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

lBETURuM RETICE CIRCULATING COPY ;-. RERPOIS ESKD BE~ RETURNED -0 REPORTS gX aT 0m Report No. TO-466a 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION SAN LORENZO IRRIGATION AND LAND SETTLEMENT PROJECT (STAGE III) PERU March 26, 1965 Projects Department  C JR SX\YC 7 L g .z , Z - _.- ?,- 7, ? -O -73 x Sol 27, IIJI . IS .s t 3 S .- _-  P E R U SAN LORENZO IRRIGATION AID LAND SETTLEMENT PROJECT (STAGE III) TABLE OF CONTENTS Page No* SIkMARY .... o i - ii ooo I, INTRODUCTION . . . ... . . o . . . . . . . . 1 II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . 1 III. THE SAN LORENZO PROJECT AREA . *. . . . . . . . . o. . 3 Location and Irrigable Area a b. . . . . . .. . . 3 Physical Characteristics..... . . o . 0 . . . . . 3 Climate . . . . . . a o . . . . . . . . . 9 . o . . 4 Population. . * * * O * * a * * * * * , * * e * * V Land Settlement and Development . . . . . . . . . a 4h Land Tenure and Use .d. .e . . ... . 5 Irrigation Water Supply .. . . . . ........ 6 Drainage. . . . . . . a . . . . . a . 0 . . . . 6 Services. . . 0 . . . . . . . . . . . . . . . . . 7 Marketing ... .. .. ..... .. 7 IV. THE PROJECT -STAGE III.e o o o o a o a 7 Heavy Equipment and clTorks . . . e Q O . 8 Technical Services, Facilities and Equilpment. . . . 0 9 Agricultural Credit . . . . . . . d . t. . . .. . . .. 10 Electric Power. . . . . . . . . . . . . . * . a . . . 11 Basin Program . . . . . . . . . . . . . . . . * . . . 12 V. COST ESTIMATES AND FINANCING . ....... . . .e 12 VI. ORGANIZATION AND IMiANAGEMENT . .*. . * . . . . . . . . 15 Government Level. . . . . . . . . . . . . . . * . . . 15 Project Level . . . . . . . . . . . . . . . . . . . 15 Lending Operations. . i . . . . gao . . .... a. .... 16 Basin Program ... .... . .... . . .....a 16 VII. OPERATING RESULTS. . . . . . . . . . . . . . . . . . . . 17  -2- Page No. VIII. BEITEFITS AMD JUSTIFICATION . . . .@ . * . 00 . . . . . 17 IX. CONCLUSIONS AND RECOMMENDATIONS . . . . . . o . . . . . 18 ANNEXES Annex 1 - Map Annex 2 - Land Sales and Projected Sales by Economic Group of Irrigable Land Annex 3 - San Lorenzo Agency - Banco de Fomento Agropecuario Table 1 - Terms and Conditions of Loans to Settlers Table 2 - San Lorenzo Agency of the Banco Agropecuario del Peru - Summary Balance Sheet (Provisional) as at August 31, 1964 Annex 4 - Projected Schedules Table 1 - On-Farm Investments Table 2 - Loan Disbursements Annex 5 - San Lorenzo Project Investments - Projected Cashflow 1965 - 1985 Annex 6 - Organization Chart - San Lorenzo Irrigation and Land Settlement Project - Organization and Functions Annex 7 - Agricultural Production and Cropping Pattern Annex 8 - List of Goods and Services to be Financed  PER U SAN LORENZO IRRIGATION AND IAND SETTLEMENT PROJECT (STAGE III) S UMMNi A R Y i. The Government of Peru has requested additional financing for the San Lorenzo Irrigation and Land Settlement Project to accelerate land settlement and development. ii. Stage I consisting of the diversion works, canals and tunnels to supplement irrigation water only for the Piura Valley, was completed in 1953 . The cost was met by the Government. A Bank loan of US$18 mil- lionl! was made in 1955 to finance the foreign exchange costs of engineer- ing and construction of additional irrigation works (Stage II). These were completed in 1959 at a total cost equivalent to US$26.6 milliono,/ The local currency costs of appraximately US$8.6 million2/ equivalent were financed by P.L. 480 funds from the United States. From 1959 through August 31, 1964, the equivalent of US$12.9 milliong/ was spent for addi- tional facilities, technical services, investigations, equipment, adminis- tration, and on-farm investnents. In this period 14.,270 ha were sold and partially developed. iii. During the period September 1, 1964, through December 1967, now under consideration, the equivalent of US$29.8 million would be required to meet additional costs necessary to further develop the 14,270 ha and to settle and bring into production approximately 17,700 additional ha (Stage III). This would raise the total irrigable hectares settled and developed in the San Lorenzo area to approximately 32,000 by the end of 1967. Approximately US$6.7 million of the US$29.8 million would be met by the settlers on the Project through water payments, their initial share of on-farm development costs, and sub-loan repayments of earlier settlers, and by the farmers of the Piura and Chipillico Valleys through water payments. The undisbursed portion of the current A.I.D. loan would cover an additional US$3.3 million. However, the Government lacks the resources to provide the balance of approximately US$19.8 million in addi- tion to meeting the debt service charges on the existing Bank and A.ID. 1/ About 68 percent of total Stage II costs of approximately US$26.6 million. 2/ Dollar equivalent adjusted to present exchange rate.  - ii - loans and providing short-term agricultural credit for the settlers. Hence the need for additional Bank financing (Stage III) for equipment, technical services, drainage works and medium- and long-term agricul- tural credit. Financing is also provided in the loan for a Basin Pro- gram for Northwestern Peru for costs of engaging a firm of consultants to survey the water and related resources of the Region, to develop plans for the financing and implementation of projects to utilize these resources according to a system of priorities, and to develop recommen- dations for instituting the most effective regional organization for local administration of the Program. iv. Despite delays and problems, the Project is emerging as a suc- cessful one financially, economically and socially. It is estimated that the total Project will yield an internal rate of return to the economy of 14 percent and the incremental benefits of Stage III would result in an internal rate of return on Stage III investments of 16 percent. The Pro- ject has achieved a balance of services to physical development which is resulting in financiallv secure well-adiusted settlers. v. The proposed loan would be to the Republic of Peru. The loan funds for Stage III would be exclusively for the Project and would be ad- ministered by the Project Management under authority delegated to the Director General by the President of Peru and the Minister of Agriculture. The San Lorenzo Agency of the Banco de Fomento Agropecuario de Peru would administer the agricultural credit portion of the loan on behalf of the Management, but with the latter participating in the sub-loan determina- tions. The loan funds for the Basin Program would be administered through the Office of the President of the Republic by a local Northwestern Peru Regional Development Service. vi. The Bank appraisal confirmed the need and justification for Bank financing of US$104. million or approximately 35 percent of total Stage III costs of US$29.8 million, and for US$0.6 million to cover the costs of the consulting services for the Basin Progriam, or a total loan of US$11.0 mil- lion. The loan for Stage III would cover foreign exchange costs estimated at US$5,5 million (approximately 53 percent) and local currency costs esti- mated at US$4.9 million (approximately 47 percent). The loan for the Basin Program would be for consulting services. An appropriate term would be 20 years, including a four year grace period.  p E t u SAN LOPRENZO IRRIGATION AND LAND SETTLEMENT PROJECT (STAGE III) I. INTRODUCTION 1. The Government of Peru (the Government) has submitted a request for a Bank loan for financing a further stage (Stage III) of the San Lorenzo Irrigation and Land Settlement Project (the Project). Financing totaling US$20.75 million was specifically requested for a program of agri- cultural credit, for graveling of the canal roads, for construction and asphalt surfacing of two main artery roads, for a small hydroelectric power installation and related transmission facilities, and for equipment0 A Bank appraisal mission visited Peru in September 1964 and eliminated the road construction and hydroelectric components as not being presently jus- tified, and reduced the overall equipment component as excessive. After consultation with the Project Management (Management), however, components were added for technical services, for the construction of drainage works, and for types of equipment to enable Managementfs program of farm-to-market road construction and graveling to continue. These actions result in pro- posed Bank financing totaling US$10.4 million, or approximately 35 percent of total Stage III costs estimated at the equivalent of US$2908 million. US$0.6 million was also added for financing a Northwestern Peru Regional Basin Program (Para. 60). II. BACKGROUIND 2. The Project is located betwieen the Quiroz and Chira Rivers on the north and the Piura River on the south, about 1,000 kilometers north of Lima near the Ecuador border (See Annex 1 Map). Works affecting it have been constructed in two stages. Stage I ccnsisted of the diversion works, canals and tunnels to supplement water from the Piura River for irrigating about 31,0001/ ha only in the Piura Valley. These facilities were financed by the Government from its own resources, and construction was completed in 1953. 3. Stage II had the objective of supplying water for irrigating about 50,000 ha of new land in the project area and for providing supple- mental water for the Piura Valley. It consisted of enlarging the Stage I 1/ All hectares referred to in this report are considered to be irrigable.  - 2 - facilities and construction of the San Lorenzo Dam and Reservoir and the canal and lateral system on the Project. It was completed in 1959 at a total cost of S/ 718.5 million (US$26.6 million equivalent, of which the Bank financed the US$18 million foreign exchange costs 2/ From 1959 through August 31, 1964, the equivalent of US$120,91/ was spent for addi- tional facilities, technical services, investigations, equipment, admin- istration and on-farm investments. 4. Effective and expeditious development and settlement did not take place as expected in Stage II. Causes of delays were many, Local pressures from farmers of the Piura Valley who desired a greater share of the water supply at the expense of the development of part of the project area were at the root of the problem. There was divided responsibility and authority between the several agencies of the Government associated with the Project, and little authority was delegated to Management. Nec- essary legislation was delayed. Effective regulations and procedures failed to materialize. Funds were insufficient for development of land and for support of essential services and facilities. Water meant for the project area was utilized by farmers of the Piura Valley for approximately 18,000 ha additional to the 31,000 ha for which they were entitled to water from Stage I and II or a total of 49,000 ha.3/ This increased the pressure frcm the Piura farmers to delay or abandon development of a substantial portion of the project area on the argument that use of Project water in the Piura would be more economic. The need for a basin survey to resolve this problem prior to consideration of development beyond the 32,000 ha contemplated in the proposed Bank loan is specified in paragraph 22, 5. In 1961 the Bank reviewed the Project with special reference to soil conditions. It recommended continuation of the original plans for the project area with certain reductions. Further studies basic to the most economic development of the lands of the Project were recommended. The Bank also established an office in Peru to maintain constant liaison with the Project, 6. In early 1962 the Government approached the Bank for additional financing for Stage III. The Bank pointed out that progress in land sales 1/ Dollar equivalent adjusted to present exchange rate. 2/ See Report No. T.0. 24-c dated March 25, 1955. 3/ This figure has since been reduced to an estimated 40,000 ha due to salinity. A survey is currently underway to determine the magnitude of the problem and to recommend solutions. This survey would support the application for the Chira-Piura Project presented to the Bank in mid-1964. The object of this project would be to divert water from the Chira River to the lower Piura Valley to further supplement water for the area.  -3 and in settlement had been disappointing, and outlined the steps needed to insure the Project's success. It agreed to consider the request for a further loan only after the Government had taken necessary remedial action. 7. In 1963 the new Government accorded greater priority to the Pro- ject. A more effective organization with more autonomy stemming from the President of Peru was created. Steps were taken to provide more funds. Effective regulations and procedures were implemented, and a competent and experienced Director General of the Project appointed. The pace of development and settlement and provision of the necessary supporting serv- ices and facilities was accelerated. As of May 1963, only about 6,100 ha of irrigable land had been sold. By September 19644, 14,270 ha had been sold, and mostly settled out of a possible total of 37,569 ha. 8. For a period it appeared that Management at long last had the continuing operational authority and backing to proceed. In May 1964, however, there emerged a new and complicated law (Law 15037) which changed lNanagement's line of authority from the Presidential level to the Minis- terial level. The necessary Decrees to implement the new arrangement were not issued and the status of San Lorenzo once again became confused, 9. The Bank informed the Government in early October 196)4, that the requested loan could not be considered until the Government took action to again grant Management adequate operational and budgetary authority and funds. On NTovember 25, 1964, the President signed two Decrees granting such authorities for the Project. These have been studied in the Bank and are considered satisfactory, III. THE SAN LOIR\EZO PROJECT AREA Location and Irrigable Area 10. The project area is interrelated with the Piura and the Chipillico Valleys. Approximately 2,148 ha in the Chipillico and 40O,000 ha in the Piura presently draw partially or wholly on the same facilities which supply water to the Project. Planning prior to 1961 envisioned approximately 50,000 ha being settled on the Project. The Bank review of 1961 (Para. 5) and investigations conducted subsequently by Management resulted in a re- duction to 37,569 ha pending further investigations. Annex 1 Map shows the location of the irrigation works and districts of the project area. Physical Characteristics 11. The project area is 100 to 250 meters above sea level. The to- pography varies from flat lands or gentle slopes in the flood plains of the rivers to rolling, rough topography in parts of the San Isidro, Malin- gas and Hualtaco districts. The soils vary from the loamy sand of the  Parkinsonia, Algarrobo and Somate districts, to sandy loam in the Hualtaco, M4alingas and San Isidro districts, to clay loam and clay in the Partidor and parts of San Isidro and Malingas districts. Climate 12. Although located in the tropics, the zone has a desert climate. Rainfall is negligible--about 3 inches annual average in the project area-- and its economic significance to the Project is nil. With irrigation a full 365 day growing season is enjoyed and most crops can be planted at any time, W^Jinter (May to November) temperatures range between 20- and 242 centigrade (682 to 750 Farenheit) while summer (December to April) tempera- tures are above 24Q, sometimes moving as high as 370. Relative humidity is fairly constant at 65 percent to 75 percent. Prevailing winds are from the south. Population 13. The present population of the project area is approximately 750 families. These are largely former goat herders who had squatted on lands in the project area, and former farm hands on haciendas of the area, each of whom was entitled by law to purchase and settle a 6-8 ha-farm on the Project. When fully developed and settled, approximately 1,570 families could be settled. Settlers additional to the existing 750 families would come from all sections of Peru, and would qualify for eligibility accord- ing to a system being used by Managements which rates each applicant accord- ing to such factors as need, experience, industry, education and credit- worthiness. Moreover, a new project headquarters known as San Lorenzo is being built in the San Isidro district. It is estimated that when the Pro- ject is in full production, more than 50,000 people of the project market area would derive their livelihood from it either directly or indirectly. The Department of Piura in which the Project is located is estimated to have a total population of approximately 670,000, but only about half this number could be considered to be in the project market area. Four towns-- Piura, Sullana, Talara and Paita--easily accessible to the Project, have a combined population of approximately 181,000. Land Settlement and Development 1h. At the outset of Stage II it was projected that land development and settlement of the Project would be completed by the end of 1962. This target was not realized. In 1963, recognizing the inadequacy of funds for land development and agricultural credit, the U. S. Agency for Interna- tional Development (A.I.D.) made available us$5 million for these purposes. These funds, together with improved management and services, enabled the pace of land development and settlement to accelerate. 15. Settlement and development during the 1965-67 period depends greatly upon the continuation of adequate operational authority and funds  - 5 - for Management, and the availability to the settlers of agricultural credit. Demand for the land is great. As land has come into production and the favorable yields have become known, applications exceed many times the land available under each sale. Late in 1964 nearly 10,700 ha were being pro- cessed for sale. 16. Management has prepared a schedule of sales of irrigable and classified land (Annex 2) divided into five economic soil types. If sales proceed within a six month tolerance of schedule, it is estimated that by the end of 1967 approximately 32,000 ha of the potential 37,569 would be settled and under cultivation. 17. Development, consisting of such improvements as leveling, ditch- ing, fencing, construction of the farm dwelling and other farm buildings etc., takes place after the settler assumes ownership, except in the Parkin- sonia and Algarrobo districts where they would precede sale of the land, The farmer is entitled to receive medium- and long-term credit for approxi- mately 80 percent of the total of such costs. He may elect to do the work himself in a manner approved by Management; or to have the work done by Management on a reimbursable basis. Most farmers elect the latter method for such items as leveling, ditching and dwelling construction. Land Tenure and Use 18. Farm sizes range from 6 ha minimum to a small number over 80 ha. Each farm is classified by economic soil type (Para. 16 and Annex 2). The minimum size of each is determined by its potential productivity according to the formula based upon these soil types, As of August 31, 1964, approxi- mately 60 percent of the total number of sales were in small sizes of 6 to 8 ha. This resulted from the provision of the law requiring the first sales to be to the squatters and farm hands (Para. 13) of the area. Only 3,000 ha of the 14,270 ha were divided into these small farros, The ave--age size of all farms sold was approximately 19 ha. iWhen the Project is fully de- veloped, the average size of all farms would be approxiriiately 24 ha. 19. At the time the settler receives title to his land he must agree to keep the farm and to cultivate it in a manner satisfactory to the Manage- ment for a period of eight years. Land thus far settled is being farmed principally in cotton, maize, root crops, fruit and other tree crops, vege- tables and forage crops. Rice production is being discouraged because of its high water requirements. The range of possible cropping patterns is large, due to the year-around growing season and favorable soil types. Cotton is grown only in the so-called winter season because of insect pests. Management is strongly encouraging a diversified cropping pattern includ- ing livestock, to spread water use, work, and income more evenly through- out the year. It is expected that livestock production, especially dairy production, would be a major source of income in the Algarrobo and Parkin- sonia districts where more sandy soils predominate and forages thrive.  -6- Irrigation Water Supply 20. 1Monthly water allocations are specified in each farm plan for each year. These are based upon the hydrological and soils studies. Cur- rently, water requirements are higher in the Parkinsonia, Algarrobo and Somate districts of sandy soil than in other districts. There is not yet sufficient experience in the Project, however, to determine the optimum applications of water for each crop in each district. Management is cap- able of solving this problem. 21. Despite below average flow of the rivers for the past few years, water supplies have been adequate for the Project and for the Piura and Chipillico Valleys. The reservoir was drawn down to the extremely low figure of 18 million m3 (maximum capacity is 250 million mi3) by the end of the dry season in September 196h. Heavy rains during late September and October raised the reservoir to approximately 94 million m3 at the end of December. This reserve, plus estimated availabilities from the rivers in 1965--based upon 1964 availabilities which were below average-- should produce a net availability of approximately 730 million m3 in 1965, after deduction of 90 million m3 for a technical reserve in the reservoir and for water losses. This would barely cover a full requirement totaling 725 million m3 for 1965, assuming an average of 20,000 ha under cultivation on the Project, 40