Peru - Import of Agricultural Goods Project

P-73 RESTRICTED FIL"El C!y This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME.NT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN to the BANCO DE FOMENTO AGROPECUARIO DEL PERU TO FINANCE THE IMPORT OF AGRICULTURAL GOODS INTO PERU November 5, 1954  INTERNATIONAL BANK FOR RECONSTRUCTIO0I AND DEVELOPME1NT REPORT AND RECOT'IENDATIONS OF TfIE PRESIDENT TO TiHE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO DE FOD7ENTO AGROPECUARIO DEL PERU FOR THE IMPORT OF AGRICULTURAL EQUIPFMET ARD LIVESTOCK 1. I submit herewith a renort and recommendations on a proposed loan of $5 million to finance the imDortation of agricultural equipment, livestock, and storage and processing plants to be distributed in Peru by the Banco de Fomento Agropecuario del Peru (hereinafter called the "Banco"?). PART I - HISTORICAL 2. On March 25 of this year the Banco, with the concurrence of the Peruvian Government, submitted a proposal to the Bank for a series of five annual loans, totaling 6t24 million, to enable it to undertake an expanded five-year program of medium and long-term lending. The proceeds of the loans were to be used to finance the import of agricul- tural materials and equipment and livestock, which would be purchased by farmers with the help of loans granted by the Banco. 3. A Bank representative visited Peru in Aoril and i'ayr of this year to assess the demand for agricultural credit. Another staff member and consultant in agricultural credit were in Peru in June and July to investigate the Banco, its organization and credit program. PART II - DESCRIPTION OF T'rTE PROPOSED LOAN Borrower 4. The Borrower would be the Banco, an autonomous credit institution of the Peruvian Government. The Banco is administered by the general manager under a Board of Directors whose members are appointed by the Government, the Central Reserve Bank, the Commercial Banks of Limi, the National Agrarian Soeiety and the Rural Association of Peru. With head- quarters in Lima, it operates throughout the country by means of 76 local offices. Its rnain activity to date has been the provision of short-term credit to farmers. Though it has expanded its medium- and long-term lending in recent years, these operations are still on a relatively small scale. The proposed loan would be used by the Banco to finance medium- and long-term loans covering imDorted goods. As a consequence the Eanco would be able to devote more of its ol-m available resources to medium- and long-term loans related to expenditures in local currency.  - a - 5. Accordingly, the Bank and the Banco have thought it appropriate to agree upon a two-year program of medium- and long-term loans to be made not only with the proceeds of the proposed loan but also from the Banco's own available resources. This program sets out categories of agricultural goods to be financed and the amounts to be devoted to each category and is incorporated in a draft letter which is attached hereto as Appendix IV. The period of two years was chosen because a minimum of two years is considered necessary to enable the Banco to put into effect a comprehensive programn of medium- and long-term loans. It would be difficult to plan realistically for a longer period. Guarantor 6. The Guarantor will be the Republic of Peru, a member of the Bank. Amount 7. The amount of the Loan would be $5 million or its equivalent in other currencies. Purpose 8. The purpose of the Loan is to enable Peru to import agricultural machinery and equipment, irrigation pumps and equipment, fencing, live- stock and parts and materials for amall processing and storage plants. These goods will be distributed in Peru with the help of inedium- and long-term loans granted by the Banco. Interest, Commission and Co;mitment Charges 9. The loan would bear an interest rate of 4-1/4% per ainum, including the statutory conmission of 1%. The commitment charge would be 3/4 of 1% per annum and would accrue from the effective date of the Loan Agreement or sixty days after the date of the Loan Agree- ment, whichever is earlier. ANortization 10. The loan would be for a period of eight years. It would be amortized by semi-annual<pWrments of principal beginning August 1, 1957 and ending February 1, 1963, as set out in Schedule I of the proposed Loan Agreement.  - 3 - Legal Instruments and Legal Authority 11. Drafts of the Loan Agreement and Guarantee Agreement are attached as Appendix I and Appendix II, respectively. Attention is drawn to the following special provisions in the Loan Agreement. Section 2.02(b) provides that no withdrawals are to be made for goods to be incorporated in processing or storage plants until the particular project has been approved by the Bank. The total amount allocated for this purpose is 4$500,000. In Section 5.03 the Banco obligates itself not to incur debt of one year or more maturity until it has received the consent of the Bank. Section 5.08 provides that the Banco will make arrangements satisfactory to the Bank to assure that purchases of agricultural equip- ment are made only through dealers who have adequate service and repair facilities. The report of the Committee provided for in Article III Section 4(iii) of the Articles of Agreement is attached as Anpendix V. PART III - APPRAISAL OF THlE PROPOSED LOAN 12. A detailed appraisal of the Project (TO 67) is attached as Appendix III. Justification of the Project 13. Peruvian agricultural production has increased in recent years but has failed to keep up with consumption. Imports of foodstuffs continue to grow year by year. There is thus an urgent need to increase the production of foodstuffs and other crops to meet the needs of a growing population and an expanding economy. 14. The Banco represents the only source of medium- and long-term credit available to agriculturalists. Medium-term loans are particularly required for the purchase of agricultural machinery and equipment and breeding stock, and for the construction of small drainage and irrigation works. Longer term loans are required particularly for processing and storage facilities. About half of the proposed loan wouild be used for the purchase of machines and implements, mostly tractors and tractor- drawn equiDment. Due to shortage of labor, increased mechanization is essential in the coastal regions where the principal crops are cotton, sugar and rice. The introduction of machines is necessary in the high mountain valleys if production of wheat, barley and potatoes (the main crops of this region) is to be expanded. Machinery will also be required if the extensive jungle areas of Peru are to be cleared and colonized. The imports of tractors contemplated in the two-year program of the Banco will hardly suffice to make good the obsolescence on tractors now in use in Peru. About one-quarter of the loan woluld be used for the purchase of pumPs and irr-igation equipmenit. Shortage of water, particularly in the coastal region, makes expansion of irrigation works a basic requirement for increasing production.  - 4 - 15. The proposed loan would complement the two SCIPA loans.(PE 67 & 98)e Machinery pools of light tillage and threshing equipment have deomon- strated the effectiveness of mechanized farming. As a consequence, demand for this kind of equipment has been stimulated but credit terms are needed to enable farmers to make these purchases. As a general rule, it would not be economic for farmers to own the kind of heavy equipment which the SCIPA pools use for land rehabilitation, but the farmer:.requires credit to enable him to rent such equipment from SCIPA. The Banco will be in a better nosition to supmly this kind of credit from its own resources if the loan rroposed herein is apDroved. 16. The benefits to be derived from the nroposed loan would be extensive. It is estimated that the cost of tractors and other agri- cultural machinery can be paid for out of one or two crops even allowing for all current expenditures such as fuel, repairs and labor. As a consequence, the net benefits to the farmer, if the machinery has a life. of, say, six years, would be four or five times the value of the original purchase. A well with Dumping equipment would on the average cost M20,000, but it would increase the production of the 50 hectares it would serve by the equivalent of 0,5,000 Der annum. 17. It is more difficult to assess the benefits to be derived from the import of livestock and of machinery and materials for storage and processing facilities. Peru still has insufficient high quality breeding stockt of both cattle and sheep and must continue imports for some time to come. The ultimate effect of such imoorts on the production of milk, meat and wool should far outweigh the original investment. Storage and processing facilities will stimulate nroduction, promote orderly marketing, reduce waste and spoilage, and thus result not only in better returns to the farmer but in lower orices to the consumer. The Economic Situation 18. The economic background against which the proposed loan can be considered is contained in the Economic Report (WH 22a) presented to the Board of Executive Directors on April 8, 1954. This report was prepared shortly after the Peruvian Government had taken several steps to remedy an exchange crisis which had resulted iin a 30, decline in the va] of the sol during 1953. The events of the last six months show that the policies of the Peruvian Government have borne fruit and the situation has improved appreciably. 19. The period 19