Peru - Alto Mayo Rural Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4058-PE STAFF APPRAISAL REPORT PERU ALTO MAYO RURAL DEVELOPMENT PROJECT November 17, 1982 Latin America and the Caribbean Regional Projects Department Agriculture 4 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 US$1 = Peruvian Soles S/. 550 S/. 1,000 US$1.82 WEIGHTS AND MEASURES 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 kilogram (kg) = 2.2 pounds 1 metric ton (m ton) 1,000 kg = 0.98 long ton ABBREVIATIONS BAP Peruvian Agricultural Bank CGIAR Consultative Group for International Agricultural Research CIAT International Center for Tropical Agriculture CIPA Agricultural and Livestock Investigation and Extension Center DCCN Directorate of Campesino and Native Communities DS Directorate of Services (TD) DWE Directorate of Works and Equipment (TD) ECASA National Rice Marketing Enterprise ED Executive Directorate of the Project ENCI National Enterprise for Marketing Inputs HCBM Huallaga Central - Bajo Mayo Project IFAD International Fund for Agricultural Development INAF National Institute for Expansion of Agricultural Development INFOR National Forestry Institute INIPA National Institute for Agricultural Research and Extension MAG Ministry of Agriculture MTC Ministry of Transport and Communications OAAM Alto Mayo Aguaruna Organization OGCAR General Office of Cadastral and Rural Affairs (MAG) ONERN Office for Evaluation of Natural Resources SENAMA National Agricultural Machinery Service (INIPA) SMS Subject Matter Specialist in Extension Service (INIPA) TD Technical Directorate of Project  FOR OFFICIAL USE ONLY PERU ALTO MAYO RURAL DEVELOPMENT Table of Contents Page No. I. THE AGRICULTURAL SECTOR .......................................... 1 General ........................................................ 1 Resource Base ............. ..................................... 1 Government Policies. 2 Previous World Bank Participation. 2 II. THE PROJECT AREA. 3 Location and Access. 3 Regional Context. 3 Resource Base ............... 4 Settlement. 5 Present Agricultural Situation. 7 Infrastructure. 8 Institutions and Agricultural Services ......................... 10 III. THE PROJECT .13 A. Introduction .13 B. Brief Description .14 C. Detailed Features .15 Farm Development and Credit .15 Irrigation .15 Land Clearing Equipment .17 Access Roads .17 Extension and Research .19 Storage .20 Fisheries .21 Forestry .21 Health .21 Education .22 Project Technical Directorate .22 Studies .23 Technical Assistance .24 Local Mapping and Titling .25 National Mapping .25 Native Communities .26 D. Project Costs .27 E. Project Financing .29 F. Procurement .30 G. Disbursements .31 This report is based on the findings of an appraisal mission which visited Peru in March 1982. The mission comprised Messrs. M. Wilson and J.E. Fernandez of the Bank, and M. Raczynski, J.E. Coaldrake and S. Romanoff (Consultants). 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.  TABLE OF CONTENTS (Continued) Page No. IV. CRGANIZATION AND MANAGEMENT . ............................ 32 Executive Directorate ..... . . ... ....... 32 Technical Directorate .............. 0 ................ , , ,, , 33 Credit .... 34 Access Roads ....... .... , 34 Operation and Maintenance ...... . 34 Agreements with I mplementing Agencies .......................... 34 Accounts and Auditing .. .................................,.,. 35 Monitoring and Evaluation ................... . . .... ... 36 Project Reporting . . . ............ 36 V. AGRICULTURAL PRODUCTION ... ................. 37 Land Use and Cropping Patterns ....................... 37 Yields and Production ...... ............. 38 Labor Demand ........................ 39 Marketing and Prices rs............ 40 VI. BENEFITS AND JUSTIFICATION .40 General.. ....... .40 Cost Recovery and Fiscal Impact ..41 Economic Rate of Return Estimate ....41 Sensitivity Analysis ... .42 Project Risk. ....... . .42 Environmental Impact .... 43 VII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ...43 ANNEX 1: Selected Documents and Data Available in Project File .. 46 ANNEX 2: Key Indicators for Monitoring and Evaluation . .47 TABLES 1 - Irrigation Component: Metereological and River and Canal Data (2 pages) .............................. 2 - Irrigation Component: Cost Summary, Investment Schedule, Schedule for Incorporation of Land into Irrigation (2 pages)................................ 3 - Irrigation Component: Yuracyacu System............... 4 - Irrigation Component: Irrigation District............ 5 - Land Clearing Equipment: SENAMA...................... 6 - Access Roads: Estimated Costs of Road Improvements (3 pages)........................................... 7 - Access Roads: Proposed Road Standards................ 8 - Extension: Civil Works Investments*.................. 9 - Extension: Equipment, Vehicles and Operating Costs... 10 - Extension: Staff Requirements........................  TABLE OF CONTENTS (Continued) TABLES 11 - Research : Civil Works Investments................... 12 - Research : Vehicles, Equipment and Machinery......... 13 - Research : Operating Costs .......................... 14 - Research : Staffing.................................. 15 - Storage ........................................... 16 - Fisheries Component................................... 17 - Forestry Component.................................... 18 - Health Component (2 pages)............................ 19 - Education Component................................... 20 - Project Technical Directorate: Investments........... 21 - Project Technical Directorate: Staffing.............. 22 - Project Technical Directorate: Incremental Operating Costs..................................... 23 - Technical Assistance, Studies, Training............... 24 - Local Mapping and Titling Component................... 25 - National Mapping Component............................ 26 - Project Component Costs by Time....................... 27 - Summary Project Account by Component.................. 28 - Summary Project Account by Time....................... 29 - Disbursement Schedule................................. 30 - Implementation Schedule............................... 31 - Model 1: 10-ha Irrigated, Farm Budget................ 32 - Model 1: 10-ha Irrigated, Yields, Production & Production Value.................................... 33 - Model 1: 10-ha Irrigated, Operating Expenditures..... 34 - Model 2: 20-ha Irrigated, Farm Budget................ 35 - Model 2: 20-ha Irrigated, Cropping Pattern, Yields, Production & Production Value....................... 36 - Model 2: 20-ha Irrigated, Operating Expenditures..... 37 - Model 3: 20-ha Rainfed, Farm Budget.................. 38 - Model 3: 20-ha Rainfed, Cropping Pattern, Yields, Production & Production Value....................... 39 - Model 3: 20-ha Rainfed, Operating Expenditures....... 40 - Model 4: 40-ha Dual Purpose Livestock Farm........... 41 - Prices: Financial and Economic....................... 42 - Economic Analysis: Rate of Return and Sensitivity Analysis (2 pages).................................. CHARTS 1 - Irrigation District 2 - Technical Directorate Irrigation Group 3 - Project Organization MAP IBRD 16496 - Peru: Alto Mayo Rural Development Project   I. THE AGRICULTURAL SECTOR General 1.01 The performance of the agricultural sector in Peru in the 1970s was poor. At a time when the population was increasing at 2.8% p.a. (4.1% in urban areas), the value of total agricultural production rose at only 0.7% per annum compared to 2.5% p.a. between 1950 and 1970, and in real terms actually declined by 0.6% p.a. in the decade of the 1970s. In the same period, the volume of food imports increased by over 20%, and today agricul- ture constitutes 11% of GDP compared to 15% in 1970. Employment in the sector currently stands at about 41% of the labor force, despite significant emigration from depressed rural areas (especially in the Sierra) to urban areas where employment opportunities are also inadequate. 1.02 The generally poor performance of the agricultural sector can be attributed largely to a sweeping land reform and considerable Government intervention following the military takeover in 1968, 1/ compounded by the effects of a three-year drought between 1978 and 1980. With the return of a constitutional Government in 1980, high priority has again been given to agricultural diversification and to increasing agricultural production and policies designed to achieve these goals have already been put into effect. Resource Base 1.03 Peru's agricultural resource base is limited compared to other Latin American countries. Of the total geographic area of about 1.3 million km2 (128.5 million ha), only about 3.0 million ha are currently in agricul- tural use, of which about 1.2 million ha are under irrigation and 1.8 million ha rainfed. Of the balance, about 22.0 million ha are natural grassland. There are three well defined topographic and climatic zones - the Costa, the Sierra and the Selva. 1.04 The Costa, coastal zone in the west of Peru, is a narrow 3,000 km long belt of flat desert plains, sand dunes and dry, heavily eroded Andean foothills. Approximately 50% of the population live on this 13 million ha (about 10% of the total area) and agriculture is limited to highly productive irrigated coastal valleys. The climate is ideal for a wide range of crops such as sugar, rice, cotton, corn, potatoes, citrus, olives and grapes. However, most of the existing irrigation systems are old, inefficient and poorly drained, and land loss to waterlogging is serious. Although Government is taking steps to rehabilitate and renovate existing systems, this is a slow and costly process. 1/ A detailed discussion of Agrarian Reform and Institutional Aspects of Agricultural Production in Peru is presented in "An Economic Review of the Agricultural Sector in Peru", Bank Report No. 3550-PE, dated June 30, 1981 (green cover).  - 2 - 1.05 The Sierra, Andean Highlands zone, covers about 27% of the total land area (33 million ha) and has about 44% of the population. It consists of steep mountains reaching over 5,000 meters above sea level and high valleys located between the mountains. Although over half of Peru's cultiv- ated areas are in the Sierra (about 2.3 million ha), this represents only about 7% of the Sierra's total area. About half the remaining area (14.3 million ha) is used for grazing or natural pastures on steep slopes at high altitude. Annual cropping predominates and is limited to one short cropping season from about November to March. While there is little scope for bring- ing new land into production, there is some potential for improving produc- tivity through extension, research and use of production inputs. However, recent trends indicate considerable migration of the farming population from the area to both the coastal towns and to the Selva. 1.06 The Selva, the tropical forest zone east of the Andes mountains covers about 63% of the total land area (about 81 million ha) but accounts for only 10% of the total population. It comprises two sub-zones: the eastern slopes of the Andes at medium altitude - the Ceja de Selva; and the Amazon jungle - the Selva Baja (Lower Selva). Although most soils in the Lower Selva are classified as marginal and suitable only for grazing and forestry, soils in the Ceja de Selva are generally of better quality and are concentrated primarily in four river valleys. With the construction of a Trans-Andean Highway System and oil exploration, the Selva has been gaining in economic importance over the last decade, and the related migration of experienced, commercially motivated farmers from the Sierra to the Ceja de Selva, in particular has provided considerable impetus to agricultural devel- opment. This dynamic development has led to the conclusion that the Ceja de Selva is likely to be an important new agricultural frontier with potential to help meet the rapidly rising food needs of the large urban populations along the coast. Government Policies 1.07 The previous Government had a policy of intervention in the agri- cultural sector, the present Government does not. Consequently, intervention in agricultural marketing processes, price controls and consumer subsidies have been substantially reduced, and a more balanced allocation of develop- ment resources throughout the country is in the process of being made. The greater role foreseen for the private sector would have a particularly strong effect on the Ceja de Selva region. Government has also adopted a Sneral policy to improve agricultural supporting services throughout the country to encourage farmers to produce efficiently; during the agrarian reform period, research services were allowed to languish and extension virtually dis- appeared. Government's 1981-82 National Plan for Development, in defining objectives and actions to be implemented on a short-term basis for stabiliz- ing the national economy, calls for increased development of rural and regional projects in frontier areas and the Ceja de Selva. The proposed project, which is located in the Ceja de Selva, therefore, responds to one of Government's important development priorities. Previous World Bank Participation 1.08 The Bank has made 12 agricultural loans to Peru. Five of them, in the period 1954-73, totalling US$55.0 million, were for agricultural credit  - 3 - and were channeled through the Peruvian Agricultural Bank (BAP) (105-PE, 162-PE, 257-PE, 415-PE and 933-PE). In general, BAP performance has been acceptable and disbursements on the last loan (933-PE) have been completed. Two otber loans (67-PE of 1952 and 98-PE of 1954), totalling US$3 million, were for farm machinery imports. Loans 114-PE of 1955 and 418-PE of 1965, totalling US$24.5 million, financed irrigation works and land settlement in the San Lorenzo area within the Chira-Piura basins. Owing to managerial problems, inadequate counterpart funding and shortage of water, the second of these loans encountered considerable difficulties and took 11 years to disburse but, nevertheless achieved its basic goals and produced important benefits (Project Performance Audit Report, SECM-48 of January 1978 and Impact Evaluation Report of October 1981). A third irrigation project (Loan 1403-PE) of US$25 million approved in 1977 financed the rehabilitation of drainage and irrigation systems in six valleys in the southern part of the Coastal Zone. Another irrigation rehabilitation project in the Lower Piura area in the northern part of the Coastal Zone was approved in 1980. Both of the latter have experienced early management problems but implementation is progressing satisfactorily. The most recent loans approved by the Bank wre for an integrated rural development project in the Sierra (Puno Rural Development), which had experienced administrative start-up problems but which are now being remedied, and a National Agricultural Research and Extension Project, which was signed on September 13, 1982. II. THE PROJECT AREA Location and Access 2.01 The Alto (Upper) Mayo Valley, situated in San Martin departnent, of which Moyobamba is the capital, runs in a northwest-southeastern direction and is the last valley on the foothills of the Andes before entering the lower Amazon basin (Map IBRD 16496). The area proposed for development under the project, is located at about 800-900 m above sea level in the provinces of Moyobamba and Rioja. Access is mainly by road from Olmos (about 600 km to the west) and from Tarapoto about 100 km to the east. Construction of the road began in the 1960's and was completed in the early 1970's. Regional Context 2.02 San Martin is a Department in the Ceja de Selva region, which has experienced rapid agricultural development in the last 30 years. Prior to 1950, agricultural production was primarily for local consumption, however, construction of an airport at Tarapoto, in 1950, allowed produce to be flown to Lima at which time settlement began in the Huallaga Central and Lower Mayo valleys based on coffee and cotton production. In the late 1970's these valleys were the target of an agricultural development project financed by the US Agency for International Development, the experiences of which wre taken into account in the preparation of the current project. The Alto Mayo Valley in the northeast of the Department remained isolated until the early 1970s when construction began in the area on the "Marginal de la Selva" highway. With the knowledge that a road to the coast was under construction, settlers spontaneously migrated into Alto Mayo beginning in 1973, reaching a peak in 1976 and 1977. They came from the Departments of Amazonas, Cajamarca  - 4 - and Piura, and many were rice farmers who already had experience in irriga- tion. As a result, they developed the easily divertible streams (particu- larly the Yuracyacu, a small tributary of the River Mayo), and on land adjacent to flat fertile areas, they dug canals and also cleared forest for rainfed crops (rice, maize, foodcrops) under shifting cultivation. In contrast to the established agricultural population, the newcomers were commercially motivated. 2.03 Government encouraged this settlement and land was made available free. A rudimentary extension service was started in 1973, an agency of the Agrarian Bank was opened in Rioja in 1975, and in 1977, the National Agricultural Machinery Service (SENAMA) began to provide services in land clearing and levelling. Government also encouraged rice production in the Ceja de Selva by paying higher farmgate prices than in the Costa, and eight of the nine Aguaruna native (indian) communities in the valley were given inalienable titles to prevent invasion by new settlers. The Alto Mayo Irrigation District, with headquarters in Rioja, was created in 1973, and in 1978, under the Government's decentralization program, regional headquarters of all ministries were located in Moyobamba. 2.04 It is now recognized by farmers and authorities alike that after this pioneering decade of the 1970s, the current need in Alto Mayo is for consolidation". Basic infrastructure is still inadequate (particularly feeder roads and irrigation systems), agricultural supporting services (research, extension, credit) need improvement, only a fraction of farmers have titles to their land, living conditions are primitive, disease is rife and educational facilities are inadequate. Also, action is needed to allow native communities to participate in the local economy. Although production would likely continue to increase for a time under its own momentum, even without new investments, longer term progress is likely to be affected by production reversals expected to result from permanent damage to the fragile agroclimatic environment. If unchecked, shifting cultivation would progres- sively incorporate poorer and poorer land as is observed in many tropical countries. Resource Base 2.05 Topography and Soils. The Alto Mayo basin lies between two ranges of hills (northeast and southwest), and of its 770,000 ha, 74% (570,000 ha) has slopes in excess of 25%, while only 15.5% (120,000 ha approximately) are less than 5% slope. Most of these bottom lands, which constitute the project area, lie on the right bank of the river Mayo. The alluvial bottom land soils reflect their origin in the acid sandstones of the northeast range and characteristically vary from shallow to medium depth, moderate to poor permeability, moderate to poor fertility with acid to very acid pH. There is also an impermeable clay layer below the surface which is high in aluminum. Studies on potential land use capabilities (discussed in detail in a consul- tant paper on file) indicate the following classification of soils in the area:  -5- Suitability Class Area % Cropping II, III 57,000 47 Permanent Pastures, some Forestry V 43,000 36 Forestry VII 7,000 6 Protection/Preserve VIII 13,000 11 Total 120,000 100 2.06 Climate. The climate may be classified as "semi-humid subtropical". Temperature and humidity vary little throughout the year (22