Peru - Urban Sites and Services Development Project

L a ' npy VDocument of FILE COPY The World Bank FOR OMCIAL USE ONLY Report No. P-1857-PE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA VIVIENDA DEL PERU WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR AN URBAN SITES AND SERVICES DEVELOPMENT PROJECT May 27, 1976 This document hos 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.  RATE OF EXCHANGE Currency Unit = Sol (S/.) us $1 S s/.45.o s/.l- US$0.02 S/.l,OOO = US$22.22 S/.i,ooo,OOO - US$22,222,22 Borrower's Fiscal Period - January 1 to December 31 Guarantor's Fiscal Period - January 1 to December 31 of the following year. ABBREVIATIONS AND ACRONYMS BVP = Banco de la Vivienda del Peru COFIDE = Corporacion Financiera del Desarrollo CONAPS = Comision Nacional de Propiedad Social ELECTROLIMA = Electricidad de Lima ELECTROPERU = Electricidad del Peru EMADI = Empresa de Administracion de Innmuebles (MVC) ESAL = Empresa de Saneamiento de Lima ESAR = Empresa de Saneamiento de Arequipa SEAL = Sociedad Electrica de Arequipa, Ltda. SENATI = Servicio Nacional de Aprendizaje y Trabajo Industrial SINAMOS = Sistema Nacional-de Apoyo a la Movilizacion Social  FOR OFMICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA VIVIENDA DEL PERU WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR AN URBAN SITES AND SERVICES DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Banco de la Vivienda del Peru with the guarantee of the Republic of Peru for the equivalent of US$21.6 million to help finance an Urban Sites and Services Development project. The loan would have a term of 20 years, including three years of grace, with Interest at 8.85 percent per annum. PART I - THE ECONOMY 2. A report entitled "Economic Position and Prospects of Peru" (No. 655-PE) was distributed to the Executive Directors on March 3, 1975. Country data sheets are attached as Annex I. 3. Since 1968 the Government has followed a development strategy in which economic growth is linked to a transformation of the society to achieve broader popular participation in the country's economic, social and politi- cal life, thus addressing one of the most serious problems of Peru's economy and society -- the sharp differences in wealth and opportunities between income classes and geographical regions. As was recognized by the Consulta- tive Group for Peru, which met in Paris in April 1975, progress has been made during recent years in implementing this strategy. The land reform in the coastal areas is advanced and, although greater difficulty has been found in Improving the lot of the Sierra peasants, efforts to organize production cooperatives there are being accelerated. In the field of industry most enterprises have complied with the Industrial Community legislation -- which provides for a gradual participation of the workers in the ownership of enterprises -- and a new Social Property Law was approved aimed at promoting new industrial and entrepreneurial capacity within a system of self-manage- ment by the employees. 4. A new government headed by General Morales Bermudez took office in August 1975. It has been reassessing the progress made since 1968 and has publicly acknowledged that errors had been committed during the past eight years in the difficult task of reconciling growth, financial stability and better income distribution. The main problems that arose were a contraction in domestic savings, a fall in efficiency in the productive sectors and a retrenchment in the level of investment by the private sector. The President has stated the need for important modifications in policies that would leave the basic long term objectives unchanged, but would call for a more gradual approach to reforms of the economic and social system, and would emphasize measures that increase domestic savings, encourage private sector investment and improve efficiency in production. 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.  - 2 - 5. GDP grew at an annual rate above 5.5 percent during 1970-74. Gross domestlc investment rose from less than 13 percent to almost 17 percent of GDP between 1970 and 1974, largely because of the increase of public and private investment in mining and petroleum. However, as consumption also grew faster than GDP and heavy losses were incurred by public enterprises marketing imported petroleum and foodstuffs, gross national savings fell from 15 to 11 percent of GNP between 1970 and 1974. The excessive growth of aggregate demand combined with the sharp rise In Peru's import prices since 1973 resulted In an acceleration of the annual rate of domestic inflation -- from an average annual rate of 7.2 percent during 1969-73 to over 18 percent In 1974 -- and an increase in the deficit of the balance of payments on current account from 0.5 to 6.2 percent of GDP between 1972 and 1974. Net long-term capital inflows rose from $110 million in 1972 to $840 million in 1974 and allowed a $275 million increase in net international reserves in spite of the widened resource gap. 6. During 1975 the Government approved a series of tax and price measures directed at attacking some of the causes of Peru's financial diffi- culties, i.e., excessive growth of aggregate demand with a resulting fall in national savlngs, stagnation of food output and low rate of export growth. In January 1975 indirect taxes were increased and subsidies on food were reduced. On June 1975 a second set of measures included: (a) increases in prices of basic foodstuffs, petroleum (ranging from 25 percent for diesel fuel to 100 percent for premium gasoline), and other basic goods such as steel and cement; (b) a 40 percent reduction in prices of fertilizers; (c) strict controls on salary adjustments in the public and private sec- tors. Subsequently, in September the Sol was devalued by about 14 percent. 7. The measures taken did not suffice to stop a sharp deterioration of Peru's external and internal finances largely because of two factors. In the first place, export earnings fell because of the decline in world prices of Peru's exports, adverse weather conditions and labor strikes. The decline in export demand, together with work stoppages, resulted in a drop in mining output; ecological conditions limited the recovery of fishmeal production and reduced the catch of food fish; while bad weather conditions, inadequate supply and high prices of fertilizers and other production inputs, and in- adequate price and marketing policies followed in previous years, affected agricultural output. Secondly, while gross domestic investment rose to 19 percent of GDP, savings continued to drop and the resource gap widened to over 9 percent of GDP. The fall In savings was principally caused by the large losses of state enterprises marketing petroleum, foodstuffs and fertilizers. Import demand grew rapidly not only because of the expansionary financing of public sector deficits, but also because of the sharp increase in food and petroleum imports and because the new investments (mainly in petroleum and mining) had a high import content. Net long-term capital in- flows totalled an estimated $1.1 billion in 1975, but were not sufficient to finance the current account deficit and net international reserves fell from $680 million in December 1974 to around $127 million in December 1975 equiva- lent to less than three weeks of merchandise imports.  - 3 - 8. This year will be a difficult one for Peru's finances. By March 15, 1976, although gross international reserves were still around $440 mil- lion, net international reserves had become negative by about $110 million. A viable financial position will require import cuts since: (a) terms of trade are not llkely to improve in 1976, while the volume of exports will remain well below the 1972 level; and (b) Peru may have difficulties In obtaining substantial additional funds from commercial sources. Both the President and the Minister of Finance in -recent public statements have under- lined the seriousness of the economic and financial difficulties and have emphasIzed,the need to increase both domestic savings and labor productivity. This has been reflected in a series of measures approved this year. On January 10, 1976 a package of measures was approved aimed at reducing the public sector deficit, discouraging imports and stimulating agricultural production. Partly because of these measures, the public sector's overall deficit may fall from 10.9 percent of GDP in 1975 to 8.1 percent in 1976. However, since a substantial unfinanced gap of approximately 1 percent of GDP would have remained for 1976, on May 19, 1976 the government approved addi- tional,tax measures that include: (a) increasing the rates of the sales tax (from 17 to 20% for the general rate and from 27 to 40% for the rate on luxury goods); (b) tripling the taxes on yearly automobile registration; (c) increasing the rate of the cigarette sales tax from 67 to 72.5%; and (d) reducing the exemptions of import duties on capital goods. Moreover, the government announced that still further measures to restrict demand would be taken during the next few weeks. In April the mining and fisheries sectors were declared in a state of emergency; amonig other things this effec- tively prohibits strikes. More recently, the President has also emphasized the importance of a dynamic private sector and the need for a more stable environment that would.enhance the investment climate. In addition, the tax rebates on non-tradltional exports were increased in early May to a maximum of 62%. 9. On March 3 the IMF approved SDR 97.3 million (approximately $112.5 million) of financial assistance (first credit tranche and oil facility) on the basis of a letter of Intent which refers to additional measures to reduce the public sector deficit and increase interest rates and puts ceilings on credit to the private and public sectors. On April 16, an additional SDR 61.5 million of financial assistance was approved by the IMF under the compensatory financing scheme. 10. During 1968-70 commitments of medium- and long-term loans to the public sector averaged less than $200 million annually. Thereafter, they rose sharply to an annual average of almost $1.1 billion in 1973-74 and $0.9 billion in 1975. The rapid increase was mainly the result of the sharp increase in public investment and during 1974-75 large requirements of commercial borrowing for balance of payments support. 11. While total public sector external debt (outstanding and disbursed) more than tripled between 1970 and 1975 -- from $0.9 billion to $3.6 billion -- average terms deteriorated markedly. Average maturities fell from 17 years in 1970 to 14.3 years in 1974, since over 65 percent of net disbursements  -4- durlng 1970-74 came from commercial banks. During 1975, the situation worsened since commercial banks continued to account for about 70 percent of net disbursements while their terms hardened. The average terms in 1975 of commitments from commercial banks were: 5.8 years maturity (in- cluding 2.3 years of grace) and 9.5 percent interest rate. This,situation reafflrms the Bank's assessment, endorsed by the conclusions of the last Consultative Group Meeting in April 1975, that the resource transfer required to support the country's development program is not likely to be achieved at adequate terms If all external lending from official sources is restricted to the foreign exchange component of projects suitable for ex- ternal financing. 12. The public debt service ratio rose from 22 percent in 1974 to an estimated 30 percent in 1975 reflecting both a sharp Increase in interest payments and the decline in the value of merchandise exports. During 1976 the public debt service ratio is expected to fall to 26 percent because of the expected recovery in exports and a small decrease in debt service pay- ments. However, given the very serious foreign liquidity squeeze the country is now going through, this level of debt service will place a heavy burden on the balance of payments. The Government has committed itself to give first priority in foreign exchange allocation to debt service payments. During 1977-80 the public debt service ratio may rise further to 35 percent, but would decline in the 1980s if the government is successful in increasing national savings and stimulating nontraditional exports and if more suitable lending terms are obtained in future years. 13. Peru is a country with some very serious constraints to its devel- opment efforts but also with a large untapped resource potential. The Govern- ment is trying to accelerate growth while broadening the participation of the population in the development process. It has been caught by a short- term financial squeeze at a time when some of the unavoidable negative effects of the structural transformation were being felt. Consequently, the present situation is difficult. The Government is aware of these difficulties and is determined to resolve them. The President has called for a process of con- solidation and re-examination of social and economic policies. Improvements in the balance of payments position during 1977 and thereafter will depend on: (a) continued efforts to increase savings, contain import growth and reduce dependence on foreign borrowing; (b) reducing dependence on imported petro- leum with the completion of the oil pipeline and with addltional petroleum exploration; and (c) Increasing export volume with the timely completion of mining projects now underway and -- since it is now unlikely that Peru will become a substantial net exporter of petroleum in the foreseeable future -- the expansion of nontraditional exports. On the basis that such Improvements will take place, Peru will continue to be creditworthy for Bank lending. The Bank both as a lender and as chairman of the Consultative Group will continue to monitor developments closely.  PART II - BANK OPERATIONS IN PERU 14. The Bank has made 30 loans in Peru for a total amount of $470.7 million, net of cancellations. Of this amount 47 percent has been for transportation (mainly hlghways and ports), 22 percent for electric power, 17 percent for agriculture, 9 percent for mining and industry, and about 5 percent for education. 15. IFC commitments to date have been about $24.0 million ($15 mil- lion to Southern Peru Copper Corporation for the Cuajone Copper mining project and the rest all in industry) of which $15.3 million is held by the Corporation. Project execution has been generally satisfactory. Annex II contains a statement of Bank loans and IFC investments as of February 29, 1976, and notes on the execution of ongoing projects. 16. On July 25, 1975, the Government nationalized the assets of the Marcona Mining Company in Peru without making provision for the payment of compensation. Subsequent negotiations between the Company and the Government did not reach a conclusion and the matter was taken up for negotiations between the United States and the Peruvian Governments. Substantial pro- gress is being made in these negotiations and an agreement Is expected to be signed in the near future. I intend to review further progress made on this matter prior to presentation to the Board of other loans now at an advanced stage of consideration (see paragraph 18 below). 17. The Bank plans to assist the Government in achieving its economic and social development goals by aiding in: (a) the expansion of productive capacity in crucial sectors; (b) the creation of a physical and social infra- structure capable of sustaining and fostering the evolution of the nation's productive capacity; and (c) the consolidation of structural and Institutional reform which will help the socioeconomic transformation now underway. The Bank also expects to continue to play a role in coordinating external assist- ance and being a catalyst for new sources of funds for major investment projects through the mechanism of the Consultative Group. 18. The Bank's program in agriculture has a two-fold objective: to raise the standard of living of the large'rural population of the high- lands (sierra) and-to Increase food production. Following up on the agricul- tural sector mission which visited the country in 1974, Bank staff and the Bank/FAO Cooperative Program are assisting the Government in the preparation of projects for-rural development in the Sierrra and irrigation rehabilita- tion in the coastal area; a first irrigation rehabilitation project is being appraised by the Bank. Also, a DFC project is currently being appraised. In addition, the Bank has identified other projects in the water supply and transport sectors. Bank loans to Peru constituted about 6.0 percent of total outstanding debt, including undisbursed, at the end' of 1975, and ab- sorbed 4.0 percent of the country's external debt service obligations in 1975. With the increasingly active lending to Peru, the Bank's share in the country's total outstanding debt is expected to increase but not to exceed 9 percent by the end of 1980.  - 6 - PART III - IJRBANIZATION IN PERU Urban Growth 19. Traditionally, net migratory movements in Peru have been from the highlands to the coastal area mainly as a result of the pressure of a fast population growth in the highlands, where the arable land Is limited, and of the governmental policies for rapid industrialization which have favored the urban centers. While Peru's population has increased at 3.1 percent per annum, the urban population has increased at 5.1 percent per annum. A large proportion of the population moving to the coast has traditionally settled in Lima, although other urban centers, Piura, Arequipa, Trujillo, Chiclayo, Chimbote and Ica have also experienced significant population increases through migration. Estimates are that Peru's population will increase from 14.1 million in 1972 to 27.2 million in 1990. The urban population as a whole is projected to increase from 8.4 to 18 million and Lima's population alone from 3.6 to 8.1 million over the same period. Pueblos Jovenes 20. An increasing number of the people who migrate to the coastal cities live In what has been called Pueblos Jovenes (literally "Young Settlements"). These are population settlements which are established by organized occupa- tion 1/ of public land, generally in the outskirts of the cities. The popu- lation of Pueblos Jovenes is largely made up of families with young children, and living conditions are poor compared to those of all but the worst inner city slums of Metropolitan Lima and other centers around which they are located. The population in Pueblos Jovenes has been increasing at 13.7 per- cent per year in the last decade. In 1975 it is estimated that about 2.4 mil- lion people lived in Pueblos Jovenes, of which 1.5 million were in the Lima Metropolitan Area and about 200,000 in,Arequipa. 21. Because of the present magnitude and expected continuing increase of their population, Pueblos Jovenes have become a social and political factor in the policies of the Peruvian government, which has tried to mobilize their latent potential into constructive activities. Pueblos Jovenes gained legal status by Law of February 14, 1961. The Government also began In 1963 a program to legalize land tenure of Pueblos Jovenes residents and the pre- sent government has accelerated this effort. The legalization of ownership has fostered a sense of community and encouraged the planning efforts of the residents. A local self-government system has evolved focusing in successive stages on (a) organized land invasion, (b) economic development 1/ In general, prior to land occupation, a group of squatters form an association (called Organizacion Vecinal or neighborhood organization) to organize the settlement, plan the land use, and allot to each family a plot of land. The association represents its members before government agencies for the legalization of the settlement and for the installation of urban services and community facilities.  - 7 - through the creation of cooperatives, (c) urban community social develop- ment, and (d) self-managed communal social, economic, and administrative development. The structure of self-government within the Pueblos Jovenes has been formalized, and the Peruvian Government has given acceptability as well as promotion and direction to the institutions of the Pueblos Jovenes through the establishment, in April 1972, of the Sistema Nacional de Apoyo a la Movilizacion Social (SINAMOS) an agency for support of social mobilization. Through SINAMOS, the Pueblos Jovenes have made their priorities known to the Government and have made it clear that they attach a much higher prlority to job creation than to housing. Other basic requirements urgently called for at this time include the upgrading of services, particularly water supply. National Urban Policies and Programs 22. National urban development programs and related infrastructure investments are coordinated through the Ministry of Housing and Construc- tion, which is responsible for the formulation of policy, preparation of urban plans and coordination of public and private housing investments, as well as for government investments in general construction, water and sewerage, and infrastructure for low-income areas. Apart from the formula- tion and subsequent approval by Government of a long-range National Urban Development Plan to establish 13 urban industrial centers throughout the country and thus to deal with the excessive concentration of population in Lima, the Government is also actively engaged in short term programs - such as the ones under this project - designed to alleviate the current plight of the large and growing number of Peru's urban poor. 23. Present Government programs to upgrade Pueblos Jovenes include credits to individual residents for housing construction and/or materials; loans for sewerage, water, and electric connections within Pueblos Jovenes, to be amortized, along with construction costs, through bills for service to individuals on a monthly basis; improvement of roads both within the community and outside to connect it with employment areas; construction and staffing of health facilities; and building of schools and community centers. 24. The underlying policy of these programs Is to keep costs to a level compatible with the principle of cost recovery and the capacity of the Pueblos Jovenes residents. Consequently, the use of self-help and mutual aid to Pueblos Jovenes dwellers constitutes a major factor in all construc- tion and public works activities within the communities. 25. In. addition, the Government is committed to the difficult task of generating employment opportunities and income in Pueblos Jovenes. To that end plans have been formulated for the creation of industrial zones within .elected Pueblos Jovenes by providing the basic infrastructure required for the settlement of small and medium-size industrles. The industries proposed for Pueblos Jovenes are designed to have major employ- ment-creating effects and are to be mostly - but not exclusively - worker-  -8- managed enterprises set up under the social-property system. 1/ Under this scheme, Initial capital Is provided by the National Social Property Fund; the enterprise is then assigned an annual contribution to the Fund to be paid through the life of the enterprise. The response to these programs for the establishment of industries in Pueblos Jovenes is encouraging if judged by the number and quality of proposals submitted to the National Social Property Fund for consideration. In conjunction with the establishment of industrial zones, the Government is establishing regional vocational training centers through SENATI (National Service for Training in Industry) to provide the skills needed in small and medium-size industries best suited to Pueblos Jovenes. In Lima, plans include the development of five new Industrial zones which would provide an estimated 275,000 new jobs In manufac- turing by 1980. Industrial parks are planned in 13 different cities in the National Urban Development Plan. Further public investments projected in this Plan are intended to provide employment for about 16% of the estimated Increase in Peru's economically active population during the plan period, creating a total of 680,000 new jobs. PART IV - THE PROJECT 26. The proposed project was Identified, within the Government pro- grams for improving the living conditions of the urban poor in the country, in November 1974, and subsequently prepared by Government, with assistance provided by the Bank in the course of two preparation missions in April and August 1975. The project was appraised in November 1975 and negotiations were held in Washington in May 10-14, 1976; the Banco de la Vivienda delegation was led by Mr. Victor de Castro, Director General, and the Government was repre- sented by Dr. Ulises Montoya, Executive Director of Public credit in the Ministry of-Economy and Finance. A Loan and Project Summary is attached as Annex III. Description 27. The proposed project is an integral part of the Government's program aimed at providing the urban poor with basic facilities and employ- ment opportunities to increase their capacity to be absorbed productively in the urban economy. The project focuses on three areas of assistance-- 1/ The Empresa de Propiedad Social (ESP) is a novel form of industrial ownership system developed by Peru's Revolutionary Government. It is still largely in an incipient and experimental phase; the longer term intention is that it is to coexist with private and public ownership in manufacturing, agriculture and the service industrles. It is basically an attempt to create worker managed and owned enterprises, and to tap the entrepreneurial capacity of large groups - individual workers' ownership rights are not transferable and cease with their employment in an ESP enterprise.  -9- infrastructure, productive Investment, and technical assistance--and instl- tutionalizes a delivery system for urban services to low-income areas. The project would consist of: (a) Infrastructure: (i) water and sewerage for Pueblos Jovenes in Lima and Arequipa provlding about 7,200 household connections; (ii) electrification of 16,300 households in Pueblos Jovenes in Lima and Arequipa; (iii) access roads of 86.1 km to connect Pueblos Jovenes to main roads and upgrade existing roads in these settlements in Lima; and (iv) health and nutritlon centers in Pueblos Jovenes in Lima. (b) Productive investments: (i) industrial sites and services (about 63.5 ha) in Lima and Arequipa; (ii) housing and commercial sites and services in Lima; and (iii) supervised credit in Arequipa. (c) Technical assistance: (i) to establish a unit in the Ministry of Housing and Construction to assist settlers primarlly in self-help construction; (ii) to provide advisory assistance for the planning, management and monitoring of the industrial sites and services in Lima; (Iil) to assist in the review of plans and in the pre- paration of a water supply and sewerage project in Arequipa; (iv) to provide advisory assistance as well as vehicles and equipment for the development of a training program for community health and nutrition in Puebl6s Jovenes; and (v) to assist the Banco de la Vivienda del Peru in overall project implementation, financial plan- ning and related studies for the mobilization of additional resources for urban development program and future projects.  - 10 - 28. Banco de la Vivienda del Peru (BVP) would be the executing agency for the project. BVP would enter into contractual arrangements satisfactory to the Bank, with participating agencies (see below, Paragraphs 19-20) for speciflc project components as needed (Section 3.02 of draft Loan Agreement). These contractual arrangements will spell out the responsibilities of the respective agencies, with regard to the project. The Government will bear the exchange risk of the proposed Bank loan to BVP (Section 3.04 of draft Guarantee Agreement). BVP, assisted by the consultant services financed under the project, will have the technlcal and administrative capacity to carry out the project efficiently. To help ensure a smooth, and continuous flow of financial resources during project execution, and particularly to facilitate the participation of small contractors with limited financial backing, BVP will establish a revolving fund with an initial sum of at least US$500,000 equivalent from which it wlll make disbursements directly to contractors (Section 3.05 of draft Loan Agreement). This fund will be replenished by disbursements to It by the Bank and Government. The establish- ment of the fund would be a condition of effectiveness of the proposed loan. The establishment of a Technical Assistance Unit within the Ministry of Housing and-Construction to assist settlers in the construction of dwelling units or shops/stores, would also be a condition of effectiveness. The pro- ject is expected to be completed by December 31, 1979. The Borrower 29. Banco de la Vivienda del Peru is a state owned semi-autonomous company which was created in 1962 to establish and administer savings and loan associations. The savings and loan system has 17 associations with IIS$172 million (1973) in savings and has been one of the most successful in Latin America. In 1969 it received authority to mobilize funds (through Issuance of mutual development bonds) and to extend credits for housing and construction, including lending to housing cooperatives and public and private developers, lending for direct programs or urban renewal and rede- velopment in poor areas, and lending for experimental projects. Total assets as at December 31, 1974, amounted to S/. 5,743 million ($127.0 million); share capital reserves and retained earnings amounted to SI. 1,017 million ($22.6 million), long-term debt to S/. 3,063 million ($68 million), and deposits and accounts payable to S/. 1,294 million and S!. 367.4 million, respectively ($28.7 million and $8.1 million). BVP accounts for about 40% of total housing investment by housing finance institutions. Past finan- cial performance of BVP has been good; of the loans made as of December 31, 1974, only about 5% were in arrears; the amount in arrears represent about 1.5% of the loan portfolio. Operating income, which has been declining in recent years because of greater use of long-term debt rather than deposits, thus increasing the borrowing cost, has nonetheless been sufficient to provide BVP with a positive net income. Financial performance is expected to improve in the future as net lending is forecast to increase from S/. 3,455 million to S/. 8,326 million in 1980 with a better interest spread on this lending.  - 11 - 30. BVP is managed by an eight-member board (four members represent- ing the Ministry of Economy and Finance, and four representing the Ministry of Housing and Construction) headed by a president, who also acts as Chairman of the Board. The present chairman is a banker with more than 25 years of experience. The senior staff and middle management personnel are suitably qualified and experienced. Operations are directed by a General Manager, working through four Central Managers: administration, commercial credit, operations (medium- and long-term credit) and supervision. In addition, each of the departments may draw as needed on the services of fout advisory departments (economic, legal, management and technical) for specific exper- tise in special situations as they arise. Of particular importance at this time is the technical department which will be strengthened both in numbers and technical capability to fulfill the demands that will be put upon it as BVP expands its activities in large-scale programs of low-cost housing and related Infrastructure; it has been agreed that at least four additional technicians be employed In this department (Section 4.02(b) of the draft Loan.Agreement), and that the employment of such technicians be a condition of effectiven-ess of the loan. The Participatlng Agencies 31. The components of the proposed project involving substantial self help, particularly water supply and electrification in both Lima and Arequipa and supervised credit in Arequipa, have been organized by SINAMOS. The plans submitted to BVP by SINAMOS for these components con- tain the names of at least 70% of the families who will participate in them. SINAMOS also recommended the authority, i.e. the ministry or regional agency, which should execute each plan and be responsible for collections. After BVP's technical department reviews the plan and evaluates its feasibility, BVP signs a contract with the authority, whlch becomes the supervisor, executor and collector for the loan. 32. A summary follows of the principal ministries and agencles whlch will aid BVP in carrying out the various subprojects: (a) Water Supply and Sewerage - ESAL and ESAR in Lima and Arequipa respectively. (b) Electrification - ELECTROPERU and ELECTROLIMA in Lima and SINAMOS and SEAL In Arequipa. (c) Access Roads - The Ministry of Housing and Construction. (d) Health and Nutrition Centers.- The Ministry of Health. (e) Industrial Sites and Services - The Ministry of Housing and Construction and EMADI, a real estate public enter- prise under the Ministry. (f) Housing and Commercial Sites and Services in Lima - The Ministry of Housing and Construction.  - 12 - (g) Arequipa Industrial Sites and Services - The Ministry of Housing and Construction and EMADI. (h) Supervised Credit In Arequipa - SINAMOS. These ministries and agencies have effectively managed substantial programs of similar types in the past and are expected to carry out thelr respective parts of the project efficiently under contracts to be signed with BVP. Estlmated Cost and Financing 33. The total cost of the project, inclusive of land cost and con- tingencies, is estimated at $43.2 million of which about 35%, or $15.2 mil- lion, represents the foreign exchange component. The summary table below shows the costs of the various elements of the project: US$ Million Subprojects Local Foreign Total Water Supply & Sewerage 6.45 5.83 12.28 Electrification 2.51 0.74 3.25 Access Roads 2.90 1.13 4.03 Health and Nutrition Centers 0.93 0.45 1.38 Industrial Sites 4.04 1.21 5.25 Commercial and Housing Sites 2.54 0.80 3.34 Supervised Credit 1.21 0.11 1.32 Technical Assistance 0.14 0.56 0.76 Subtotal 20.72 10.83 31.55 Consultant Services 1.24 0.57 1.81 Contingencies Physical 2.22 1.37 3.59 Price Escalation 3.78 2.47 6.25 Subtotal 6.00 3.84 9.84 Total Cost of Project 27.96 15.24 43.20 34. The proposed $21.6 million loan would finance 50% of the total project costs, i.e. the foreign exchange component of the project plus $6.4 mlllion of local currency costs. (See para. 11 above for a general justif- ication of local cost financing in Peru.) The relatively low foreign exchange component of the project (35%) and its hlgh priority make some local currency financing in this case appropriate. The balance of the project costs will be financed by Banco de la Vivienda ($19.1 million of which $12.9 million will be provided by Government to BVP in the form of equity contribution) and down payments from project beneficiaries ($2.5 million).  - 13 - Cost Recovery and Relending 35. It is an accepted principle in Peru that investments made for the improvement of the living conditions of Pueblos Jovenes are to be recovered from the beneflciaries Insofar as feasible. The proposed project would not be an exception to this general rule; recovery of costs for the project would come mainly from flnal users. In this connection BVP will relend a portion of the proceeds of the loan to individual households to finance (a) 90% of their portion of project costs related to water supply and sewerage (mainly tertiary distribution and household connections); (b) 90% of their portion of project costs related to electrification (low voltage networks and home connections); (c) 90% of their portion of project costs related to construction and development of sites and services, and construction of core dwelling units and core shop/stores in Lima; and (d) the construction of core housing units in Arequipa, within a framework of mutual aid, through supervised credit. 36. These subloans to individual households, which represent about two thirds of the loan, would be made for 20 years at an annual interest of at least 12%, except electrification where subloans would be made for ten years (Section 3.04 of draft Loan Agreement). These interest rates are negative in real terms at the hlgh current rate of inflation but appear acceptable in view of the high priority social objectives for which the loans are being made and because it is expected that inflation will subside early enough to ensure positive real rates over the life of the subloans. Moreover, the proposed rates are consistent with the Pueblos Jovenes dwellers' current capacity to repay the loans. The spread between the proposed Bank loan terms and BVP's average relending terms is considered sufficient to cover administrative costs and to generate a surplus. Small surpluses would also be generated because of the somewhat shorter average grace period and repayment term on BVP loans to indlviduals than on the Bank loan. The surpluses would be relent for projects similar to the ones financed under the proposed loan (Section 3.06 of the draft Loan Agreement). 37. A portion of the loan, mainly for major construction works, would be relent by BVP to other Peruvian agencies on-the same terms as the Bank loan. These loans will be mainly to ESAL to finance water supply works in Lima and to EMADI to aid in financing infrastructure in Arequipa and Lima. BVP will also make available part of the loan to finance construction to be carried out by the Ministries of Housing and Health and for technical assistance; BVP will be reimbursed these amounts by the Government. 38. More than two thirds of the project costs will be recovered through repayments of loans by individual beneficiaries or Government agencies. Increased tax revenues will also occur as the income earnings capaclty of the Pueblos Jovenes dwellers rises as an outgrowth of the project.  - 14 - Procurement and Disbursement 39. Contracts for civil works and equipment would be awarded on the basis of international competitive bidding in accordance with the Bank guide- lines, except for up to $240,000 worth of locally manufactured equipment and electrical facilities, because Peruvian legislation effectively prevents international competitive bidding for Industrial products manufactured in Peru, as well as for reasons of efficiency, standardization and avallabllity of repair facilities. Building materials provided by BVP to individuals to upgrade or erect modest shelter units through a program of mutual aid will also be procured on the basis of domestic competitive bidding because of the small size of contracts and the nature of the materlals. 40. Disbursements would be made on the following basis: (a) 100% of the CIF cost of imported vehicles and equipment; (b) 48% of the cost of civil works and buildings; (c) 50% of the cost of consultants' services; and (d) 50% of disbursements made by BVP under the supervised credit component. Disburse- ments would be made for expenditures incurred after December 1, 1975, for consultants' services for the preparation of detailed engineering of the proposed works. The amount of this retroactive flnancing would not exceed $100,000. Based on the project execution schedule, the proposed loan would be fully disbursed by June 30, 1980. Justification 41. The primary objective of the project is to contribute to the econo- mic and social advancement of residednts of Pueblos Vovenes. The various components of the project will extend essential services, provide basic employ- ment and training and increase the productivity of the urban poor. It is expected that about 6,000 new permanent jobs will be created by encouraging the establishment of small- and medium-size industries in the Industrial sites to be provided under the project, together with the provision of industrial training and capital provided under broader government schemes (see para. 25). 42. Many of the benefits of the project, such as improved health, com- fort and social well being of the community, cannot be quantified. Other benefits, such as reduced cost of services to be provided (water supply sys- tem and electricity) or savings for road users of the new access roads, etc., which are quantifiable have been compared with the present costs to consumers of alternatives now available, and appear to be substantial. The average rate of return for these components, which represent over 90% of the project cost, has been estimated at 30%, the lowest rate of return for individual components being over 17%. Sensitivity analysis to cost increases by 15% or benefits decreases by 15% show that such variations would have a limited effect on the estimated rate of return for the project which would still remain over 26%. It is to be recognized, however, that these rate of return calculations re- present only rough orders of magnitude since they are in part based on the assumption that prices currently paid by consumers and to be paid for services to be provided under the project reflect their long-term marginal costs and substantial uncertainties exist regarding these costs.  - 15 - 413. An important unquantifiable benefit of this project is that it represents a -step forward in the Government's objective of trying to reduce investment costs significantly so that the number of Pueblos Jovenes resident- benefitting under this type of scheme can be substantially Increased. In tl,. proposed project the average per capita cost of providing 7,200 water and 11,()000sewer connections - exclusive of water production costs - is abovut Sll0; tlhe average per capita cost of providing 16,300 electricity connection; is ihout '(30: and the investment to be made in access roads would amount to about $16 per capita. Under the supervised credit component of the project the cost per household plot, (i.e.' with water, electricity, sewerage and ac(:ess roads) and a simple core dwelling unit will amount to about $1,400, which cotuld be obtained by the beneficiary with a down payment of about $140 and a monthly payment of $14, which Is affordable by the lowest 20th per- centile in the income distribution curve. These costs compare favorably with those of most other Latin American countries and, particularly, with the cost of dwelling units under a previous program undertaken by BVP in 1974 with foreign assistance, which was about $7,400, a price only accessible to middle-income-families. Apart from making savings in design standards and methods of construction which have been determined with the active parti- cipation of the communities served, one other important reason for these reason- able costs is the use of self-help and mutual aid by the beneficiarles which the project will help foster. This system of self-help and mutual aid will aLso generate about 13,000 man-months of employment in the course of imple- mentation of the project. Because of the low per capita costs fpr improving existing dwellings by providing basic services or construction of core dwel- ling units and community facilities the 200,000 Pueblos Jovenes resldents will be directly affected one way or another by the project. This Is a modest number if compared with the existing Pueblos Jovenes population In Lima and Arequipa, but the project Is expected to make a major contribution by promo- ting further investments, on the basis of low cost, self-help schemes in other areas of Lima and Arequipa'and elsewhere in the country. This will be aided by the institution-building aspects of the project through improving the "delivery system" for urban servlces to low income areas by establishing more eEfective working arrangements between Banco de la Vivienda and Governmental agencies to provide capital investment funds for thls purpose. PART V - LEGAL INSTRUMENTS AND AUTHORITY 44. The draft Loan Agreement between the Bank and Banco de la Vivienda del Peru, the draft Guarantee Agreement between the Republic of Peru and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 45. The draft Loan and Guarantee Agreements conform to the normal pattern for loans for sites and services projects. Two special conditions to the effectiveness of the Loan (the establishment of a revolving fund and the establislhment of a Technical Assistance Unit within the Ministry of  - 16 - Housing and Construction) are mentioned in paragraph 28 and one (the employ- ment of four additional technicians by Banco de la Vivienda) is mentioned in paragraph 30 of this report and reflected In Section 7.01 of the draft Loan Agreement. 46. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 47. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments Washington, D.C. May 27, 1976  ANNEX I Page 1 of 3 pewse 0UU! DATA - F.M 1,27215 he 412 mIm (mid-1972) 1.00 For heaof arable land SOCIAL DhD?ATS ph,'u 11oamdVo nChi'let Swede. -W PER GAPrTA US$ (ATIAS BASIS) / . 520 La 750 La~ 800 L- 1,,480 La DZJ0RAPHIC-- Ur-E&Vto rate (pe thoaemd) 441-45 4.2 c 16 Lgm 27 1.3.1 4i Crude death rate (per thaoaand) 1[1 1Iam 9 06 Infat mortalty rate (per tbouee.d live births) 9173 a6 f 79 1.1 LPfoepatis:gothnya brith (yers 606663 638/a 73 0.7 13 2 a1.5 se 3. ~ 9 2. P,lyp.lanting Ruwt oft IInpor nmleie tba.) .3 Ag.stu.um(prcnt.o)sr %o ere en .. P6odovnaerepoa n giotr 50 15 5 .01 L j5 j Percent pofulation al ar inoeoeeie btotgael 0 69 u 60 /a 61. 576 Zj/r Percentof nat o .a taof usersved bf marrie 20 321.5 PrcenT of ntioal incom received by highast 5.% 50 73 9, 36 /i 130 It owced by top 109 of cuaere ..93 % cand by smalleet 10% of ownere . 0.1 Fbpua icN per pbiclan 2,200 .Ac 1,920 1 1:1.1. 2,020/ d 720 Population per -sing perao . 3,200 1,570 5,170 Z~Pd 280 L population per hOspital bed 1.90 Ia. 680 810 250 i 70 L Per capita calorie eupply as % of.requiramnta Lk 97 8 98 12. 101 108 Per capita protein sopply, total (grass per day) L 61 62 65 71 80 Of bdch, animal end pulee 25 ~7j 21.L 28 lag 32 56w Death rate 1-4. yeare La 10I . 1.1 3 /j 0.1.r NOCOATION ~~.! school enrollment ratic 89 oa .1 h L..ai.. 1.01 /.i 119 /.i.aj 97 Adjuet,,d secnday. school enrollment ratio 18ab 11 /-h 23 29 102 Lt Toean of a hcling provided, first and second level 12~ 10 12 12 12 Vocational enrollmet an % of eec. school enrollment 20 lot 17 oah 21. LA 33 35 Adult literacy rats % 63/.-k 72 7,,.- 8 .1. -5 9 i- 99 ZEIan MM .ig Nio. of perons por room (urban) 2.0 an h 2.2 an 1.3 a.,, 0.7/o Percent of occpied unita withmt piped water 8 na . 61 n 10aa 3 Access to electricity (as % of total population) 28 ~m . 59 a 85 7 Prcent of Oural population connected to electricity h .. 28a 30 ~!~ irar- per 1000 Population 101 138 3 31 2~1.69a/ 32 /M Passenger car Per 1000 popua-tion 8 17 3 s 022 - 307 m Klectric po-r consuption (kals p.c.) 297 Lh 1.32 L 662 7 890alT 8988 NewsprInt aceonumption p.c. kg per year 1.8 2.9~j 2.-69~ 27.6 Not-et Figures refer either to the latest periods or to account of evrcetlteaaa oywihe o the latest years. latest pwnioda refer in principle to distribution by age and sam O national POP..lticos. the Yearn 1956-60 or 1966-70; the latest years In pr.in- /6 Protain standards (requimmeants) for all countries as metob- ciple to 1960 and 1970. 'Linhed by WOk Economic Research Service provide for a elniwmo ; Th Per Capita GNP estimate is at market prices for .,U.lwanoe of 60 geas of total protein per day, and 20 gpsee of year,a other than 1960, calculated by the case conveseion animal and pulse protein, of whicb 20 gpam should be eninal technique an the 1972 World Bank Atla3. protein. These standards are eomauht 1eew than thos. of 75 /2. Average number of daughters per wooan of reproductive pas- of total protein and 23 grac of anima protein as an ago. average for the warld, proposed by FAO in the Thirid World Food 12 Population growth ratee are for the decades ending in Survey. 1960 and 1970. LiSwe studies have suggested that crude death rate, of children RaNtio of population under 15 and 65 and over to popula, aese 1 through 4. may be u"ad aa a first approximation, Indx of tin if ages 15-61 for We dependency ratio and to labor malnutrition. force of ages 15-65 for economic dependency ratio. LI Pereentage enrolled of correspondn population of school age FA PO reference standards reprecet physiological re-a defined for each couatry.- quirenents formoroal activity and health, taking ~ a1972; /b 1960-65 UN eeticate; /c 1965-70 MlI eatinato; /d '1965; /e 1967; Lf Registered only; In 19fl; 1961, 7r 19659; j 19,69-70, 7TE 1955-611 &i 1960-72; Lm 1956-UTl /n Capitals of districts and toase populated rooter; with ouch urban cha~racteriatico as stmoeta, plazas, water supply system., sewerage ayetems, electric lights, etc.; Lo 1961.73; /p loualities of 2,500 or core inhob tant / Poulated centers which hove definito urban characteristics contributed by certain public and municipal=ariee , Built-up areas with at least 200 inhabitants and usually not core than 200 ceters between hounco; La Data exdlude adjuatment for underenuneration; and Indian Jungle population; Lt 1970-75 UN estimate; /u Excluding Indian jungle population; estimated at 1OD,830 in 1961; /v Population; /w 1970-71; Lx Economically active population; LI Households; z~ 1968; Laa " 1973; lab 1970 e tlmate booed on rasUt of household survey. Excludes Inidian jungle populaitmu; /ac 96b/ad Government only; las 1962; If 1960-62; /M 1961.66; lah Including evenig echools; /ai Including overge students; Lo1Estimate; /ak 17 yeara and over; J7a Defintion unkanoa; Isa 15 years and over; /a Data reer to houaing unit.; lao Urban and rural ; /a Water piped inside; /a DeTa is not cosparehie; 7a 1960-73; /as 10 Years and over; jat 1971.; L/au Urban areas only. S-idedn hoc been selected ae an objective country for Peru because of ita high level, of taco.. accompanied by an active ocio-economic policy aimed at attaining a noma equitable immc distribution; and an economic policy which atmenese the icportant rule of the state in, the concoct. 81. September 12, 1975  ANNEX I Page 2 ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 197 ANNUAL RATE OF GROWTH (%. constant prices) US$ Mln. % 1961 - 67-/ 1969-72- 1975 GNP at Market Prices 13,780 100.0 5.9 6.2 3.4 Gross Domestic Investment 2,615 18.9 9.4 4.5 17.6 Gross National Saving 1,047 7.5 3.6 - 10.4 31 -10.7 Current Account Balance -1,568 -11.3 . 4/ Exports of Goods, NFS 1,752 12.7 2.7 -0.8 3.1 Imports of Goods, NFS 3,123 22.6 12.9 4.7 17.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 197 5/ Value Added Labor Force - V. A. Per Worker US$ Mln. % Thous. % US $ _% Agriculture 1,199 17.7 1,961 44.4 610 40 Industry 6/ 2,356 34.8 872 19.8 2,700 175 Services 3,221 47.5 1,440 32.6 2,240 145 Unallocated . . 142 3.2 Total/Average 6,776 100.0 4,415 100.0 1,535 100 1/ GOVERNMENT FINANCE General Government Central Government (Soles Bln.) % of GDP (Soles Bln.) % of GDP 1975 1975 1973-75 1975 1975 lY77j-75 Current Receipts 115 20 20 9i8 .5 15 Current Expenditure 109 19 18 92 i6 15 Current Surplus 7/ 6 1 2 -4 -1 2 Capital Expenditures 34 6 5 31 5 5 External Assistance (net) 17 3 2 17 3 2 MONEY. CREDIT and PRICES 1965 1970 1973 1974-/ 19751V (Billion Soles outstanding end period) Money and Quasi Money 26.5 55.9 90,4 110.3 125.4 Bank Credit to Public Sector 4.4 12.2 27.6 26.3 51.Z Bank Credit to Private Sector 20.8 39.8 73.2 85.2 106.9 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 23.0 23.7 25.4 24.6 21.9 General Price Index (1970 = 100) 8/ .. 100 126 149 183' Annual percentage changes in: General Price Index .. 7.3 14.6 18.2 22.9 Bank credit to Public Sector 51.3 5.4 60.0 -l.7 94.7 Bank credit to Private Sector 25.6 16.2 24.1 16.4 25.5 1/ Preliminary estimates. 2/ As there was a severe economic crisis in Peru 1967-68, it would not be meaningful to show the usual period 1965-70. Instead the chosen periods are "before the crisis" and "since the crisis". 3/ No trend exists, values are very scattered with a sharp peak in 1970, a year of record current account surplus. 4/ Refers to 1962-68. 5/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. 6/ Comprises Manufacturing, Construction and Mining. 71 Includes capital revenues ,8/ GDP deflator not atailable not applicable  ANNEX I Page 3 TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF,' PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1973-75) 1973 1974 1975 US $ Mln X (Millions US $) Exports of Goods, NFS 1,347 1,842 1,752 Fish products 213 16.0 Imports of Goods, NFS 1,400 _2,42 3.123 Copper 273 20.4 Resource Gap (deficit = - ) -53 -600 -1371 Sugar 180 13.5 Iron ore 65 4.8 Interest Paymentsl/ -83 -126 -215 Silver 124 9.3 Workers' Remittances .. .. .. Zinc 135 10.4 Other Factor Payments (net) _79 -47 -26 All other commodities 342 26 Net Transfers 42 - 48 5 Total 1,332 100.0 Balance on Current Account -173 -725 7 EXTERNAL DEBT, DECEMBER 31, 1974 US $ Mln Direct Foreign Investment 86 133 316 Net MLT Public Sector Borrowing 333 713 806 Public Debt,. incl. guaranteed 2,042 Disbursements (690) (1,093) (1,132) Non-Guaranteed Private Debt Amortization (357) o (-326) Total outstanding & Disbursed Subtotal 419 b6& .1,122 2/ Capital Grants ,, .. DEBT SERVICE RATIO for 1974 - Other Capital (net Y -13 -7 -13 Other items n.e.i. 22 161 -95 Increase in Reserves (+) ?+8 +275 - Public Debt, incl. guaranteed ,20.5 Non-Guaranteed Private Debt Gross Reserves (end year) 564 949 459 Total outstanding & Disbursed Net Reserves (end year) 405 680 127. RATE OF EXCHANGE IBRD/IDA LENDING (March 31, 1976) (Million US$): Through September. 25 1975 IBRD IDA US$ 1.00 = S/. T3T0./0 s/. 1.00 = US$ 0.0258 Outstanding & Disbursed 149.3 Undisbursed 74.o Since_September 26A 1975 Outstanding incl. Undisbursed 213.3 S/. 1.00 = 0.0222 1/ Public sector only, interest on private debt included in "Other Factor Payments". 2/ Ratio of debt service in foreign currency (excluding prepayments) to exports of goods and non-factor services. 3/ This was the main rate (certificate rate); there was also a secondary rate (draft rate US$r.OO = S/.43.38). / Net loans to the private sector. ..not available not applicable May 7, 1976  ANNEX II Page 1 of 3 THE STATUS OF BANK GROUP OPERATIONS IN PERU A. STATEMENT OF BANK LOANS (as at March 31, 1976) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank Undisbursed 22 loans fully disbursed 206.7 418 1965 Republic of Peru Irrigation 6.5 0.1 706 1970 Republic of Peru Roads 30.0 8.3 933 1973 Banco de Fomento Agropecuario Agriculture 25.0 17.4 949 1973 Republic of Peru Education 24.0 23.8 1025 1974 Republic of Peru Roads 26.0 24.4 1975 Republic of Peru / Transport 76.5 76.5 Total 394.7 of which has been repaid 104.9 Total now outstanding 289.8 Amount sold 18.3 of which has been repaid 18.3 - Total now held by Bank 289.8 Total undisbursed 74.0 Note: No IDA credits have been made to Peru lJ Signed on May 27, 1976 2/ Prior to exchange adjustments. A $36 million loan for a Fifth Power project was approved by the EKecutive Directors on March 2, 1976 and will be signed shortly. A $40 million loan for the CENTROMIN Expansion project will be considered by the Executive Directors on May 28, 1976.  ANNEX II Page 2 of 3 B. STATEMENT OF IFC INVESTMENTS (as at March 31, 1976) Type of Amount in US$ million Year Obligor Business Loan eity Total 1960 Industrias Reunidas, S. A. Home 0.3 0.3 Appliances 1960 Luren S. A. and Ladrillos Calcareos, S. A. Bricks 0.3 0.3 1960 Durisol del Peru, S. A. Building 0.3 0.3 materials 1960; 1962 Fertilizantes Sinteticos,S.A. Fertilizers 4.1 4.1 1962; 1968 Cemento Andino, S. A. Cement 2.2 0.2 2.4 1964; 1967 Cia. de Cemento Pacasmayo Cement 1.1 0.5 1.6 1975 Southern Peru Copper Corp. Mining 15.0 15.0 Total gross commitments 23.3 0.7 24.0 less cancellations, terminations, repayments and sales 8.3 0.4 8.7 Total commitments now held by IFC 15.0 0.3 15.3 Total Undisbursed 5.0 - 5.0 C. PROJECTS IN EXECUTION / Loan No. 418-PE: San Lorenzo Irrigation Project; US$11 million Loan of June lo, 1965; Effective Date: November 2, 1965; Closing Date: June 30, 1976 Because of inadequacy of water supply, the Bank agreed to reduce the project area; consequently, the project was redefined and the original loan amount of US$11.0 million was reduced to US$6.5 million. (See Memorandum to the Executive Directors "Peru; Proposed Change in Loan 418-PE", February 28, 1968-33). The Closing Date, originally June 20, 1967, was postponed four times, first to June 30, 1969, then to December 31, 1973, then to December 31, 1974, and then to June 30, 1976. The last postponement of the Closing Date was granted to allow the Borrower to use the undisbuarsed amount of the loan (US$350,000) for the replacement of a valve at the San Lorenzo reservoir, which is important for the overall operation 2/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 3 of 3 of the system. The project has encountered a number of difficulties, both administrative and technical but these problems are being overcome. Project management has been strengthened and the last part of the project related to the drainage scheme is progressing satisfactorily. The Loan is expected to be fully disbursed by the revised Closing Date. Loan 706-PE: Road Reconstruction Project; US$30 million Loan of September 14. 1970; Effective Date: October 26, 1970; Closing Date: March 31, 1977 This Loan was signed only three and a half months after the earthquake in the Callejon de Huaylas. However, the identification, feasibility study and final engineering of the roads to be improved have taken much longer than expected because of a too optimistic assessment at the time of appraisal, because of administrative and coordination difficulties in connection with the on-going decentralization of the Central Government, and because of problems with the consultants engaged to study and supervise the project. Construction of a short section of road near Huaraz, the capital of the region, is near completion. Work is well advanced on the two remaining sections along the Callejon; bidding for the access road has now taken place and construction of this last section has also started. The road reconstruction element of the project is expected to be completed by the end of 1976, 15 months later than the original Closing Date of the Loan, which has been extended accordingly. Loan 933-PE: Agricultural Credit Project; US$25.0 million Loan of September 12, 1973; Effective Date: December 12, 1973; Closing Date: December 31, 1977 The Loan was signed in September 1973 and became effective on December 12, 1973. Although the project had a slow start, progress is now satisfactory. Disbursements are slightly behind schedule. Loan 949-PE: Education Project; U $24.0 million Loan of December 5, 1973; J