Peru - Puno Rural Development Project

Document of The World Bank ! __ a > FOR OFFICIAL USE ONLY HIE COPY Report No. 2736-PE STAFF APPRATSAL REPORT PUNO RURAL DEVELOPMENT PROJECT PERU February 12, 1980 Regional Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents (At May 1979 Exchange Rate) US$1 = S/. 220.00 (Peruvian Soles) S/. 100 = US$0.45 S/. 1 million = US$4,545.00 Weights and Measures 2 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilometer (km) 2 = 0.62 miles 1 square kilometer (km ) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.2 pounds 1 liter (1) = 0.26 gallons 1 metric ton (m ton) 3)= 1,000 kg = 0.98 long ton 1 million cubic meter (Mm = 264.18 million gallons Abbreviations AID: Agency for International Development AOP: Annual Operating Plan ARE: Agrarian Reform Enterprise AU: Animal Unit BAP: Banco Agrario del Peru Peruvian Agricultural Bank BIP: Banco Industrial del Peru Peruvian Industrial Bank CAP: Cooperativa Agraria de Produccion Agrarian Production Cooperative CAS: Cooperativa Agraria de Servicios Farm Services Cooperative CENCIRA: Centro Nacional de Capacitacion e Investigacion para la Reforma Agraria National Training Center for Agrarian Reform CIP: Cooperativa de Integracion Parcelaria Farm Unification Cooperative COMDEP: Comite Departamental de Puno Puno Department Committee  FOR OFFICIAL USE ONLY -2 - CORPUNO: Corporacion de Desarrollo de Puno Puno Development Corporation DRAA: Direccion Regional de Agricultura y Alimentacion Regional Directorate for Agriculture and Food DRE: Direccion Regional de Educacion Regional Directorate of Education DRS: Direccion Regional de Salud Regional Directorate of Health DRTC: Direccion Regional de Transportes y Comunicaciones -Regional Directorate for Transport and Communication ENCI: Empresa Nacional de Comercializacion de Insumos National Input Marketing Company EPS: Empresa de Propiedad Social Mutually Owned Enterprise FAO: Food and Agriculture Organization FDR: Fondo de Desarrollo de Empresas Rurales Rural Enterprise Development Fund ICB: International Competitive Bidding IDB: Interamerican Development Bank IFB: Invitation for Bid INIA: Instituto Nacional de Investigacion Agraria National Agricultural Research Institute INN: Instituto Nacional de Nutricion National Nutrition Institute INP: Instituto Nacional de Planificacion National Planning Institute LCB: Local Competitive Bidding MAA: Ministerio de Agricultura y Alimentacion Ministry of Agriculture and Food This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 3 - ONERN: Oficina Nacional de Evaluacion de Recursos Nlaturales National Office for Natural Resources Studies ORDEPUNO: Organismo Regional de Desarrollo de Puno Puno Regional Development Organization PU: Project Unit SAIS: Sociedad Agricola de Interes Social Ntutually Owned Farm Enterprise SOE: Statement of Expenditures SPA: Subsidiary Project Agreement UNTA: Universidad Nacional Tecnica del Altiplano National Technical University for the Highlands  PERU PUNO RURAL DEVELOPMENT PROJECT Table of Contents Page No. I. THE AGRICULTURAL SECTOR ................................ 1 A. General ........................................... 1 The Resource Base ............................ 1 The Coastal Zone ................1................ The Selva ....................................... 2 The Sierra ............................ 2 Policy Background ............................ 2 Agrarian Reform .................... 3 Marketing .. ..................................... 4 Credit .. 5 B. Previous Bank Involvement and Proposed Bank Strategy in the Sector .......................... 6 II. AGRICULTUREiAND RURAL POVERTY IN THE SIERRA .... ........ 7 III. THE PROJECT AREA ....................................... 8 Location and Physiography .............................. 8 Climate . ................................................ 9 Soil and Water Resources ............................... 9 Communications ......................................... 9 Population and Employment .............................. 10 Land Tenure and Farmer Organization .................... 10 Crop and Livestock Production .......................... 11 Regional Institutions .................................. 11 V. TE PROJECT. 13 IV. THE PRJEC ............................................ 1 A. Introduction ........ .............................. 13 B. Brief Description .............. .. ................. 14 C. Detailed Features .............. .. ................. 15 Irrigation ...................................... 15 Agricultural Credit Program ..................... 16 Forestry Program ................................ 17 This report is based on the findings of an appraisal mission consisting of Messrs. D. Fitchett, A. Kogan and F. Sands (Bank) and Messrs. 0. Echeverri, R. Gallagher and J. Pines (Consultants) who visited Peru in May/June 1979.  Table of Contents (Continued) Page No. Project Unit .................................... 17 Research Program ................................ 17 Roads and Communications ..................... 18 Social Infrastructure ........................... 18 Potable Water ................................. 18 Rural Health Facilities ....................... 18 Rural Vocational Training ..................... 19 Second Phase Studies ............................ 19 D. Project Costs ..................................... 19 E. Project Financing ................................. 20 F. Procurement ....................................... 22 G. Disbursement ...................................... 23 V. ORGANIZATION, MANAGEMENT AND IMPLEMENTATION ...... ...... 25 A. Organization and Management ....................... 25 B. Participating Agencies ............................ 26 C. Crop and Livestock Technical Assistance Program ... 28 D. Nutrition Program ................................. 29 E. Lending Policies and Procedures for Agricultural Credit .......................................... 29 F. Project Accounts .................................. 31 G. Accounts and Auditing ............................. 31 H. Project Monitoring, Reporting and Evaluation ...... 31 VI. AGRICULTURAL DEVELOPMENT, OUTPUT, AND MARKETING ........ 32 A. Crop and Livestock Productivity ................... 32 Cropped Area .................................... 32 Yields .......................................... 32 Farm Models ..................................... 33 Ranch Models ........... 35 B. Project Output .................................... 36 C. Marketing ......................................... 37  Table of Contents (Continued) Page No. VII. FINANCIAL ANALYSIS ...... ............................. 37 A. Crop and Livestock Operations .............. .... 37 B. Project Cost Recovery ..... ...................... 38 VIII. PROJECT BENEFITS, ECONOMTIC RATE OF RETURN AND PROJECT RISKS ...................................... 40 A. Project Benefits ................................ 40 B. Economic Rate of Return and Sensitivity Analysis 40 C. Project Risks ................................... 41 D. Environmental Impact ............................ 41 IX. SUMIARY OF AGREEMIENTS REACHED AND RECOIMENDATION 42 SCHEDULE A - Lending Procedures, Terms and Conditions 45 ANNEXES 1. Disbursements Against Statement of Expenditures (SOE) ..... 51 2. Supporting Tables and Charts ..... ......................... 53 T.1 Average Monthly Climatic Data T.2 Land Distribution, Livestock Ownership and Income in the Project Area T.3 Huata-Quita Irrigation Rehabilitation - Summary Cost Estimate T.4 Huata-Quita and Cabanillas Irrigation Systems - Water Demand and Supply T.5 Cabanillas Irrigation Rehabilitation - Summary Cost Estimate T.6 Taraco Irrigation System - Water Demand and Supply T.7 Taraco Irrigation Rehabilitation - Summary Cost Estimate T.8 Buena Vista Irrigation System - Water Demand and Supply T.9 Buena Vista Irrigation System - Summary Cost Estimate T.10 Small-Scale Irrigation Systems - Water Demand and Supply T.11 Small-Scale Irrigation Systems - Summary Cost Estimate T.12 Equipment for Irrigation Subprojects - Summary Cost Estimate T.13 Irrigation Subprojects - Phasing of Investment T.14 Irrigation Subprojects - 0 and M Costs at Full Development T.15 Costs of Establishing and Operating the Forestry Program  Table of Contents (Continued) 2. Supporting Tables and Charts (Continued) T.16 Locally Recruited Project Unit Staff T.17 Internationally Recruited Consultants for Project Unit Staff T.18 Prvject Unit Equipment - Investment and Operating Costs T.19 Project Unit Facilities - Investment and Operating Costs T.20 Costs of Extension Staff Training Program T.21 Nutrition Component - Investment and Operating Costs T.22 Crop and Livestock Research Program - Investment and Operating Costs T.23 Pirapi Irrigation Training and Demonstration Center - Summary Cost Estimate T.24 Improvement of Roads and Communications Program - Investment and Operating Costs T.25 Potable Water and Sanitary Units Systems - Investment Costs T.26 Rural Health Program - Investment Costs T.27 Rural Health Program - Operating Costs T.28 Rural Vocational Training Centers - Summary of Investment and Operating Costs T.29 Second Phase Studies Program - Summary Cost Table T.30 Project Cost Phasing T.31 Project Financing T.32 Distribution of Cropland by Farm Type, Without and With Project T.33 Yield Schedule for Major Crops T.34 Incremental Farm Input Requirements T.35 Model 1: Sales and Operating Costs for Minifundista T.36 Model 2: Consolidated Farm Budget for Minifundista T.37 Model 2: Sales and Operating Costs for Small Farmer T.38 Model 2: Consolidated Farm Budget for Small Farmer T.39 Model 3: Medium Farmer Investment Program T.40 Model 3: Sales and Operating Costs for Medium Farmer T.41 Model 3: Cash Flow for Medium Farmer T.42 Model 4: Sales and Operating Costs for ARE T.43 Model 4: Cash Flow for ARE T.44 Sheep Ranch: Investment Costs T.45 Sheep Ranch: Flock Projection T.46 Sheep Ranch: Sales and Operating Costs T.47 Sheep Ranch: Producer's Cash Flow T.48 Cattle Ranch: Investment Costs T.49 Cattle Ranch: Herd Projection T.50 Cattle Ranch: Sales and Operating Costs T.51 Cattle Ranch: Producer's Cash Flow T.52 Alpaca Herd: Investment Costs T.53 Alpaca Herd: Herd Projection T.54 Alpaca Herd: Sales and Operating Costs T.55 Alpaca Herd: Producer's Cash Flow T.56 Prices Used in Economic and Financial Analysis T.57 Rent and Cost Recovery in Irrigation Subprojects T.58 Flows of Incremental Economic Benefits and Costs T.59 Economic Rate of Return and Sensitivity Tests  Table of Contents (Continued) Chart 1 - Organization of ORDEPUNO Chart 2 - Implementation Schedule for Principal Project Components Chart 3 - Project Unit Organization 3. List of Related Documents and Data Available in the Project File MAP IBRD 14684   PERU PUNO RURAL DEVELOPMENT PROJECT I. THE AGRICULTURAL SECTOR 1/ A. General 1.01 Agriculture contributes about 13% to Peru's GDP, but it occupies more than 42% of the labor force and accounts for about 29% of total merchandise exports. Food processing employs an additional 4% of the labor force and con- tributes about 9% of the GDP. The value of food production at constant prices rose initially in the 1970s and then trended downward through 1978. The popu- lation, increasing at about 2.9% per annum, is now about 17 million; some 7.4 million persons (about 45%) live in rural areas. Per capita food production has dropped continuously during 1971-78; by 1978 it was about 69% of the average per capita food production during 1961-65. Consequently, the country's dependence on imported foodstuffs has increased, mainly in dairy products, pulses, vegetable oils, and grains such as wheat and maize. At the same time, the volume of agricultural exports declined in 1975/76 to about 60% of its 1962/63 level. Improvement of the performance of the agricultural sector has now become critical to the country's economic progress and to the well-being of the rural population. The Resource Base 1.02 In comparison to other Latin American countries, Peru has a rela- tively limited natural resource base. While the total area of the country is about 128 million ha, only about 3.7 million, or 2.9%, are cultivable, and another 22 million ha (17%) are natural pasture land. Most of the soils suitable for intensive agriculture are already cultivated. Additional land could be developed either in the Ceja de Selva (lower eastern slopes of the Andes), which would be expensive due to lack of access and basic infrastructure and services, or in the Coastal Zone, also requiring substantial investments to provide irrigation on presently marginal land. The ratio of cropland actually harvested to rural population is relatively low at 0.34 ha per person, but actual figures vary according to the three main ecological regions into which Peru can be divided--the Coastal Zone, the Selva and the Sierra. 1.03 The Coastal Zone. The Coastal Zone, which lies between the 3,000-km- long Pacific Ocean coastline and the Andes, consists mainly of flat desert plains, sand dunes and the dry Andean foothills. It covers about 13 million ha (11% of the country's area) and has about 46% of the country's estimated 17 million population. As rainfall is extremely low, coastal agriculture is 1/ This chapter is based on the Agricultural Sector Updating Report issued in September 1977, whose findings are incorporated into the Basic Economic Report (No. 2204-PE) issued April 13, 1979.  - 2 - limited to the river valleys where irrigation is possible; these valleys produce over 40% of the country's gross value of crop output. The crops in the Coastal Zone include sugar, rice, cotton, maize, potatoes, citrus, olives and grapes. The region enjoys relatively close proximity to the major urban markets, a gc d transportation network and other infrastructure, and is relatively prosperous. 1.04 The Selva. The Selva, or jungle region, which covers about 77 million ha (62% of Peru's area) and accounts for 10% of total population, is a humid tropical region. It contains two sub-zones, the low Selva and the Ceja de Selva. Fruits, coffee and tea are the main crops in the Ceja de Selva, and livestock production is being developed in some areas. Despite the relatively low soil quality, the Selva region has been gaining importance economically because of oil discoveries and development of two Trans-Andean Highway projects. It is likely that these projects will give impetus to further agricultural development in the region. 1.05 The Sierra. The Sierra, or Andean highland region, with about 44% of the population, covers over 33 million ha (27% of the total land area). It consists of steep mountains, reaching over 5,000 m, and high valleys located between the mountain ranges. The Sierra accounts for well over half of the arable cropland in Peru (about 2.3 million out of a total of some 3.7 million ha). However, this represents only 7% of the Sierra's total area. About half the re- maining area (14.3 million ha) is used for grazing of sheep, cattle, alpaca and llama, mainly on natural pastures under marginal conditions because of steep slopes and high altitudes. Crop farming is generally difficult and limited to one short growing season from about November to March. Accentuating the farming difficulties are: severe topography, erratic rainfall, and extreme changes in temperature, including the risk of frosts during the greater part of the year. Approximately 55% of the country's population dependent on agriculture lives in the Sierra, with an average of about 1.9 ha of cropland per family. Agricultural techniques are primitive, fallow periods are long (three to four years for every year cropped), transport costs to market centers are high, and oppor- tunities for off-farm employment are limited. While there is little scope for putting new land into production, there is significant potential for increasing crop and livestock productivity, raising output and improving farmers' living conditions through projects such as the one proposed herein. Policy Background 1.06 According to the United States Department of Agriculture statistics, from 1968 to 1978 agricultural output increased by only 4%; as population rose by about 2.9% per annum, per capita food production fell by 23% during this period. Output performance appears to have been especially poor since 1972. Some of the Government's overly interventionist policies in the agricultural sector since 1968 - such as those reviewed below - have slowed the expansion of output or contributed to its decline. Shortfalls of domestic production in recent years have resulted in considerable imports of basic foodstuffs--often distributed to consumers at highly subsidized prices--queuing, meatless days, and such. The Government has recently initiated a series of policies which include a reduction of the earlier overly interventionist approach. Marketing and price control  policies are being altered in order to promote increased production, reduce agricultural imports and improve producers' returns. This reorientation of sectoral policies is expected to resolve some of these problems, although it would be premature to undertake an assessment at this point. 1.07 Moreover, the Government has chosen to pursue a policy fostering a more balanced development, involving the rural population, largely concen- trated in the Andean Highlands and who so far have benefitted little from the agrarian reform or large-scale investment programs concentrated on the Coast. Through actions under this policy, the Government hopes to slow the migration to the coastal cities and to address the problems of unemployment and mal- nutrition in the rural areas. The proposed project is a first effort to translate these goals into a modest-scale first-phase rural development project for one of the most densely populated and impoverished areas of the country. 1.08 Agrarian Reform. In June 1969, the Government issued a new agrarian reform law which introduced significant changes into the agricultural land tenure pattern of the countryside. Large private landholdings were expropri- ated and property rights transferred to groups of agricultural workers, small farmers and Indian communities. The main targets of the reform process were to expropriate some 14,500 farms covering 10.3 million ha (43% of the country's area in farms) by the end of 1977 and adjudicate 10.6 million ha (including 0.4 million ha of state land); 77% of the land area was adjudicated to--and 95% of the beneficiaries were grouped in--associative or cooperative operating units (Agrarian Reform Enterprises (AREs)). 1.09 During the initial years of the reform process, the Government sought to impose relatively rigid forms of associative or cooperative operation on the enterprises established under the reform program. This was relatively easy to superimpose on the modern large-scale, often export-oriented crop production and agroindustrial enterprises on the Coast. Agrarian Production Cooperatives (CAP) were the typical organizational units introduced. Similarly, on the large-scale livestock enterprises in the Sierra, the Mutually Owned Farm Enterprise (SAIS) was established, incorporating not just ex-workers and ex-tenants as beneficiaries but also embracing the surrounding Indian communities to share in enterprise management and profits. Further coopera- tivization was to be sought: (a) for the lands of Indian communities through communal cooperatives for joint production; (b) among smallholders through Farm Unification Cooperatives (CIP) to consolidate small farmers into joint production units; and (c) also among smallholders, Farm Service Cooperatives (CAS) to facilitate access to inputs, credit and infrastructure. 1.10 The expropriation and adjudication stages of the agrarian reform process were by and large completed by the end of 1978. This formidable task was accomplished only with notable stress on the institutional capabilities in the sector; the Agricultural Ministry's trained manpower was concentrated on the land transfer process, and other priority items were downgraded or neglected. In this process, the Ministry's extension services were severely reduced. Moreover, despite the concentration of credit and technical  - 4 - assistance on the newly established AREs, performance has been uneven. The Government had great expectations that agrarian reform would alter the political and economic structures of the country, promote agricultural production and eliminate rural poverty. Nevertheless, achievements have fallen short of expectations and a new set of serious problems are emerging f- e the reform sector. The more that cooperative farming changed the pre-reform patterns of production and the smaller the initially distributable ARE profits, the less willing members were to participate in attaining the AREs' goals. Member rejection has been particularly noticeable in the poor tenant-based haciendas of the Sierra, where the shift to cooperatives has been accompanied by attempts to eliminate individual plots/herds. The rigid size criteria imposed on cooperatives have made many of the Sierra AREs uneconomically large. Basic conflicts of interest have arisen on the SAIS between members/workers (who want to maximize wages and reduce employment) and members of the surrounding peasant communities (who want to reduce permanent worker wages and maximize seasonal employment). At the same time, since individual profit sharing is small and the member has little control on the allocation of the reinvested profits, he pushes for high wages and low profits; since the wage and the job are both virtually guaranteed, there are few incentives toward labor effort and discipline. Similarly, the incentives encourage members to mechanize operations rather than expand non-member employment opportunities. These organizational problems have made it difficult to manage the AREs, especially when the managers and technicians hired by the enterprise are inexperienced and given very limited authority. 1.11 The Government recognizes that the success of the AREs will depend on solving their present operational problems and increasing efficiency. The key issue will be how to increase the identification of the members with the fate of the cooperative to ensure a rational allocation of resources, to establish labor discipline, and to reduce conflicts between members. For this reason, the Government is reviewing both the organization of some of the cooperatives--where the conflicts between types of members are inherent to the organization--and the size of cooperatives--where diseconomies of scale are important. Combined with the envisaged strengthening of technical services, input supplies and marketing facilities, the performance of the reformed sector should rise. Nevertheless, while most public sector resources in the past decade have been concentrated on implementing the reform, which involved about 43% of the area in farms and 25% of the rural families (and probably the relatively better-off families), the 40% of the farm families which are minifundistas and 12% which are landless laborers have benefited little or none from this costly process. 1.12 Marketing. Other public sector policies have not stimulated effi- cient production. The Government considered that market forces were not allocating sufficient resources to the production of food, and that monopol- istic practices resulted in excessive profit margins and inefficiencies in marketing. To force growth of food production, the Government has for some time decreed that 40% of all arable lands be dedicated to crops, and in 1975, it set up a complicated central planning system to partially replace the market on production and pricing decisions. In marketing, the Government imposed controls in prices and marketing margins; took over all marketing of  - 5 - exports, imports and some domestically produced foodstuffs; and established controls regulating the physical movement of agricultural goods. As a result, the farm area in food production has increased, but gross value of output per hectare has declined, and net foreign exchange savings appear to have been negative. Price subsidies on fertilizers helped the richer farmers and often resulted in excessive use with little impact on production. The Government lacked manpower, money and storage facilities, while wholesale markets and other marketing infrastructure remain inadequate. 1.13 The inefficiencies introduced by past state intervention in the marketing system have become a serious bottleneck to agricultural development. The Government is presently changing its approach, moving over to a system of partial intervention to eliminate the possible monopolistic practices now exercised by middlemen and to ensure that marketing margins are as small as possible, benefitting both producers and consumers instead of trying to police the whole. In line with this new approach, in the last few years, the Government has started to relax its controls on prices and to reduce consumer subsidies on basic foodstuffs. These new measures are intended to stimulate production and improve producer returns, lower imports and reduce the heavy burdens placed on the Government budget by consumer subsidies resulting from earlier policies. 1.14 Credit. Less than 20% of farms obtain institutional credit, at negative real interest rates. The remainder operate with informal sources at high interest rates or obtain no credit at all. The bulk of credit-- institutional or informal--is short-term; medium- and long-term lending averaged less than US$20 million annually from 1975 to 1978. The Government's credit policies discouraged the commercial banking system from lending for agriculture and at the same time promoted inefficiency and decapitalization in the Peruvian Agricultural Bank (BAP). Borrowers came to depend on subsidized credit in a highly inflationary environment, rather than applying financial discipline in their farming operations. 1.15 BAP is a government-owned institution with 18 branch offices, 54 agencies and 34 field offices. It has executed five agricultural credit loans and acts as banking agent for the on-farm development credit component of the ongoing Irrigation Rehabilitation I Project and the recently negotiated Lower Piura Project. It would provide short- and long-term credit under the proposed project. BAP provides about 85% of institutional credit to the sector, 10% is provided by commercial banks, and the rest comes from other development banks and direct Government allocations. About 90% of BAP's annual lending is short-term production credit, mainly to associative enter- prises. Its main source of short-term resources is the Central Bank through its discount facilities. Long-term loans have generally been made using external sources such as Bank or Interamerican Development Bank (IDB) loans. BAP's lending operations have grown in recent years owing to its rapidly expanding lending to associative enterprises and the reduced participation of private banks. In the period 1970 to 1975, lending operations increased by about one-third in real terms. However, the volume of long-term development credit has increased to a lesser degree. While BAP has had some success in reducing its loans in arrears, these continue to be relatively high (about 10% of its portfolio). It is also striving to reduce the burden of its administra- tive costs, which are about 10% of the value of its portfolio. Despite sub- stantial increases in recent years in loan interest rates, which are applied  - 6 - retroactively to outstanding as well as new loans, the capital base of BAP has been seriously eroded by inflation, requiring continued new capital contri- butions from the Government. Moreover, these interest rates continue to be appreciably below the rate of inflation. Finally, BAP's relatively small technical staf. cannot provide adequate technical assistance services to sub- borrowers, while MAA's farm extension services continue to be very deficient and not coordinated with BAP's credit programs. The BAP is currently preparing a request for a new Bank loan (the Sixth Agricultural Credit Project), in which these sectoral and institutional issues will be addressed. B. Previous Bank Involvement and Proposed Bank Strategy in the Sector 1.16 The Bank has made 11 agricultural loans to Peru. Five of them, totalling US$55.0 million, were for agricultural credit and were channeled through BAP (105-PE, 162-PE, 257-PE, 415-PE and 933-PE). Disbursements of the last loan (933-PE) are completed. Two other loans (67-PE and 98-PE), totalling US$3 million, were for farm machinery imports and the other three (144-PE, 418-PE and 1403-PE) were for irrigation. The first two of these loans for irrigation, totalling US$24.5 million, financed irrigation works and land settlement of the San Lorenzo scheme in the Piura Valley. The Second San Lorenzo Loan (418-PE) suffered managerial problems, inadequate counterpart funding and water shortages. While it took 11 years to disburse, it neverthe- less acheived its basic goals and produced important benefits (OED Project Performance Audit Report SECM-48 of January, 1978). The third irrigation project (Loan 1403-PE for US$25 million) finances the rehabilitation of irrigation and drainage systems in six southern coastal valleys. A second irrigation rehabilitation project--the Bajo Piura Project--has recently been approved by the Bank. 1.17 It is anticipated that the Bank will intensify its lending operations in the agricultural sector in the coming years in support of the Government's policy initiatives and investment programs. Further large-scale irrigation rehabilitation and drainage projects on the Coast are a distinct possibility as the Government strengthens its implementation capabilities in this area. Financing of small-scale irrigation construction and improvement sub-projects carried out under the aegis of a national program in both the Coast and the Sierra is to be further examined with the authorities. Also in the Sierra, the Bank could support dairy development in several of the major milksheds (e.g., Cajamarca and Huancayo), mainly among small-scale producers. The experience to be gained in the execution of this proposed rural development project should provide the basis for future projects of this type in the Sierra. The Bank would also examine possibilities for promoting tropical tree crop and livestock development and rural infrastructure in the Ceja de la Selva. Finally, among the projects with national scope would be Bank support of term lending for crop, livestock and agroindustrial development (building on the experience of five previous loans), provision of marketing and storage infrastructure (especially in rural areas) and strengthening of the agricul- tural research and extension services.  - 7 - II. AGRICULTURE AND RURAL POVERTY IN THE SIERRA 2.01 The Sierra's population in 1972 was about 6 million, 44% of the total for the country. About a quarter of the people depend on mining and services and most of the remainder on subsistence farming, cottage industries, commerce, and such, sometimes complemented with seasonal work (often in the coastal areas). The Sierra's agricultural economy has shown little dynamism, it has traditionally experienced neglect and borne the brunt of the pro-urban bias of Government policies. The concentration of physical infrastructure and support services (research, extension and credit) in coastal agriculture and the low food price policy of most Governments have impeded the expansion of agricultural output in the Sierra. The health situation is poor and infant mortality is exceptionally high; life expectancy is as low as 35 years. More than 50% of the children under five, and pregnant and lactating women are at risk of serious malnutrition. Protein-calorie malnutrition shows a high inverse correlation with size of family farm plot, with more than 90% of protein-calorie malnutrition found among families with 3 ha or less of culti- vable land. Owing to substantial out-migration to other regions, the popula- tion is currently increasing at a rate of only about 1% per annum. A large part of the rural population lives in traditional communities. 2.02 According to the 1972 agricultural census, there were 1,083,100 farms in the Sierra (77% of the nation's total). Land in farms came to 19.4 million ha, 2.3 million ha of which were in croplands, about 500,000 of which were irri- gated. Of this cropland, 1.2 million ha were in annual crops and 0.9 million ha were fallow. Permanent cropland amounted to 184,200 ha of which about 60% were in cultivated pastures. Natural pasturelands totalled about 14.3 million ha. Owing to the relatively high population pressure in rural areas, rainfed cultivated cropland has progressed up mountain slopes, encroaching on marginal and non-arable lands, thus accelerating erosion. The National Office for Natural Resource Studies (ONERN) estimates that 50 to 60% of the pasturelands are not presently suitable for sustained extensive grazing. thus, overstocking may be likely. 2.03 Of the 1,083,100 units in the Sierra, 1,039,400 farms (95%) under 20 ha in size averaged 1.7 ha of cropland each and accounted for 77% of the Sierra's cropland. The remainder was distributed between 32,300 farms in the 20- to 100-ha range (281,000 ha) and 11,400 farms over 100 ha (230,000 ha). Main crops are potatoes, barley, wheat and quinua; the Sierra is the country's main producer of these staples. Yields are low, in part owing to primitive cultivation techniques, poor quality seeds and lack of nitrogen and other elements in most of the soils. Further constraints derive from climatic condi- tions; late summer and early autumn frosts can often wipe out an entire harvest, while the rainfall (600 to 1,000 mm) is concentrated in a few months but often erratic in both timing and volume. Only 13% of the farms apply fertilizers, 16% purchase seeds and 2% are provided with extension services and institutional credit. (In 1976, barely 15% of BAP credit went to Sierra farms.) 2.04 Natural grasslands are predominantly in the larger farms (over 100 ha), which also have 15% of the cultivated pastures. Nevertheless, although the region accounted for 79% of the national cattle herd in 1972, 64% of all cattle were on Sierra farms less than 20 ha in size. While 97% of the country's sheep are in the Sierra, 67% are on farms with less than 20 ha. The distribution of cameloids (llama and alpaca) is most likely similar.  - 8 - Herd extraction rates and output of fiber per head are low, owing to the low genetic constitution of most animals, inadequate nutrition, negligible animal health measures and poor management practices. 2.05 Expansion of agricultural production is further cons 'ained by the inadequate road network, little of which is paved and much of which is poorly maintained. Market information services are meager and poorly organized, and product transport and marketing is to a large extent carried out by a great number of small-scale truckers and traders. Product storage, wholesaling and retailing infrastructure is inadequate. *.06 In the mid-70s, typical 'arm family income in the Sierra was esti- mated at some US$250 equivalent (including subsistence production, farm produce sales and off-farm employment). Low economic performance is accompanied by social and cultural impoverishment. Literacy rates amenR the rural population are typically below the national average, especially for females. Housing is primitive, with grossly inadequate potable water and sanitary facilities; few homes have electricity. Health services are rudimentary or non-existent; Sierra Departments average less than one health facility bed and less than one professional or technical staff per thousand persons--less than one-half the national average--and even these few are concentrated in urban centers in the Sierra. Infant and maternal mortality rates in the Puno Department are about 101/1,000 and 9.8/1,000, respectively. Respiratory tract (33%) and intestinal tract (15%) infections are the most prevalent causes of mortality. In both cases, malnutrition is an important conditioning factor. Most causes of morbidity are traceable to inadequate personal hygiene, lack of immunization, and absence of potable water and sewage disposal facilities. Finally, nutritional levels are inadequate in the region, e.g., a 1975 survey carried out in rural areas of the Puno Department demonstrated that caloric and protein requirements were covered only to the extent of 64% and 69%, respec- tively. Nutritional deficits were especially notable in the group under five years of age. The project proposed herein would be directed at overcoming these obstacles to increasing farm output and improving rural living conditions in one of the poorest areas of the Sierra. III. THE PROJECT AREA Location and Physiography 3.01 The Department of Puno, with a population of about 780,000, is on the southeastern border of Peru. The Juliaca micro-region project area lies wholly within the Department. The total land area of the micro-region is 855,800 ha, in a strip from Lake Titicaca at 3,810 meters above sea level northwest to the divide (at about 5,000 meters) between the Sierra and the Costa. The physiography of the micro-region is generally homogeneous, con- sisting mainly of a wide elevated plateau, cut in several places by valleys, b-at generally flat, with only gently undulated scattered features. Most of the agricultural lands are located at the lower part, the elevations ranging between +3,810 m and +4,200 m. The general slope of the topography of the area is toward its main hydrological catchment basin, Lake Titicaca, which covers an area of 8,100 km2 and has a maximum depth of about 212 m.  -9- Climate 3.02 The climate is semi-dry and cool. Some 87% of the annual average rainfall of 565 mm is concentrated in the summer months of November to April. Altitude and proximity to Lake Titicaca are principal factors affect- ing the range and variability of temperature; as one moves farther from the lake and upland, average temperatures are lower, their range widens and the probability and intensity of frosts during winter months increases. Average monthly temperatures at the lakeside (Capachica) vary from 5.70 in June and July to 8.60 in January. Further inland at Lagunillas the average 0 ~~~~~~~6 monthly temperature in July is 3.80 and in November is 7.7 . Average annual evapotranspiration is about 500 mm. Climatic data recorded at two climatological stations are shown in Annex 2, Table 1. Soil and Water Resources 3.03 Most of the soils in the altiplano area are of sedimentary and alluvial origin and contain a moderate amount of nutrients, although somewhat deficient in nitrogen and phosphorus. The soils of the micro-region are relatively well supplied with potassium, pH is neutral to moderately alkaline, and are generally of medium fertility, requiring in some cases nitrogen and phosphoric chemical fertilizers. The quality and the genetic and morphological characteristics vary within the area and, consequently, so does their suitability for agricultural use. In some parts of the micro-region they would need surface drainage and in a few cases also underground drainage. According to a soils survey carried out by ONERN in 1965, an area of about 42,000 ha is classified as Classes III and IV, considered as suitable for intensive annual and perma- nent crops, with relatively good natural fertility and productive capacity. Another 152,000 ha belong to Class V, which are suitable mainly for cultivated and improved pastures, but would require careful management and drainage. 3.04 Surface waters drain into the main hydrological catchment basin of the area, Lake Titicaca. The main rivers are the Coata, Cabanillas, Lampa, Illpa and Ramis. The existing hydrological information on these surface water resources is incomplete and the records in some places cover only a short time period. Groundwater is presently utilized only on a small scale, by shallow wells, mainly for domestic uses. They are spread over the whole area, are of rude construction and most of them are unprotected from contamination. There appears to be substantial groundwater potential for cropping and livestock uses, but the full extent of its availability has not yet been sufficiently studied. Communications 3.05 The town of Juliaca is the main commercial center of Puno Department. Two trunk roads cross the project area. The Arequipa-Juliaca-Puno-Desaguadero road is the main route to the Pacific Coast and also carries relatively heavy cargo traffic originating in or bound for Bolivia. Except for a relatively short paved stretch from Juliaca to Puno, this road is gravel surfaced and in  - 10 - poor condition. A second road from Cuzco to Juliaca serves as the main route in the southern highlands and is also gravel surfaced and in relatively poor condition, especially during the rainy season. In all, the road network in the project area consists of about 302 km of gravel-surfaced roads, 323 km of dirt-surfaced oads and 35 km of paved road. Except for this last component, the roads system is in poor condition, much of it permitting little or no passage during the summer rainy season, and requires an intensive repair, upgrading and improved routine maintenance program. The principal town in the project area, Juliaca, also lies on the main Cuzco-Arequipa rail line, with daily passenger and cargo service, and has an airport served by a commercial airline. Population and Employment 3.06 According to the 1972 national census, the total population of the Department's 23 administrative districts which comprise the Juliaca micro-region was about 165,000; 113,300 persons (68%) lived in rural areas and 51,700 (32%) lived in urban areas, of which Juliaca (39,000 pop.) was the principal one. Population growth from 1940 to 1972 was 1.5%, mainly in urban areas (4.5% p.a.) rather than in rural areas (0.7% p.a.). Of the total rural population of 118,000 estimated to live in the project area in 1978, the economically active population was about 31,100 persons. 3.07 There are about 29,500 families in agriculture. Some 12,370 (42%) are classified as minifundistas, whose net income derived from farming their land (estimated at about US$70 equivalent p.a. in 1977) is less than that required for subsistence consumption. Their farms average about 1.1 ha and, to the extent possible, they engage in part-time labor off their farms to supplement their income. About 13,390 small farmers constitute a second group, representing about 45% of the rural families. Their annual farming income is about US$209 and their farms average about 12 ha. Medium farmers, with more than 20 ha, number about 740 (2.5% of the total families) and have an annual income of about US$577. Finally, about 3,000 families are members of the seven AREs in the project area and have an annual average income of about US$548 equivalent, derived in part from labor income on the enterprises and in part from running their private herds (huacchas) or cropping on enter- prise lands. Land Tenure and Farmer Organization 3.08 Land reform was carried out in the project area in the early 1970s, when a series of haciendas were incorporated into seven large AREs. The present land distribution situation is summarized below and presented in greater detail in Annex 2, Table 2:  - 11 - Average Farm Average Area Category Size Total Area Families per Family (ha) (ha) % No. % (ha) Private Farmers Minifundistas 1.1 13,605 2 12,370 42 1.1 Small Farmers 12.2 163,177 19 13,390 45 12.2 Medium Farmers 93.2 69,003 8 740 3 93.2 Sub-total 9.3 245,785 29 26,500 90 9.3 AREs Associative Enterprises 52,766 369,363 43 3,000 10 123.1 Operations of ARE Members 45 122_671 14 (2,700) (9) 45.4 Sub-total 492,034 57 3,000 10 164.0 Other Lands (communal, state, etc) - 117_981 14 - - TOTAL 855,800 100 29,500 100 3.09 The agrarian reform focussed on the expropriation of large farms, and had little or no impact on the 90% of the farm families living off those haciendas. The relatively few families on the AREs manage over half the area in farms, partly within the associative enterprises and partly through usufruct of ARE land; a much smaller share of the land is managed by private farmers. Nevertheless, private farms account for about 80% of croplands, while the AREs are predominantly livestock enterprises, based on extensive grazing of natural pastures. Almost half of the livestock in the project (mainly sheep, secondly, cameloids, and, finally, cattle) are on the AREs; about 10% of all livestock are in herds owned by individual ARE members, but graze on ARE lands. Thus, while the associative enterprises are operated as large units under the direction of a hired manager, the individual pursuits of ARE members on ARE lands are not insignificant. Crop and Livestock Production 3.10 There are presently some 16,000 ha of crops in the micro-region. About half this area is in potato production, one-quarter in quinua, 20% in barley and small amounts in canihua, beans, lupines, and such. Livestock output includes about 3,300 m tons of meat (slightly over half from sheep), 1.2 million liters of milk and 1,100 m tons of wool and fibers from sheep and alpaca. There is also an appreciable amount of cattle fattening undertaken (mostly by minifundistas and small farmers); live animals are then shipped to coastal areas for finishing and slaughter. Regional Institutions 3.11 The Puno Regional Development Organization (ORDEPUNO) was created by Decreto Ley 22214 in June 1978 (Chart 1). Its predecessor agencies were the Puno Department Committee (COMDEP) and the Puno Development Corporation  - 12 - (CORPUNO). The Chief of ORDEPUNO has the rank of Minister; the Regional Offices of the various national ministries (agriculture, health, education, transport, and such) are under his control and their budgets are established by ORDEPUNO according to regional priorities and plans and the general finan- cial appropriations it receives from the Central Government. 3.12 The Regional Directorate of Agriculture and Food (DRAA) is headquar- tered in Puno. In 1972 the total professional and technical staff numbered 411. Of these, 43 are presently located in the micro-region, assigned to the Sub-Directorates of Soils and Water (including administration of irrigation districts), Crops and Livestock (including farm extension), and Forestry, Marketing. There is no formal organized extension service in the project area. The several small agricultural agencies scattered throughout the area are staffed by technicians trained in various agricultural and animal husbandry disciplines. However, they are heavily engaged in administrative chores and, as a result, can devote little time to establishing effective contact and assisting farmers. The National Training Center for Agrarian Reform (CENCIRA) operates a training facility for MAA technical staff and farmers in Lampa, near Juliaca. The National Agricultural Research Institute (INIA) has been operating a small experimental station at Tahuaco, south of Puno, and is just initiating a crop research program at a new site at Illpa (in the micro-region). However, these facilities are poorly staffed and not adequately equipped to meaningfully address the problems of the micro-region. The National Input Marketing Company (ENCI) operates limited storage facilities in Juliaca, markets pasture seeds, and has four private commercial agents for marketing fertilizers in the project area. 3.13 The Regional Directorate of Health (DRS) maintains in the project area one general hospital (50 beds) in Juliaca (to be replaced by a larger one presently under construction), a smaller (unequipped and unstaffed) hospital in Lampa, three health centers, and 31 health posts. Each of the seven AREs also maintain a health post. These facilities are staffed by five doctors (all located in Juliaca) and 58 nurses aides. There are also 35 trained rural health promoters and 15 trained midwives who provide primary health care, using small medical kits. The Regional Directorate is also responsible for carrying out the national rural potable water program. Less than 2% of the rural population has access to potable water. The remainder takes water directly from streams, springs and shallow wells. Those few rural systems which exist have been constructed by the Office of Sanitary Engineering of the Health Directorate and their operation is the responsibility of locally formed Administrative Boards, which maintain the systems and collect beneficiary fees to cover operating costs; the DRS provides ongoing technical supervision. The establishment of such an Administrative Board is a precondition for the construction of a system. 3.14 The Regional Directorate of Education (DRE), operating under ORDEPUNO, is headquartered in Juliaca. In the Department of Puno, there are 1,398 state- operated schools and 272 private institutions; there are some 222,000 students, 77% of whom are enrolled in primary schools. Seventy-one percent of the approximately 6,000 teachers are in primary schools. In the micro-region, there are about 20,000 students enrolled in primary and secondary schools (about 55% of the population aged six to 16 years). While access to facilities  - 13 - is reasonably good in towns and larger villages, in smaller villages and for the relatively poorer dispersed rural population, this is an acute problem. Moreover, the quality of physical facilities, teacher preparation and instruc- tional materials are inadequate. The Regional Directorate also operates 38 basic vocational training schools, with some 8,000 enrollees and 217 instructors in the Department. 3.15 The Regional Directorate of Transport and Communication (DRTC), under ORDEPUNO, is responsible for the Departmental road system, presently consisting of 142 km of paved roads, 1,073 km gravelled and 850 km of graded ungravelled roads and 2,251 km of unimproved roads open only to seasonal vehicular traffic. Its staff comprises eight civil engineers, seven topographers, two draftsmen, one soils mechanics laboratory technician, 86 office staff and about 400 laborers. Major equipment items are seven dump trucks, three front loaders, five graders and one tractor. There are four local offices outside Puno (one in Juliaca) and two motor pools (also one in Juliaca). 3.16 The Juliaca Agency of BAP operates under the Puno branch and parti- cipated in the previous Bank agricultural credit project. Its total staff of 31 includes five crop and livestock credit officers, and one field inspector. Its jurisdiction includes the project area. 1/ In 1978, it made some 4,800 loans for S/. 968.7 million. While its short-term lending is to both private farmers and AREs, the latter account for most of its long-term lending. Nevertheless, in 1977, 96% of its subloans were less than S/. 150,000 each. During the past two years, loans overdue have averaged 8% to 9% of the port- folio, which is below the national average. IV. THE PROJECT A. Introduction 4.01 Rural development in the Sierra has been an important topic in the Bank's discussions on sectoral development issues with the Government. After several sectoral and identification missions in the early and mid-1970s, it was agreed with the Ministries of Agriculture and Food (since fused into a single Ministry - MAA) in early 1977 that the preparation of a first-phase rural development project in the Department of Puno should be initiated. A working group was established under the chairmanship of the Director of the Puno Agrarian Region, with the active involvement of the various regional agencies expected to participate in the proposed project. This group prepared a project feasibility study under the guidance of the FAO/IBRD Cooperative Program. The feasibility study was completed in mid-1978 and sent to the Bank in October of that year. A Bank mission visited Peru to appraise the project in June 1979. 1/ The only part of the project area not served by the Juliaca agency is the SAIS Buena Vista, which is within the jurisdiction of the Puno Office.  - 14 - B. Brief Description 4.02 The objectives of the proposed project would be to increase agricul- tural produc- on on approximately 20,000 ha of rainfed crop and pasture lands and 4,100 ha of irrigated lands in the project area, thereby increasing the incomes of approximately 17,000 low-income rural families, and to improve the quality of life of rural families living in the project area. 4.03 To accomplish these objectives, the project would provide for: (a) Rehabilitation and construction of small irrigation systems, benefitting about 4,100 ha; (b) Agricultural credit to finance on-farm investments and incremental production costs, (c) Planting some 1,500 ha of forest trees for soil conservation and fuel; (d) An intensive crop and livestock extension program, a nutrition program and technical assistance to promote and strengthen small rural industries, all carried out by the Project Unit; (e) Support to applied crop and livestock research programs, an associated training and demonstration program and an irrigation training and demonstration center; (f) Rehabilitation and upgrading of rural roads, strengthening the road maintenance capability of the Transport Ministry in the micro-region, and construction of six post offices in the micro-region; (g) Construction and equipping rural health facilities, training and equipping rural health agents, and equipping the already constructed small hospital in Lampa; (h) Installation of small communal potable water systems; (i) Constructing and equipping vocational training centers; and (j) Studies to prepare a second-phase project covering a much larger area in the Southern Altiplano. A Project Unit responsible for project execution would be established within ORDEPUNO.  - 15 - C. Detailed Features Irrigation 4.04 The Huata-Quita Irrigation System. This system was originally constructed in the 1960s to serve some 800 ha. Only the principal civil works were completed and presently some 170 ha are irrigated. Water is supplied by gravity flow from the Cabanillas River. Under the project, the headworks would be rehabilitated, the main lined canal repaired (and an additional 2.5 km lined) and regulating and distribution structures installed. In addition, 8.7 km of lateral irrigation canals, 36 km of sublaterals, 7.2 km of drainage collectors and 21 km of drainage ditches would be constructed. A ditch tender's house would also be constructed. The rehabilitated system would adequately serve some 600 ha, benefitting about 424 families. Cost estimates are presented in Annex 2, Table 3. 4.05 The Cabanillas Irrigation System. Located about 10 km downstream, this system was constructed at about the same time as the Huata-Quita system. Again, only the principal civil works were provided for about 1,200 ha; as a result, only about 20% of the area has been irrigated in recent years. The system presently consists of a gravity intake on the Cabanillas River, 17.2 km of main canal (5.5 km lined) and some 52 (deteriorated) distribution outlet structures. Rehabilitation comprises repair of the headworks, repair of exist- ing lining and lining of an additional 1 km of the principal canal, construc- tion or repair of several structures (overflow gate, conduits, aqueducts, and gates on distribution outlets), and construction of 15.4 km of laterals and 29.7 km of sublaterals. In addition, about 5 km of main drains, 7 km of lateral drains and 35 km of on-farm drains are envisaged. A ditch tender's house would also be constructed. The rehabilitated system would adequately serve some 1,000 cropped ha, benefitting about 600 families. The water supply available from the Cabanillas River and the demand generated by the Huata- Quita and Cabanillas systems are presented in Annex 2, Table 4, while cost estimates appear in Annex 2, Table 5. 4.06 The Taraco Irrigation System. This system, supplied by the Ramis River, was originally constructed in the late 1960s. Water is lifted some 32 meters from the river by a set of five pumps to a 17.5-km main canal (14.3 km lined) to serve (originally) some 2,000 ha. In recent years, about 200 ha have been irrigated. The pumping units have been poorly maintained and need repair. Structures for distribution and operational control for the most part also need basic repairs. Under the project, the intake structure would be repaired and upgraded, an additional pumping unit installed, two pumps overhauled and the other pumps inspected and repaired, and the structure housing the pumps improved. Lining of 5 km of the main canal would be repaired, an additional 2 km would be lined, and various structures along the main canal would be built. Lateral canals (35.3 km) would be constructed (21.6 km lined), with complementary structures and 48 km of sublateral canals provided. A main drainage canal of 11 km and 56 km of secondary drains would be provided and access roads (11 km) and service roads (17 km) would be constructed or upgraded. Housing for system operators and a ditch tender would also be  - 16 - provided. The rehabilitated system would adequately serve some 1 600 ha, benefitting some 1,000 families. The water supply available from the Ramis River and the demand generated by the Taraco subproject are presented in Annex 2, Table 6. Cost estimates are presented in Annex 2, Table 7. 4.07 The Buena Vista Irrigation Sub-project. This component is intended to demonstrate the potential for irrigated crop production under the specific soil and micro-climatic advantages of farmlands near Lake Titicaca. Under it some 400 ha would be irrigated by water supplied by a small intake on the lake, through an inlet pipeline and canal, to a pumping station with two pump units discharging into a 1.2-km main canal, 7.5 km of laterals and 24 km of sublaterals. About 4.5 km of drains and collectors and 8.7 km of service roads would also be provided. Water demand and supply for this subproject appear in Annex 2, Table 8 and cost estimates appear in Annex 2, Table 9. 4.08 Small-Scale Irrigation Systems. A number of small-scale systems, pumping water from wells, streams and lakes are envisaged under the project. These would serve groups of small farmers. Such systems would comprise developing a water source (e.g., a shallow well), installing a pump and ancillary equipment, and providing a small distribution system, with some land levelling where required and other on-farm works. It is anticipated that about 60 such units would be provided under the project, serving some 500 ha. Water requirements for typical units are presented in Annex 2, Table 10 and cost estimates appear in Annex 2, Table 11. 4.09 Irrigation District Equipment. The project would also provide a small machinery pool to the Juliaca District Irrigation Sub-Directorate. This equipment would permit the Sub-Directorate to assist in performing minor on- farm development works for the subprojects described in paragraph 4.08. In addition, the equipment would substantially strengthen the Sub-Directorate's maintenance capabilities on the systems to be rehabilitated under the project (paras 4.04 to 4.07). With this expanded capability and the continuance of the traditional organized community system maintenance activities, supplemented where necessary by services of local contractors, it is envisaged that these systems would be adequately maintained. The composition and estimated cost of this equipment set are presented in Annex 2, Table 12. Agricultural Credit Program 4.10 Agricultural credit would be provided, on the basis of technically and financially viable production and investment plans, to finance on-farm investments, sucth as irrigation works (including shallow wells, pumping equipment, distribution systems, and such), planting improved pastures and forages, farm structures, on-farm storage facilities, tools, farm machinery purchase or repair and--where justified--breeding stock. Subloans would also finance incremental operating costs, e.g., land preparation, purchase of improved seeds, fertilizers and pesticides, machinery services, and small livestock fattening operations. About 14,000 small and medium producers and seven AREs (with 3,000 member families) would benefit from this component. Operating procedures and estimated costs and phasing of this program are presented in paragraphs 5.11 and 5.12 and Schedule A.  - 17 - Forestry Program 4.11 Under the forestry program, to be carried out by the Forestry Sub- Directorate of the DRAA on marginal lands of AREs and communities, not suited for crops and livestock, a nursery for raising seedlings would be established in the first year, while in the three ensuing years, some 1,500 ha of plantations of Eucalyptus globulus (75%), Cupressus goveniana (15%) and Cupressus macrocarpa (10%) would be planted. Families in the areas to be benefitted by these forests would provide the labor for establishing and caring for the forests, under DRAA supervision. A small program of adaptive trials with several other varieties would also be carried out. Approximately 2,850 rural families would benefit by having a new source of badly needed fuel and additional income from sale of wood cuttings. Moreover, the animal wastes presently used for fuel could instead be applied to the soil, thereby improving its physical and nutrient status. Estimated costs of the forestry program appear in Annex 2, Table 15. Project Unit 4.12 A Project Unit (PU) would be equipped, trained and headquartered in Juliaca, with additional agencies in Lampa and Santa Lucia. The PU would super- vise and coordinate the various project components carried out by the other participating agencies. It would directly execute the farm and ranch extension program, under which crop, livestock and irrigation agents operating out of these three offices would work with groups of small and medium farmers and the AREs. About 17,000 families would benefit from this program, the details of which are set out in paragraphs 5.08 and 5.09. A program to promote improved nutrition practices and expanded output of subsistence foodstuffs among some 6,000 subsistence and minifundia farm families living in about 40 communities in the project area would also be carried out by specialized nutrition staff of the PU (para 5.10). Finally, a small staff would also promote and provide technical assistance for small rural industries. Further details on the activities and functions of the PU are presented in Chapter V. The detailed staffing and budgets are presented in Annex 2, Tables 16 to 21. Research Program 4.13 The research component would support the establishment of a crop and livestock experiment station on MAA land at Illpa and improve the facilities at the already existing Tahuaco station. The former would undertake work applicable to the Andean valleys and plateau, and the latter would carry out work appropriate to the project area in the vicinity of Lake Titicaca. The costs of this program are summarized in Annex 2, Table 22. A small irrigation training and demonstration center would also be established at Pirapi to undertake a limited research program on suitable techniques for irrigating crops and pasture in the area and to train extension and irrigation personnel and farmers in appropriate irrigation practices. The component includes constructing, equipping and operating the research and training facility, including rehabilitating and extending the irrigation infrastructure on about 14 ha belonging to the research complex. Cost estimates are presented in Annex 2, Table 23.  - 18 - Roads and Communications 4.14 Under the project, about 309 km of rural roads would be improved by patching, regrading, regraveling and repairing or adding drains and culverts. A further 206 km of unsurfaced dirt roads would be up-graded to all-weather standards, requiring widening, grading and drainage. A set of equipment would be procured to carry out this program and ensure adequate future maintenance. To further improve the micro-region's communication infrastructure, new post offices would be constructed in Juliaca, Lampa, and four small rural villages. The estimated cost of this program is presented in Annex 2, Table 24. Social Infrastructure 4.15 Potable Water. The potable water supply component of the project would be implemented by the Regional Directorate of Health (DRS) of ORDEPUNO. It envisages providing potable water to 46 communities, four health centers and 26 health posts. It is estimated that about 53,000 persons would benefit. For the most part, water would be supplied by shallow wells equipped with manual or windmill-operated pumps. A few systems would be fed by springs or pumping from rivers. No house connections would be provided under the project. Simple filtration would be provided, but water sources would be chosen so as to minimize the need for additional treatment. In addition, in about 30 communities and at the health centers and health posts, public laundry and shower facilities would be provided. The Sanitary Engineering Office of the Ministry of Health has prepared a series of basic designs for rural potable water facilities, which are constructed under the National Rural Potable Water Program. These units are designed to serve groups of about 200 persons with an average daily supply of up to 40 to 60 liters. Beneficiary investment costs are in the range of US$10 to US$20 per capita. The Sanitary Engineering Office of the Regional Directorate constructs the works and undertakes to organize Administrative Boards which are responsible for oper- ating and maintaining these systems, under this office's supervision. These Boards also collect user fees to cover system operation and maintenance costs. The cost estimate of the rural potable water program is presented in Annex 2, Table 25. 4.16 Rural Health Facilities. Health services in the project area are under the supervision of Hospital Area No. 2 of the DRS. Under the project, six new health posts providing ambulatory care would be constructed in villages now lacking such facilities, while seven existing health posts would be rehabilitated. The next higher level of health care is provided by the health center, a four- to eight-bed facility. Under the project, two health posts would be upgraded to health centers and two health centers would be rehabili- tated. The presently existing Lampa hospital would be equipped and staffed as a 20-bed facility. In addition to the civil works and equipment proposed for these facilities, the program would provide three 4-wheel drive ambulances; training, medical kits and bicycles for volunteer rural health promotors; and a small maintenance workshop for maintaining and repairing vehicles, refrigera- tors and electromedical equipment. The estimated costs of the health facilities component are presented in Annex 2, Tables 26 and 27.  - 19 - 4.17 Rural Vocational Training. The Regional Directorate of Education (DRE) would construct and operate 23 vocational training centers under the project. These would be located in rural villages and provide basic training in such activities as weaving garments and rugs (using wool and alpaca fibers), operating school or community gardens, hat-making leatherwork and brickmaking. In some cases, day care facilities for children of mothers undergoing training would be provided, promoting the participation of women, and the centers would also be available for evening courses. It is anticipated that about 4,200 persons would participate in the vocational training programs during the four years of project execution, some of whom could be employed in small rural industries in the project area (para 5.03). The estimated cost of this component is presented in Annex 2, Table 28. Second-Phase Studies 4.18 The project provides for assembling data, carrying out studies and developing practical plans for exploiting the region's limited natural resources. Most of the information would be obtained from technical and other reports already done on the Puno Department. Field work would be carried out, however, to update and secure precise and accurate data where required to produce a functional plan. The agricultural phase of this component would be headed by an expatriate consultant, but the rest of the staff would be local consultants. Studies would cover such topics as soils and land use capabili- ties, appropriate cropping and animal husbandry systems, forestry resources and reforestation needs, appropriate structuring of public sector institutions to better promote the region's development and other economic and social factors which may affect or inhibit development in the region. In addition, the studies would cover investigation of the availability and development potential of the area's hydraulic resources. The feasibility of flow regula- tion and seasonal storage would be studied on the Illpa and Cabanillas Rivers and Lake Umayo. Feasibility studies would also be undertaken for rehabilita- tion of existing irrigation systems or possible new irrigation projects. On the basis of these studies, a project preparation team would prepare a feasibility report of such scope and detail as to enable the Bank to consider undertaking a second-phase rural development project in the southern Altiplano. Summary costs are presented in Annex 2, Table 29. D. Project Costs 4.19 The project would be implemented over a period of about four and one-half years (Chart 2). Total project costs amount to US$27.3 million, in- cluding a foreign exchange component of US$12.1 million, or 44%. Base costs, totalling US$20.3 million, are calculated according to May 1979 prices. Costs of civil works are estimated according to recent experience with similar classes of works in the highlands; a 3% tax on the cost of civil works, paid by contractors and amounting to about US$0.1 million equivalent, is included. Costs of imported goods are estimated CIF Callao, excluding domestic inland transport costs to the project area. The average fees for foreign consultants were estimated at US$8,000 per man-month, including salaries, allowances, travel and living expenses, overhead and profit. Physical contingencies, estimated at US$1.6 million, were calculated at 10% for civil works, equipment,  - 20 - salaries, other operating expenses and activities financed under the farm and ranch credit program. Price contingencies, expressed in US dollars, are US$5.5 million and have been estimated to average 10% p.a. for equipment and civil works in 1979, 9% in 1980, 8% in 1981 and 7% in 1982 to 1985. It has been assumed that deviations between international and internal inflation would be offset by compensating changes in the exchange rate, as has been the government's policy in the past few years. Project costs are summarized on the following page. The expected phasing of expenditures is presented in Annex 2, Table 30. E. Project Financing 4.20 The Bank loan of US$15.0 million, 55% of project costs, would cover the foreign exchange cost of US$12.1 million and the equivalent of US$2.9 million (about 19%) of local currency costs. The Government of Peru would provide counterpart funds equivalent to US$11.6 million, or 42% of total project costs, and project beneficiaries would finance the equivalent of US$0.8 million, or 3% of total project costs. The proposed financing plan is detailed in Annex 2, Table 31, and is summarized below: Project Item Beneficiaries Government Bank Total US$M % US$M % US$M % US$M % Equipment 0.41 20 1.67 80 2.08 8 Civil Works 1.18 20 4.71 80 5.89 22 Operating Costs 0.66 20 2.63 80 3.29 12 Training and Studies 0.10 10 0.90 90 1.00 4 Technical Assistance 1.09 100 1.09 3 Farm Investment Credit 0.43 9 4.40 91 - - 4.83 18 Farm Production Credit 0.19 9 1.97 91 - - 2.16 8 Contingencies 0.17 2 2.83 41 4.00 57 7.00 25 TOTAL 0.79 3 11.55 42 15.00 55 27.34 100 4.21 To help assure a prompt initiation of the project, recruitment and training of Project Unit staff and extension personnel would begin in early 1980, as would a study of Cabanillas River flows and finalizing the designs and preparing procurement documentation for irrigation civil works. For this reason, retroactive financing of up to US$140,000 equivalent is proposed to help cover eligible expenditures after January 1, 1980, but before the loan is signed. The Government would be the borrower and would repay the loan, including interest, and bear the foreign exchange risk. The Bank loan of US$15 million would be for 17 years, including four years of grace, at the interest rate prevailing at the time of Board approval. During negotiations, assurances were obtained from the Government that adequate counterpart funds would be provided to the participating agencies in order to properly staff, operate and maintain project facilities.  P ERU PUNO RURAL DEVELOPMENT PROJECT Project Cost Foreign B ase Item Local Foreign Total Local areigs, Total Exchange Cost -sI----- -5 .,000 - - - -- - ------$