Rather more than half the amount of long-term loans during the first three years of this period was financed with the proceeds of the two Bank loans. In the last two years local currency loans aggregated almost twice as much as those financed by the Bank, the volume of which has per- sistently declined (see paragraph 8). In 1958/59 the Banco made 1331 long- term loans aggregating S/ 121.6 million. The average size of loan was about $3,200 equivalent. 44. The volume of short-term loans has grown steadily, both the num- ber of operations and the total amount involved having more than doubled during the last five years. In 1958/59 nearly 19,000 short-term loans were made, aggregating some S/630 million. The average amount was less than $1,200 equvalent. There has been a rapid increase in the number of loans, and a decline in their average amount, in the last two years. 45. Condensed profit and loss statements for the last five fiscal years are given in Annex 5. Gross revenues have more than doubled during this pe- riod (from S/50 to S/ 111 million), while net income rose from S/ 12.5 mil- lion in 1954/55 to about S/27 million in 1957/58, and fell in the following year to S/ 17 million. This decline resulted partly from a banking strike, partly from reorganization expenses, and partly from increased interest charges on the Bank loans. All available income has been appropriated to reserves, no dividends having been paid. The development of reserves is shown in Annex 6, 46. It should be noted that the profit and loss acounts do not include all the amounts of accrued interests receivable, and it is not known to what extent this distorts the earnings picture. In addition, credit has been taken for delinquent interest not received (the amount of which has been added to the borrowerts loan account). The improved accounting system should eliminate these deficiencies. 47. The accounting system in use in these years did not permit any analy- sis of the relative profitability of the Banco's various types of activity. The heavy administrative expenses (consistently more than 50% of gross revenues) reflect the cost of maintaining a country wide system of branches and agencies - 9 - engaged not only in administering a large number of small loans, but also in extension and other services for which no income is received. 48. The improved accounting system should permit analysis of the costs and earnings of the Bancols different activities, and should enable the man- agement to decide what could be done to reduce administrative expenses. It would be some time before this information becomes available. However, the management recently decided to increase interest rates from 7% to 9% (plus 2% commission) on new loans of over S/50,OO0 made after May 1, 1960. They estimate that this should increase earnings in 1960/61 by about S/7.5 million and in 1961/62 by about S/ 10 million which should again place earn- ings on a satisfactory level. Quality of Portfolio 49. While the proportion of delinquent loans has been growing for some years, and is high, losues have been insignificant, since loans are well se- cured, and reserves appear adequate. 50. The development of delinquency during the last four years is shown in Annex 7, which also shows the proportion of long and short-term loans de- linquent as at September 30, 1959. The figures do not include loans made on hehalf of the Government. 51. The amount of short-term loans and installments on long-term loans in arrears rose in the last three years from S/55 million to S/155 million, which represented about 15% and 21% respectively of the total outstanding. In September 1959 more than a quarter of all long-term loans were in arrearss with unpaid installments representing 12.8% of the total amount outstanding. More than one quarter of the short-term loans were also delinquent, repre- senting more than 30% of the amount outstanding. It should be noted that about half the total delinquent was less than 90 days in arrears. 52. This situation is less serious than it appears to be. It is the Banco's policy to cut the terms of its loans to a minimum. Repayment dates of short-term loans, to be liquidated from the proceeds of crop sales, are related as closely as possible to the expected harvesting date, in order to keep a tight control over repayments. On long-term loans, the Banco's stat- utes permit terms up to 10 years. In practice, irrigation credits are given for 4-8 years; plantation development credits from 6-8 years; and machinery credits for as little as 2 years. The Banco's policy is to take the risk of a period of delinquency by setting minimum terms, rather than to make loans on longer terms than might prove necessary in favorable circumstances. 53. However, the bulk of the existing delinquencies are due to poor markets for the principal crops during recent years. Prices for export crops dropped considerably, as mentioned in paragraph 8 above. Domestic prices, especially for rice and meat, were held down by Government policy at the same time. Costs have reflected the increase in the general price level, and borrowers of Bank funds have been hit by the devaluation. 54. No rapid improvement of the delinquent debt situation can be ex- pected. However, domestic price controls have now been lifted, and the mar- ket outlook for export crops is rather better, so that there is reason to hope for a gradual improvement. - 10 - 55. Losses are not expected to be large. During the last five years, it has been necessary to write off only S/906 million. Loans are well se- curedj and reserves for bad debts amounted in September 1959 to about S/50 million, equivalent to 63% of loans more than 90 days delinquent, and to about 32% of total delinquencies. The Banco's financial situation, there- fore, does not appear to be jeopardized. Financial Requirements and Resources 56. The Banco's estimated requirements of funds for purposes other than short-term credit operations during the three years ending September 30, 1962, are as follows: (in million soles) Long-term loans (see para.7) 489.7 Net increase in fixed assets 11.2 Repayments to IBRD 311.4 Total 642.3 57. The resources from which it expects to meet these requirements are as follows: Retained earnings 56.3/1 Capital increases 88.1 Repayments from borrowers 360o IBRD loan withdrawals 142.5 Total 647.2 58. The estimates of retained earnings, capital increases and loan re- payments have been conservatively based on past experience. Provided, there- fore, that a Bank loan of $5 million equivalent is granted, the Banco should have adequate resources to meet its requirements. 59. Adequate funds for short-term credit operations are expected to be available from deposits by the Government and its agencies, supplemented by discount facilities with the Central Bank. Prospective Financial Situation 60. Pro forma balance sheets as at the end of each of the three years of the proposed program are given in Annex 8. The amount due to the Bank is expected to remain more or less unchanged, since repayments will approxi- mately balance withdrawals. The expected increase in equity would reduce the debt-equity ratio from 35:65 to 28:72. 1/ Not adjusted to reflect recent increase in interest rate on new loans granted. - 11 - IV. JUSTIFICATION OF ThE PROJECT 61, The proposed loan would provide the foreign exchange necessary for continuing the Banco's program of productive investment in agricul- ture. As the only source of development credit for agriculture, the Banco's program provides the necessary supplement for private investment required for the improvement and expansion of agricultural production. 62. Credits made by the Banco under the two previous loans have been widely dispersed throughout the country and it is impossible to isolate their considerable impact on agricultural production. In physical terms, however, the results of the previous loans have included: the im- provement or development of more than 50,000 hectares of irrigated land (the average value of production per irrigated hectare in Peru is about S/ 10,000); the importation of some 1,100 farm tractors plus equipment (the average area cropped with one farm mechanization unit is about 60 hectares); the development of some 12,000 hectares of permanent planta- tions; the importation of some 6,500 breeding stock; the erection of over 2,000 kilometers of fences, and the establishment of a milk plant and nine other agricultural processing plants. 63. Most investments under the program have been made for production of cotton, sugar, and milk on the Costa, and for plantation crops in the Montana and the Selva. Although home consumption of these products has been increasing, the bulk of the increased production, except for milk, has been exported. In the case of cotton, exports for the five years end- ing 1955 averaged 80,000 metric tons valued at $72 million. During the three years (1956 through 1958) of the Bank financed program, exports of cotton averaged 98,000 tons valued at $76 million. In 1957 the trend of increasing production was reversed by an exceptionally bad season. There was quite a good recovery in 1958 in spite of the serious fall in export prices and rising costs of production. Statistics are not yet available for 1959, but a bigger crop was expected and prospects for the 1960 crop are good. Sugar exports increased from an average of 376,000 tons, real- izing $3,. million for the five years ending 1955, to an average of h)45,000 tons valued at $39 million during the next three years. During the same period, net exports of coffee increased from an average of 4,080 tons ($5 million) to an average of 11,500 tons (612 million). 64. There have also been import savings through increased production of milk and tea, Imports of milk products fell from 7)4,5000 tons in 1956 to 47,300 tons in 1958. Net imports of tea fell by nearly two thirds during this period. 65. The results of continuing the Banco's program under the proposed third loan would include: the improvement of irrigation facilities and the more effective use of the water on some 40,000 hectares of land now under partial irrigation; the importation of about 500 tractors plus equip- ment; the development of a further 6,000 hectares of plantation crops; the importation of over 1,000 head of breeding stock; the erection of about 2,500 kilometers of fencing, and the establishment of rubber, tea and cof- fee processing plants. - 12 - 66. The very considerable financial benefits which would be obtained from this program cannot be accurately estimated. The justification for the proposed third loan should be assessed on the more general grounds of the need to continue to expand agricultural output in Peru. The FAO/Bank Survey Mission considered that agricultural production must be expanded by around 5010 during this decade to retain a reasonably balanced economy; to meet the food needs of population growth, to increase export earnings, and to prevent further increases in imports of agricultural products. V. CONCLUSIONS AND RECO1MENDATIONS 67. The program of agricultural development which the Banco has asked the Bank to finance is an extension of Bank-financed programs. It is sound and economically justified. 68. The prospective borrower has the financial, managerial and tech- nical resources to pursue its activities and to utilize the loan effectively. The Bank should continue, however, to assist the Banco in its reorganization and operational procedures. 69. The yrogram is suitable for a Bank loan of the equivalent of $5 mil- lion for a period of eight years, including a grace period of three years. ANNEX 1 BACO AGROPECUARIO DEL PERU COTTARATIVE BALANCE SHEET AS AT SEPT.30,1955 - SEPT.30,1959 (in million soles) ASSETS 1955 1956 1957 1958 1959 Cash in hand and 50.2 50.1 65.0 151.6 106.9 in banks Portfolio Short-term loans 268.6 144.9 208.7 285.9 346.5 Long-term loans - 202.3 265.4 346.5 383,0 Loans on behalf of Gov. 381.1 297.1 358.6 436.7 425.5 arious debtors 20.9 238 36.5 151o 45.6 670.6 665.1 869.2 1,220.1 1,200.6 Inventories ( 27.8 15.5 15.1 28.4 28.1 Fixed Assets ( 13,4 15.0 16.1 24.6 Other 31.3 45.3 82 225 16.0 Total 779.9 792.4 1,012.5 1,438.7 1,376.2 LIABILITIES Authorized capital 400.0 400,0 400.0 400.0 00.o Not paid-in 18.9 156.6 132.8 108.9 108.4 214.1 243.4 267.2 291.1 291.6 Reserves 30.1 41.4 59.4 84.1 97.6 Special Reserves .9 .9 .9 - - Deposits of Govt. and 110.6 72.4 197.5 316.0 250.4 Govt. agencies Banks: Panco Central 82.5 91.7 60.0 141.0 110.0 Domestic-banks .3 .3 3.-9 5.9 .3 I.B.R.D. 6.3 47.9 98.8 170.0 205.10) d9.1 139.9 162.7 316.9 315.4 Operations on behalf of Govt.(discounts 302.1 259.0 284.6 393.7 388.8 in Central Bank and others) Other accounts 31.7 35.1 39.8 36.7 32.4 Profit 1.3 .3 .4 .2 - Total 779.9 792.4 1,012.5 1,438.7 1,376.2 ANREX 2 BANCO AGROPECUQRIO DEL PERU BANCO LENDING IN THE LAST TEN YEARS (in million soles) Governmentfs Operations Fiscal long-Term loans Short-Term Loans Total Loans at End of Fiscal Year Year Number Amount Number Amount Number Amount (Amount) 1949/50 - 23.2 - 92.6 6,708 115.8 3.5 1950/51 - 30.8 - 122.2 8,041 153.0 0.8 1951/52 - 35.1 - 18.4 8,590 183.5 4.3 1952/53 902 56.7 8,08% 186.9 9,386 243.6 68.5 1953/54 707 39.7 8,463 236.0 9,170 275.7 294.9 185.5 786.1 41,895 971.6 1954/55 551 72.8 8,482 260.1 9,033 332.9 293.6 1955/56 1,134 108.8 9,383 318.2 10,517 427.0 314.5 1956/57 1,191 126.6 9,885 393.3 11,076 519.9 358.4 1957/58 1,169 109.0 14,734 516.1 15,903 625.1 52.0 1958/59 1,331 121.6 18,804 628.2 20,135 749.8 414.5 5,376 538.8 61,288 2,115.9 66,664 2,654.7 ANNEX 3 BANCO AGROPECUARIO DEL PERU LONG TERM CREDITS APPROVED BY THE BANCO (in million soles) 1954-1955 1955-1956 1956-1957 1957-1958 1958-1959 Number Amount Number Amount Number Amount Number Amount Number Amount I. Irrigation 70 9.0 126 14.7 143 29.5 106 10.6 137 14.5 II. Mechanization 93 18.2 260 29.5 308 33.9 222 23.3 157 14.8 III. Betterment of Land 12 2.2 37 10.2 32 5.4 32 6.9 33 5.5 IV. Livestock 196 33.5 434 32.9 386 32.8 355 31.9 474 32.1 V. Permanent Crops and Plantations 172 7.6 255 13.6 299 21.8 410 33.1 417 43.1 VI. Fencing Material 1 0.1 8 2.1 8 0.6 33 2.0 36 3.2 VII. Miscellaneous 7 2.2 14 5.8 15 2.6 11 1.2 77 8.4 Total 551 72.8 1,134 108.8 1,191 126.6 1,169 109.0 1,331 121.6 Loans: From. own resources 376 37.0 717 49.2 714 63.6 774 59.8 1,015 88.7 From IBRD loans 175 35.8 417 59.6 477 6.0 395 49.2 316 32.9 Total 551 72.8 1,134 108.8 1,191 126.6 1,169 109,0 1,331 121.6 ANNEX 4 BANCO AGROPECUARIO DEL PERU SHORT TERM CREDITS APPROVED BY THE BANCO (in million soles) 1954-1955 1955-1956 1956-1957 1957-1958 1958-1959 Number Amount Number Amount Number Amount Number Amount Number Amount Loans to Small Farmers Agriculture 7,318 59.0 8,154 62.7 8,480 70.8 9,998 92.3 13,444 138.2 Livestock 91 2.2 118 2.9 154 3.8 3,282 12.3 3,748 14.2 Sub-Total 7,409 61.2 8,272 65.6 8,634 74.6 13,280 104.6 17,192 152.4 Loans to Large-Scale Farmers Agriculture 740 180.4 812 234.1 903 298.1 995 377.8 1,091 439.9 Livestock 60 10.0 85 9.4 101 11.2 06 15.6 108 16.2 Sub-Total 800 190.4 897 243.5 1,00k 309.3 1,101 393.4 1,199 456.1 O t h e r s 2 7 3 8 .5 2 1 4 9 .1 2 4 7 9 .4 3 5 3 1 8 .1 4 1 3 1 9 .7 Grand Total 8,482 260.1 9,383 318.2 9,885 393.3 14,734 516.1 18,804 628.2 ANNEX 5 BANCO AGROPECUARIO DEL PERU COMPARATIVE STATE11ENT OF PROFIT AND LOSS AND INCOME APPROPRIATION (in thousand soles) 1954/55 1955/56 1956/57 1957/58 1958/59 i110m Interests and commis- 39,1485 49,903 59,171 74,856 88,208 sions received Profit on rubber 9,756 9,871 14,605 16,252 13,533 Profit on exchange - - - 9,569 )4,515 Various revenues 1,266 1,053 ,82 2,387 5232 Total 50,507 60,827 714,600 103,064 111,488 EXPENDITURES Salaries and general 23,778 29,575 34,533 46,129 55,353 expenses Interests and com- 10,034 11,723 15,150 22,316 28,5L40 missions paid Depreciation 3,424 4,490 5,147 5,753 6,920 Various expenses 763 563 83 1,572 349 Total 37,999 46,351 55,313 75,770 94,162 Reserves against bad debts 7,251 8,970 13,088 10,625 7,938 Other reserves 399 356 73 9,569 - Reserves for social benefits to personnel 3,545 4,839 5,765 6,945 9,371 Income after reserves 1313 311 361 155 17 Net Income 12,508 14,476 19,287 27,294 17,326 Total 50,507 60,827 7h,600 103,064 111,488 ANNEX 6 BANCO AGROPECUARIO DEL PERU ACCUMIATED RESERVES (in million soles) 1954/55 1955/56 1956/57 1957/58 1958/59 Purpose Bad debts 17.6 24.9 37.5 45.1 49.8 Persounel indcmnity 8.1 11.3 15.3 20.3 26.9 Retirement fund 1.7 2.9 4.2 5.9 7.8 Other 2.7 2.3 2.3 12.8 13.1 Total 30.1 41.4 59.3 84.1 97.6/1 RESERVES AGAINST BAD DEBTS Reserves at beginning 10.8 17.6 24.9 37.5 45.1 Added to reserves 7.6 9.0 13.1 10.6 7.9 Write-off 0.8 1.7 0.5 3.0 3.22 Reserves at End 17.6 2h.9 37.5 45.1 49.8/ 1/ It should be noted that the net increase in reserves out of profits represents only in part new resources for the Banco. Not all interests carried to the Profit and loss Account have been in effect received. The accounting system does not indicate the amount of interest in arrears which is capitalized to the borrowers' loan accounts. 2/ This figure includes 0,h which has been transferred to "Other Reserves". ANNEX 7 BANCO AGROPECUARIO DEL PERU DELINQUENT AGRICULTURAL LOAN SITUATION (Amounts in million soles - Approximate Figures) A. DEVELOPMENT OF THE DELINQUENT LOAN SITUATION FROM SEPT. 30, 1956 Period in Arrears Sep.30, 1956 Sep.30, 1957 Sep.30, 1958 Sep.30, 1959 Amount % Amount % Amount % Amount 7 Up to 30 days 5.5 1.5 19.4 3.8 22.0 3.3 27.1 3.7 From 31 to 60 days 9.0 2.4 9.7 1.9 15.9 2.4 24.7 3.3 From 61 to 90 days 9.7 2M6 13.9 2.7 16.1 2.4 25.3 3.5 24.2 6. 43.0 8. 54.0 8.1 77.1 10.5 Over 90 days 31.2 8.4 42.5 8.2 59.6 9.1 77.9 10.7 Total Arrears 55.4 14.9 85.5 16.6 113.6 17.2 155.0 21.2 Total Agricultural Portfolio 370.9 100.0 506.9 100.0 660.2 100.0 729.5 100.0 B. DELINQUENT LOAN SITUATION AS AT SEPT. 30, 1959 1. NUMBER Long-Term Loans Short-Term Loans T o t a 1 Number % Number % Number % Loans Outstanding 5,425 100.0 18,545 100.0 23,970 100.0 Loans in Arrears 1,317 24.5 6,896 26.4 6,213 25.9 2. AM 0 UNT Long-Term Loans Short-Term Loans T o t a 1 Amount % Amount % Amount % Loans Outstanding 383.0 100.0 346.5 100.0 729.5 100.0 Installments in Arrears 49.0 12.8 106.0 30.7 155.0 21.2 ANNEX 8 BANCO AGROPECUARIO DEL PERU PRO FORMA BAIE SBEET As at September 30 (in million soles) Actual Forecast Forecast Forecast 1958/59 1959/60 1960/61 1961/62 ASSETS Cash and banks 106.9 110.0 110.0 110.0 Short-term loans 346.5 363.8 382.0 401.0 Loans on behalf of Govt. 425.5 401.0 409.5 430.0 Various debtors 15.6 73.5 76.5 79.5 long-term loans 383.0 431.6 474.5 512.7 Fixed Assets & inventories 52.7 55.9 59-9 63.9 Other assets 16.0 18.0 20.0 22.0 Total 1,376.2 1,453.8 1,532.4 1,619.1 LIABILITIES Capital 291.6 331.9 355.9 380.0 Reserves 97.6 116L.9 132.9 153.9 Deposits 250.4 262.0 274.0 287.0 Banks Banco Central 110.0 120.0 130.0 140.0 Commercial banks .3 1.0 1.0 1.0 I.B.R.D. 205.1 203.9 20L.3 206.2 Operations on behalf of the Govt. 388.8 386.0 399.0 415.0 Other Accounts 32.4 34.1 35.3 36.0 Total 1,376.2 1s453.8 1,532.4 1,619.1