Peru - Quiroz-Piura Irrigation (Second Stage) Project

R E S T R I C T E D FILE CGIY i R e p o r t N o. P-82 This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the *informlation contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF PERU for QUIROZ-PIURA IRRIGATION PROJECT (SECOND STAGE) in PERU March 24, 1955  INTERMNATIQOIAL BANK FOR RECONSTSUCTION, ASD DEV'LOPMNIT REPORT AND RECOMMINATIONS OF THIF PRESIDENT TO TT: XCUTIVE DIRECTORS ON A PROPOSED LOAIT TO 'TH REPUBLIC OF PERU FOR THE QUIROZPITlRA IRRIGATION PROJECT (S-TMOND STfiGE). 1. I submit herewith a report and recommendations on a proposed loan of S18 million to finance the foreign exchange cost of an irrigation project in Northern Peru known as the Quiroz-Piura (Second Stage). PART I - HISTORICAL 2. The Peruvian Government financed out of its own resources the first stage of this project. During its construction a Bank mission visited Peru in April and May, 1951 and the Government was informed after its return that the Banc would be prepared to consider the suitability of the second stage of the project after additional studies had been comnleted. The Peruvian Government asked the Norrison Knudsen Company, which was con- structing the first stage, to undertake certain of the studies needed for consideration of the second stage with the ides of starting the second stage immediately after the completion of the first. 3. Subsequently, Banc missions examined the project in the field. On the basis of their findings the Bank invited the Peruvian Government to send representatives to IWJashington to negotiate a loan in Mlarch, 1954. At that time the Peruvian Government had just embarked on a program of retrenchment in public expenditures and the Minister of Finance advised the Bank that, due to this program, he desired to Postpone the undertaking of this project. In view of the success of this program and assistance obtained from the United States Government in the form described under "tLocal Currency Financing," the Mlinister of Finance asked the Bank in February, 1955 to reonen negotiations for a loan. At the invitation of the Bank, representatives arrived to negotiate a loan on February 28th, 1955. The proposed loan would be the fifth loan to be madp to Peru and the fourth for agricultural development. Besides the loan of A2f million for improvement to the Port of Callao (57 PE of January 23, 1952)p two loans totalling $3 million have been made to the Government to increase SCIPAts agricultural machinery pools (67 PE of July 8, 1952 and 98 PE of April 12, 1954) and one of t5 million to the Banco de Fomento Agronecuario (105 PE of November 12, 1954) to expand its medium and long-term lending facilities. Negotiations are also under wiay for a loan of about A2.5 million to assist in financing the construction of a new cement plant at Pacasmayo in Northern Peru.  - 2 _ PAP.T II - DESCRIPTIO'NI 0 THIE PROPOSED LOAN Borrower 4. The Borrower would be the ReDublic of Peru, a member of the Banc. Amount 5, The amount of the Loan would be 118 million or its equivalent in other currencies. Purpose 6.. The proceeds of the Loan would he used to finance the foreign exchange cost of the second stage of the Quiroz-Piura irrigation project. Cultivation in the lower Piura valley has been subject to many droughts, since the Piura river is an erratic stream which sometimes dries up completely. Accordingly, the purpose of the first stage of this project was to di-vert water from the -Ouiroz river to the Piura river to Onsure as far as possiole sufficient water for the cultivation of about 30,000 hectares of land in the lower Piura valley. This stage was comnleted by the Government in December, 1953. The second stage consists of construction of a dam which would create a reservoir with a capacity of about 250 million cubic meters to store waters from the diversion canal when such waters are not required in the Piura valley. Storage of this canacity used in con- junction wfith water from the diversion canal would provide sufficient water to irrigate 50,000 hectares of hitherto uncultivated land and orovide supplemental waters in dry seasons for the 30,000 hectares of cultivated land in the lower Piura valley, Interest, Commission and Commitment Charges 7. The Loan would bear interest at the rate of 4-3/4% per annum, including the statutory commission 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 Agreement, wThich- ever is earlier. Amortization 8. The Loan would be for a period of 25 years. It wiould be amortized by semi-annual payments of principal beginning Sentember 15, 1959 and ending September 15, 1980, as set out in Schedule 1 of the proposed Loan Agreement.  -3- Legal Instruments and Legal Authority 9. A draft of the Loan "tgreement is attached as Apnendix I. Attention is drawn to the following special provisions of the Loan Agreement: Section 5.01(a) provides that the Borrower will employ (a) competent and experienced engineering consultants and contractors for the construction of the project and (b) competent and experienced irrigation engineers to assist in the administration and maintenance of the project after its completion. Section 5.02 provides that the Borrower shall maintain both Stage 1 and 2 of the project in good order and repair. In Schedule 2 the Borrower undertakes to acquire the necessary lands, build roads and subdivide the land, distribute the water and establish and maintain procedures for assessing and collecting rates for its use. In a letter the Borrower will undertake to establish experimental and demonstration farms in the areas to be irrigated and to make arrangements to insure adequate credit facilities will be available to purchasers for the clearing and preparation of the land. The Government of Peru is authorized under t,aw 11696 of January 16, 1952 to enter into this Loan Agreement. The report of the Committee provided for in Article III Section 4(iii) of the Articles of Agreement is attached as Appendix II. PART III - APPRAISAL OF Tll-E PROPOSED LOAN 10. A detailed appraisal of the Project TO 24-b) is attached as Appendix III. Justification of Project 11. Almost half of Peruts total exports are agricultural products. By far the greater part of Peru's agricultural output for export is produced in the coastal region where the chief factor limiting production is the availability of water, The project will enable water that would otherwise be wasted to be used to bring 50,000 hectares of new land into production, The total cost of bringing this land under cultivation is estimated at $37 million, or an average of $740 per hectare, which compares favorably with the cost of similar projects in other countries. 12. Due to a growing population and an expanding economy the increase in agricultural production has not been sufficient to keep pace with consumption. Imports of foodstuffs continue to grow year by year and there is urgent need to increase the production both of export crops and of foodstuffs for local consumption. It is estimated that out of the 50,000 hectares of land to be irrigated under the proposed project about 30,000 hectares will be devoted to food crons and nasture. The remaining 20,000 hectares will be used to grow long staple cotton which commands premium prices throughout the world and is a readily exportable commodity. The increase in cotton exports and savings in food crop imports should benefit the balance of payments annually to the eXtent of about Sh million in value. One-half of this would be in dollars and more than sufficient to service the proposed Loan. 13. The project is located in a fast-growing industrial area in Northern Peru which requires increased food crops and animal products and is  - h - conveniently situated for the export of cotton through the nearby port of Pieta,. 14. The direct return to the Government should be substantially more than the cost. Total expenditures by the Government, inclu.lding service of the proposed Loan and the expenses of administration, oneration and maintenance, are estimated to be '6554 million over the life of the Loan, while the Government's increased direct income from the sale of land and water over the same period is estimated to amount to ~',80 million equivalent. 15-, Under the plan to be followed,, the Government should have no difficulty in selling the newly irrigated land to Peruvian farmers, It will be sold at reasonable prices in lots ranging in size from 15 to 100 hectares. Purchases of land will be financed by the Government on the basis of a 10% down- payment with the balance in the form of a loan payable over twenty years at 6%. Under these conditions, the return to the farmer on his equity investment should be very high.. On the larger commercial cotton farms the return may well runhashigh as 60% and on smaller farms, where all the work can be done by the family unit, at an even higher rate. The high return on the equity explains the eagerness of the farmers to acquire this land. Even on the total investment before taxes and interest the yield is high, estimated in the case of cotton farms to be aO% and in the case of general farms to be over 20%. 16. In order that the land may be put under cultivation in the shortest time possible, the Government will make agreements with the Banco de Fomento Agronecuario to ensure that adequate credit is available to purchasers for the clearing and the preparation of the land and iith SCIPA to see that its machinery pools are available to those farmers wsho do not own their own equipment. It is interesting to note therefore that two Agencies benefiting from three of the Bank's previous Loans will be collaborating on this nroject. The Economic Situation 17. The economic backgroumd against which the proposed Loan can be considered is contained in the Economic Report (WtHk 22a) presented to the Executive Directors on April 03 1954. This report was prepared. shortly after an exchange crisis led to a 30% decline in the value of the sol in 1953.. The report concluded, however, that the stabilization measures initiated by the Peruvian Government had a good chance of success and that the loans proposed at that time amounting to US 430 million (including US $18 million for Quiroz.Piura Staae 2) were well within Peruts capacity to service. On the occasion of the Loan to the Banco de Fomento Pgropecuario del Peru it was stated (Report P-37, November 5, 1954) that the policies of the Peruvian Government had already borne fruit and that the situation had improved appreciably. The developments of the last four months confirm this trend and indicate an almost complete recovery from the difficulties of early 1954.. 18. Both the external and domestic position of Peru improved markedly in 1954, demonstrating the countryts ability to adjust to changing conditions without recourse to drastic control measures and also demonstrating the success of sound practices in the field of economic policy. Inflation was  - 5 - kept at bay by appropriate monetary and fiscal measures such as credit restrictions and a reduction in public outlays, measures ai.med at restoring confidence, and the knowledge of the availability of a US O30 million standby credit. Central Bank credit which had continued to expand in the first part of 195 was curtailed sharply in the second half, and expanded by only 4,6% for the year as a whole, as compared with an increase of 34% in 1953. The same trend was noticeable for rediecounts and credit facilities extended by the commercial bancing system. As a result money supply increased by only 4% less than half the rate of increase in 1953, and did not bring additional pressure on domestic prices rhich had to adjust to the depreciated exchange rate; the impact of depreciation was greater than in the previous year and the wholesale price index rose by 10% through November, as compared with 5% in 1953; the rise in the cost-of- living index for Lima was limited to [.7% but will probably continue until retail prices get adjusted to the higher wholesale price level. 19,. Under the impact of the lower rate of exchange and of the financial policy of the government, Peru's forei7n trade returned to a balanced position. Higher prices for some commodities and a higher volume of exports accounted for an 11.5% increase in the value of exports in 1954 to US $210.6 million, second best year in Peruts history after 1951 wr,hen high prices boosted exports to US 't252.5 million. In 1953 exnorts only reached US $222.0 million. Imports declined by about 15% from US A294.2 million to the equivalent of US (249,7 million. Consequently the large import surplus of US 670.9 nillion in 1953 was almost entirely eliminated in 19514. The trade balance closed writh a small deficit of only