Peru - San Lorenzo Irrigation and Land Settlement (Stage Three) Project

RESTRICTED Report No. P-425 FILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR THE SAN LORENZO IRRIGATION PROJECT April 12, 1965  REPORT AIND RECOM1MENDATION OF THE PRESIDENT TO TTIE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC (F PERU FOR THE SAN LORENZO IRRIrGATION PROIJECT 1. I submit the following resort and recommendation on a pro- posed loan of an amount in various currencies equivalent to "$ll million to the Republic of Peru. The loan would help finance the Third Stage of the San Lorenzo Project consisting of the reclamation, irrigation and settlement of sections of the Piura area as well as the cost of a general basin survey of the Tumbes, Piura and Lambayeque regions in North-Vestern Peru. PART I - PfRODUCTION 2. In response to the request of the Peruvian Government, a Bank mission visited the San Lorenzo Project Area in September-October, 1964 to appraise the project. The background of the Peruvi&n Government request and the history of the execution of Stages I and II of the project are described briefly in paragraph 7 below. 3. Negotiations for the loan began in Vashington on March 9, 1965. The Government and the San Lorenzo Management were represented by Mr. Renato Rossi, Director of the San Lorenzo Project. 1. The proposed loan would increase the total of Bank loans to Peru from $123.3 million to 113h.3 million net of cancellations. The status of previous Bank loans as of February 28, 1965 is summarized as follows:  -2- ($ million) Amount Date of Original Undisbursed Re- No. Agreement Amount Balance paid (net of cancel- lations) Republic of Peru,_Borrower 57 Callao Port 1/23,1952 2.4 - 2.0 67 Scipa 7/8,1952 1.3 - 1.3 98 Scipa h/12,1954 1.7 - 1.7 1114 San Lorenzo 4/5,1955 18.0 - 3.0 127 Highway Maintenance 8/5,1955 5.0 - 5.0 271 Aguaytia-Pucallpa Road Project 12/19,1960 5.5 2.7 0.2 300 Highway VIaintenance & Improvement 11/3,1961 10.0 0.9 0.6 373 Paita Port 4/22,196L 3.1 2.6 - Republic of Peru, Guarantor 105 Banco Agropecuario 11/12,1954 5.0 - 5.0 162 Banco Agrooecuario 3/13,1957 5.0 - 5.0 257 Banco Agropecuario 6/1,1960 5.0 - 2.1 116 Pacasmayo eement 4/19,1955 2.5 - 1.2 334 Peruvian Corporation 3/13,1963 13.2 3.9 - 205 Callao Port 9/17,1958 6.6 2.3 0.7 260 Lima Light 6/29,1960 24.0 0.3 - 365 Limna Light 11/22, 1963 15.0 9.7 - Totals 123.3 22.h 27.8  -3- $ million Total loans, net of cancellations 123.3 of which repaid 27.8 Balance outstanding 95.5 Amount sold $11.6 of which repaid 8.0 3.6 Net Amount held by the Bank 91.9 5. The total outstanding includes $22.4 million undisbursed as of February 28, 1965. On the whole, loan disbursements have been pro- ceeding regularly. There are four loans, however, which have been affected by difficulties of various kinds. (i) the largest portion of the undisbursed amount of $22.4 million is represented by the balance available to Lima Light and Power Company under the loan made in November 1963 for the construction of the Second Stage of the Huinco Power Plant. The works have been delayed by about one year but are now pro- ceeding satisfactorily; (ii) an amount of $2.7 million for the reconstruction of the Aguaytia-PucalLpa Road is still to be disbursed. Terrain difficulties and adverse weather conditions have delayed the project by two years; it is now rescheduled for completion by the end of 1966; (iii) major delays have occurred in the execution of the Port of Callao expansion project owing to unforeseen physical obstacles and lack of coordination of the work of the Port Authority, consultants and contractors' consortium. The clos- ing date of the loan of December 31, 1964 has now expired. The Bank has informed the Government of Peru and the Port Authority that a revised closing date will be considered after a new overall work schedule and cash flow are worked out and agreed by the parties concerned and that financing of the local expenditure for the project is assured. In the meantime, disbursements would be made only for certain works which are proceeding normally;  - 4 - (iv) contrary to the three cases mentioned above, the Peruvian Corporation Project is being carried out on schedule and most of the balance of the loan will be used to pay for equipment already ordered from the manufacturers. However, in spite of the benefits which the Corporation is now begin- ning to enjoy as a result of the rehabilitation of the railroad, the Corporation is in a difficult financial position and had to ask for a moratorium - which was granted - for the payment of the October 1, 1964 installment on the Eximbank loans. The Bank is not immediately involved as the first principal repay- ment is not due to the Bank until December 1, 1967 and the first cash payment of interest is expected on December 1, 1965. While traffic is increasing substantially, the Corporation's finan- cial position has deteriorated because of wage increases which could not be matched with an adequate increase in tariffs. Competition by road carriers is very keen for certain types of traffic. A financial reorganization plan is now being studied by the Government and the Corporation, which is expected to be sub- mitted to the Bank and Eximbank by N1ay 1965. As a first step toward a more normal relationship with the long-term creditors, the Corporation, with financial assistance from the Government, cleared on April 1, 1965 its arrears with Eximbank. PART II - DESCRIPTION OF THIE PROPOSED LOAN 6. Borrower: Republic of Peru. Amount: Equivalent in various currencies of $11 million. Purpose: To help finance Stage III of the San Lorenzo Irrigation Project and the cost of a basin survey in North-West Peru. Amortization: In 33 semi-annual installments beginning April 15, 1969 and ending April 15, 1985. Interest Rate: 5-11 per annum. Comitment Charge: 3/8 of 1% per annum.  PART III - THE PROJECT 7. A detailed appraisal report of the project TO-466a is attached hereto. The San Lorenzo Irrigation and Land Settlement Project is the Third Stage of a development scheme in the Piura Valley in North-West Peru. The First Stage consisted of water diversion and irrigation works to sunplement the water availability of the Piura Valley. It was com- pleted in 1953 at a cost of $7.5 million, entirely borne by the Govern- ment. The Second Stage consisted of the building of a dam, a water reservoir for 250 million cubic meters, and a system of canals. The Bank made an $18 million loan in 1955 to cover the foreign exchange cost of engineering and construction of that Stage, which was completed in 1959 at a total cost of "'26.6 million. The settlement of 14,3CO hectares of projeet lands has been completed since that time. 8. The Third Stage, to be carried out in three years at a total cost of $30.4 million, would permit the further settlement of 17,700 hectares of irrigated land and the further improvement of the 1h,300 hectares already settled, bringing the total settlement area in San Lorenzo to about 32,000 hectares. The Third Stage would include equip- ment, facilities, consulting services and credit to enable the settlers in the Droject area to develop their farms in the most economical and balanced way. The project Tould also include studies - and appropriate works - to relieve the conditions of poor drainage and salinity which threaten to affect the San Lorenzo Development Area. Furthermore, the loan would provide funds to finance the cost of a basin resources study as it has become more and more evident that a basin program is needed to assess, on a regional rather than on a piecemeal basis, the water and related resources in the region and to chart the imnlementation of a soumd program for their utilization. Arrangements for Financing 9. The total cost of the proposed Third Stage of San Lorenzo - $30.4 million - would be financed by the proposed Bank loan of $11 million, by a $3.3 million AID line of credit and by $16.1 million contribution by the Peruvian sources (Government 89.4 million, and settlers $6.7 million). On this basis, about 47% of the total cost would be financed externally and 53% would be supDlied by Peru. Were we to take into consideration the three stages of the San Lorenzo development, the overall split between external and internal financing would be about the same. About $2l.2 million, or about 80% of the total cost of the project, would be local currency cost and the balance of about $6.2 million for import items. The Bank loan would cover the whole foreign exchange component and about 20% of the Droject's local currency costs.  10. As indicated in the cash flow for the overall San Lorenzo Project attached to the Appraisal Report, San Lorenzo will become financially self sufficient only in 1971. In the meanwhile, the Government will provide not only $9.1h million toward the cost of the Third Stage, but also $9,6 million to meet the loan repayments falling due on the 1955 Bank loan on the project. Procurement 11. All civil works contracts and all contracts for procurement of equipment and services in excess of 50,000 equivalent will be awarded on the basis of international comnetitive bidding. Purchases by the farmers under the agricultural credit program will be made on local markets where most of the major international suppliers are represented. PART IV - LEGAL INSTRUMENTS 12. The draft Loan Agreement between the Republic of Peru and the Bank is being distributed to the Executive Directors separately. 13. This draft Loan Agreement is in the usual form. The following provisions are of special interest: a) Section 5.01 (c) provides that the operating policies and procedures for the carrying out of the project shall be agreed upon from time to time between the Borrower, the Bank and the San Lorenzo Management, and that the Borrower shall ensure at all times that said operating policies are daly carried out. b) Section 5.01 (d) provides that the Borrower shall cause consultants acceptable to the Bank to be employed by the San Lorenzo Management, to an extent and upon terms and conditions satisfactory to the Bank and the San Lorenzo Management, to assist in carrying out the project. The consultants to assist in the carrying out of the basin resources study shall be employed directly, however, by the Peruvian Government. c) Section 5.04 (a) provides that until the total amount of the loan shall have been withdrawn from the Loan Account, the Borrower shall notify the Bank of any proposal to appoint a Director of the San Lorenzo Management, and shall not make such appointment unless the qualifications and experience of the proposed candidate are acceptable to the Bank.  - 7 - d) In Section 5.0ol (b) it is stioulated that the Decrees establishin!. the powers of the Director of the San Lorenzo lIanagement sllall be amended or abrogated cnly by agreement between the Borrower and the Bank. e) Section 8.01 provides, ns an additional condition of effectiveness, that thie Borrower shall have entered into an agreement with the Banco de Fomento Agropecuar