Peru - Irrigation Rehabilitation Project

Dmoument of The World Bank FOR OFmFCIAL USE ONLY ) Report No. 1189-PE STAFF PROJECT REPORT APPRAISAL OF THE.IRRIGATION REHABILITATION I PROJECT PERU March 15, 1977 Projects Department Latin America and Caribbean Regional Office This doemunent bn a resiced distibution nd my be usd by reipints ody In the perfonune ofd their ociad dutis. Bs cotents mny not otherwise be dilsed without World lank authoriztlon.  Currency Equivalents Currency Unit = Peruvian Soles (SI.) S/. 1 = US$ 0.022 U$1 = SI. 45.0 at the time of appraisal and S/. millior. US$ 22,222 as used in this report. Measures mm m millimeter (1 mm = 0.039 inch) m = meter (1 m 3.28 feet) km = kilometer (1 km - 0.62 miles) ha = hectare (1 ha = 10,000 m2 = 2.47 acres) 1W2- = square kilometer (1 km2 = 247.1 acres = 100 ha) m3 = cubic meter (m3 = 1.31 cubic yards - 264.2 US gallons) Mtn3 = million m3 (Mm3 = 811 acre feet) kg = kilogram (1 kg = 2.2 lb) m ton or ton = 1,000 kg = 2,205 lb ha-m = hectare meter (1 ha-m = 10,000 cubic meters = one meter depth of water over one ha) EC - the reciprocal of the electrical resistivity of a saline solution expressed in reciprocal ohms/cm at 250C. Abbreviations RAP = Banco Agrario del Peru DGA = Direccion General de Aguas DGI = Direccion General de Irrigaciones DGP = Direccion General de Produccion DGiA y AR = Direccion General de Reforma Agraria y Asentamiento Rural EPCHAP = Empresa Publica de Comercializacion de la Harina y Aceita de Pescado EPSA = Emprasa Publica de Servicios Agropecuarios INP = Instituto Nacional de Planificacion MAG = Ministerio de Agricultura MA = Ministerio de Alimentacion (Food) ONERN = Oficina Nacional de Evaluacion de Recoursos Naturales OSPA = Oficina Sectorial de Planificacion Agropecuaria 9ENAMA = Servicio Nacional de Mecanizacion Agricola SINAMOS, = Sistema Nacional de Apoyo a la Movilizacion Social PERU Fiscal Year 1 January - 31 December  FOR OFFICIAL USE ONLY PERU APPRAISAL OF THE IRRIGATION REHABILITATION I PROJECT STAFF PROJECT REPORT TABLE OF CONTENTS Page No. SUMMARY ..... , ................ i 1. THE SECTOR .. II. THE SUBSECTOR.. 4 III. THE PROJECT .........................................6 A. The Project Areas. 6 Description of the Project Areas . . 6 Present Land Use and Production. 7 Population and Employment . . 8 Land Tenure . . 8 Agricultural Credit .. 9 Soil Surveys and Land Classification . .10 Source and Cause of Salinization . .10 Soil Reclamation ..12 Groundwater Situation and Need for Drainage 13 Water Supply and Irrigation Requirements 14 Water Rights . ..15 Water Quality ...16 B. The Project Components .17 General Scope and Purpose of the Project 17 Improvement of Main and Secondary Irrigation and Drainage Systems .17 Agricultural Development Credit (On-Farm Development) .18 Service Centers .19 Consultant Services .19 Operation and Maintenance .20 Feasibility Study for a Stage II Project 21 This report is based on the findings of an appraisal mission in December 1975 to Peru composed of H. Feuerstein, D. van der Sluijs and M. Fireman of the Bank; W.A. Lucas, Consultant and M. Contijoch, UNDP Fellowship Program. 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. C. Project Costs and Financing .................... 22 Cost Estimates ................................. 22 Financing ........................ 26 Procurement ................................. 28 Disbursement .................................... 28 Accounts and Audit ............................... 30 Environmental Evaluation ........................ 30 IV. ORGANIZATION AND MANAGEMENT . . 31 A. Project Organization .............. .. ............ 31 Special Project - PLANREHATIC ................... 31 Ministerio de Agricultura ....................... 31 Agrarian Zones and Irrigation Districts ......... 33 B. Implementation of the Project ................... 33 Engineering and Supervision ..................... 33 Construction Schedule ........................... 34 C. Participation of Other Agencies ................. 34 Banco Agrario del Peru ......................... 34 Ministerio de Alimentacion ...................... 34 SINAMOS and ONERN ............................... 35 D. Farmers' Organizations .......................... 36 Cooperatives and Farmers' Associations ........ .. 36 Water Users Associations ........................ 36 V. MARKETS, MARKETINGS AND PRICES ....................... 39 Market Situation ................................. 39 Prices for Economic Analysis ......................... 40 Prices for Financial Analysis ........................ 41 VI. AGRICULTURAL PRODUCTION AND FARM BUDGETS .... ......... 43 Area Cultivated ........... . ........................... 43 Yields .......... ..................................... 43 Cropping Patterns .................................... 43 Cost of Production ................... 44 Production and Value ................................. 44 Farm Budgets ......................................... 44  TABLE OF CONTENTS (Continued) Page No. VII. FINANCIAL ANALYSIS ................................... 69 Producer Benefits ..................,.,......... 69 Cost Recovery ..................,.,......... 70 VIII. ECONOMIC ANALYSIS .................................... 74 IX. RECOMMENDATIONS ......................................78 ANNEX 1 Related Documents and Data Available in the Project File MAP - Project Location (IBRD 12130)   PERU IRRIGATION REHABILITATION PROJECT STAFF PROJECT REPORT SUMMARY THE AGRICULTURAL SECTOR 1. Although contributing only 15% to Peru's GDP, agriculture employs more than 40% of the labor force. In addition, agro-based industries account for around 30% of employment and 40% of value added in manufacturing. Agri- cultural output, and especially food production, has lagged behind population growth (3.2%) for at least the past 15 years. The resulting growth of food imports has placed increasing pressures on the balance of payments and Govern- ment subsidies have been a serious drain on the public sector budget and national savings. Raising the sector's poor performance thus has become increasingly critical for future economic progress and to provide employment for the rapidly increasing rural population. A. The Resource Base 2. The country's three major regions are: (a) the narrow Coastal Zone along the western edge of the country which encompasses only about one-fourth of the arable land but produces around two-thirds of the value of agricultural output. Rainfall is near zero and virtually all cultivated land is irrigated. This region is highly productive and commercialized, offers good conditions for a variety of crops and livestock, and is close to the major urban markets. Prior to the land reform, summarized below, coastal agricul- ture consisted of large privately-owned plantations producing Peru's major export crops, sugar and cotton, as well as of large rice estates and small truck farms. Rapid mechanization in the 1960s resulted in increasingly serious problems of labor displacement and urban migration. The plantations and large estates have since been converted to worker-owned cooperatives. (b) the Sierra, or highland region, which is characterized by low-productivity, small land holdings and subsistence agri- culture. Climate, soils, and water availability are poor and the man-land ratio is extremely high. Commercializa- tion is inhibited by high transport costs to major markets and opportunities for non-farm employment are limited. Cereals, tubers, and livestock are the major products. Most of Peru's rural population subsists in the Sierra, often under the most precarious conditions, although increasing numbers have left the Sierra in recent decades to crowd into the urban slums of the coast.  (c) the Selva or jungle region which covers two-thirds of Peru but currently accounts for less than 10% of total popula- tion. The region is becoming increasingly important economically because of oil discoveries. Two Transandean Highway projects, one financed by the Bank and the other under consideration by the Inter-American Development Bank, are expected to contribute further to the region's development. Nevertheless, because of the difficulties of transport and frequently unfavorable soil and climatic conditions, the jungle offers only limited potential for agriculture with presently known technology. B. Agrarian Reform 3. Agrarian reform in Peru, one of the most ambitious efforts of its type ever undertaken in Latin America, has dominated the agricultural scene since the Military Government came to power in October 1968. Since that date the previous modest process of expropriating some large holdings for allo- cation to individual smallholders has been replaced by a massive program of transferring much broader categories of holdings in the Coast and Sierra (but not the Selva) into worker-owned production cooperatives and other associative units. In the process the hacienda system has been virtually eliminated. By the end of October 1975, 7.3 million ha had already been expropriated, of which 6.1 million ha had been adjudicated and assigned to 251,000 families. By the end of 1976, about 10 million ha were scheduled to have been distributed to an estimated 400,000 peasant families, or roughly one-third of the rural population. 4. The institutional structure of Peruvian agriculture has been dramatic- ally changed by the agrarian reform program. The results achieved in terms of production, employment and income distribution have thus far been positive but relatively small. The best performance has been on those plantations and estates which had been most efficiently run prior to the reform and which have kept their former management. Problems of decapitalization and inefficiencies owing to the lack of managerial experience and technical expertise did, however, occur. A major current problem in the agricultural sector is the uncertainty that the land reform has created for the remaining medium-sized private land-owners who still account for most of the food supplied to the urban markets. The Government has attempted to assuage their doubts by issuing certificates of exemption from expropriation, but these "guarantees" are heavily conditioned. The Government has recently issued a blanket exemp- tion to private holdings of 15 ha or less. While this increases the security of small farmers, the move may paradoxically have increased the uncertainties felt by the owners of larger farms, now limited by law to 50 ha. 5. One drawback of the agrarian reform is that the process of expro- priation and structural reorganization has been emiphasized at the expense of technical assistance and other programs in both the reformed and private sectors. Long-term investment credit, for example, has been severely con- strained by the shortage of qualified field personnel in the national Agrarian Bank. In an effort to attack this and other problems, the Ministry of Agricul- ture was divided into two ministries in 1975. One of them, the Ministry of  - iii - Food (MA), was given responsibility for agricultural production programs; the other, which retained the title of Ministry of Agriculture (MAG), has respon- sibility for land and water development and agrarian reform. This reorgani- zation has not yet had significant results, while creating additional diffi- culties of coordination. At the same time, little has been done to alleviate the plight of minifundistas who, particularly in the Sierra, live in extreme rural poverty. C. Current Government Policy 6. The National Development Plan for 1975-78 aims at consolidating the Agrarian Reform Program initiated in 1968 and at increasing the rate of growth of agricultural output, particularly of import substitutes. Meat imports have been significantly reduced through restrictions on consumption and the pro- motion of alternative foods. In addition, farmers are legally obliged to devote at least 40% of their arable land to foodcrops. Despite these efforts, Peru's food imports are likely to continue to grow, at least through the medium term, since Peru is not well endowed for agriculture. 7. The Government has recently initiated a nationwide agricultural production acceleration program under the Direccio'n General de Produccio'n (DGP) within the Ministry of Food. In this new attempt to respond to the needs of the country for greatly increased agricultural output, "production nuclei" are being formed, consisting of farmers committing themselves to the production of certain agricultural products or crops. Once the production program proposed by a particular "nucleus" (which may be a farmers' coopera- tive or may even consist of only one farmer) has been approved and found to conform to the zonal and national production program and objectives, it is supplied with the necessary support services, including agricultural exten- sion, credit, crop insurance and marketing of the production. The emphasis under the new program is on farm units ranging in size from 3.5 ha to 15 ha; these receive the most complete production acceleration "package" of services. D. Irrigation 8. Of the total of 3.6 million ha of agricultural land in Peru, about one-third, or 1 million ha, are irrigated, of which 770,000 ,la are located in 52 small valleys in the Coastal region of Peru. This region, where six of the ten largest urban centers are located and where 40% of the total population live, produces about two-thirds of the country's total value of agricultural output. With precipitation in most of the coastal area close to zero, irri- gation is essential for agricultural production. In general, where water is available conditions are favorable for high crop production owing to poten- tially good soils and near optimal solar radiation and temperature regimes. 9. Peru's irrigated coastal valleys have for centuries been the primary source of food production in the country. In modern times much of this area was cultivated in large holdings. Development of irrigation and drainage systems, together with on-farm development, was left to private owners with  - iv - minimal intervention by Government. The irrigation systems are antiquated and generally inadequate to achieve efficient water management and optimum use of the land and water resources. Effective drainage systems were never con- structed, and over a period of many years dissolved salts from soils in the upper parts of the valleys have gradually contaminated the groundwater. This saline water has moved downstream by surface or underground flow causing an excessive accumulation of salts in the lower part of the valleys which, together with a high groundwater table, has resulted in moderate to severe waterlogging and salinization of large areas of land; production has suffered as a result. It is estimated that a total of 150,000 ha, or 20% of all coastal irrigable lands, are severely affected, with an additional 100,000 ha affected to a lesser degree. Fortunately the lands may be reclaimed and restored to their original condition by flooding and leaching if coupled with adequate drainage. 10. Facing the problem of scarce land resources, a rapidly growing population and an unfavorable trade balance, the Government has decided to initiate a program to rehabilitate once fertile lands in the coastal zone, as had been recommended in the Bank's 1975 Agricultural Sector Survey Report (549a-PE). The Government now considers rehabilitation of existing districts an important means of rapidly increasing agricultural output and of consoli- dating its agrarian reform program and is therefore now giving greater emphasis to rehabilitation of existing areas as compared with costlier, new irrigation schemes. Not only will rehabilitation bring back into full production lands which, over the years, had to be taken out of production, but it will also halt further deterioration and reduction of the presently cultivated area and yields. THE PROJECT A. Project Concept 11. Bank and FAO/IBRD Cooperative Program staff have worked with Peruvian officials in formulating the project, which would be the first in a series of irrigation rehabilitation projects the Government is planning. The project area would consist of six coastal valleys, namely Mala, Pisco and Canete in the central coastal zone and Camana, Majes and Tambo in the southern part of the country. These valleys were selected for the first stage of the long-term rehabilitation program because their relatively high level of agri- cultural development, good infrastructure base and adequate water supply--in comparison with other valleys--make it possible to increase significantly cultivation and production quickly. The project would consist of: (a) reclaiming about 19,000 ha of salt-affected and waterlogged land which would increase both the area of arable land and agricultural production in the six valleys. This aspect of the project would directly benefit 4,000 families;  -v - (b) rehabilitating and constructing main and secondary irrigation and drainage systems for about 33,000 ha, including the 19,000 ha to be reclaimed. This would improve the delivery and use of irrigated water and provide some needed drainage facilities. (c) improving the presently inadequate operation and maintenance of existing irrigation systems throughout the six valleys, covering 68,300 ha and nearly 15,000 farms. Support services to farmers would also be strengthened with an emphasis on better water management and land preparation and new headquarters would be constructed in each valley to serve as operating bases for all irrigation-related activities; and (d) consultant services to assist in (i) the design and super- vision of construction of drainage systems; (ii) the estab- lishment of adequate operational and maintenance services in the valleys; (iii) the carrying out of the land reclamation phase of the project; (iv) the supervision of a program of groundwater investigation in the Ilala and Pisco Valleys; (v) the organization of extension and training services in the project area; and (vi) preparing feasibility studies for a similar project in other coastal valleys. The project will also provide support to, and help consolidate, the Agrarian Reform Program. In this respect, assurances have been obtained from Govern- ment that the process of agrarian reform in the project area will be completed during the course of project implementation, in accordance with the existing laws (Section 3.04 of the draft Loan Agreement). B. Cost and Financing 12. The cost of the project is estimated at US$40.9 million, equivalent, with an estimated foreign exchange component of US$15.3 million. The Bank loan would cover US$14.6 million of the foreign exchange costs and US$10.4 million of local costs. The remaining US$0.7 million of foreign exchange costs will be provided by the Netherlands under a technical assistance agree- ment. 13. The Bank loan would constitute about 60% of the total cost of the project, and would cover about 40% of its local costs. Local currency finan- cing is justified in Peru in view of the country's balance of payments posi- tion and its efforts to mobilize domestic resources. The Netherlands' Govern- ment will provide the equivalent of US$1.0 million of technical assistance (US$0.7 million for foreign exchange and US$0.3 million for local costs). The Government's contribution of the equivalent of US$14.9 million to cover the balance of the estimated total cost would be met by annual budgetary appropriations.  - vi - C. Market and Production Aspects 14. Major crops grown in the project area are cotton, together with maize and potatoes in one basic cropping pattern, and rice followed by beans in another basic rotation. Although agricultural production systems in the area are already at a relatively high level of technology, yields except for rice, are generally low and are reportedly decreasing for most of the crops due to worsening salinity problems. This trend would be reversed with the project and the estimated annual incremental net value of production at full development will be about constant 1975 US$13.2 million. Marketing of the output would involve no serious problems since transportation and processing facilities are already available in the project area and since there is a present as well as long-range need for crops grown in the project area. D. Implementation 15. The Ministry of Agriculture (MAG) would have overall responsibility for carrying out the project. The Direccion General de Aguas (DGA), a de- partment in the MAG, would be responsible for planning and final design, pre- paration of specifications and tender documents, entering into contracts and supervision of construction. Following the normal procedure in Peru for large and complex projects, a special project unit known as "Plan de Rehabilitacion de Tierras Costeras" (PLANREHATIC) has been established under the adminis- tration of DGA and would be responsible for executing the proposed project and similar projects in other coastal valleys. The special unit would have auton- omy and flexibility in managing day-to-day operations and coordinating the participation of other agencies. These include the Direccion General de Reforma Agraria y Asentamiento Rural as regards agrarian reform and the Direccion General de Irrigaciones (DGI) for assisting the special unit on studies, design and execution of those works for improvement aad construction of irrigation systems. PLANREHATIC would also have authority to receive and expend project funds for civil works, to purchase equipment, materials and supplies and to carry out other services. It would also have authority, on behalf of MAG, to arrange for the participation of other ministries or agen- cies for specific assistance in executing and managing the project. 16. The Ministry of Food (MA) would give special emphasis to agricul- tural supporting services, through its Direccion General de Produccion (DGP), to the production program in the six valleys and particularly in the reclaimed areas. The Servicio Nacional de Mecanizacion Agricola (SENAMA), under the MA would participate in providing improved mechanization services in the project area, particularly in the reclaimed areas, and organizing and managing the expanded service for operation and maintenance. MAG and MA would coordinate their efforts in providing for improvement and intensification of supporting services in the project area, particularly extension assistance under the production programs administered by DGP, and would enter into an agreement for organization and management by SENAMA of expanded operation and mainte- nance services throughout the irrigated areas in the six valleys (Section 3.05 of the draft Loan Agreement).  - vii - 17. The Banco Agrario del Peru (BAP) would act as a banking agent for development credit loans to farmers or cooperative associations for on-farm development, under an agreement to be entered into between the Government and BAP (Section 3.02 of the draft Loan Agreement); execution of such agreement will be a condition of effectiveness of the loan (Section 6.01(a) of the draft Loan Agreement). BAP would grant these loans on the basis of plans and cost estimates prepared by PLANREHATIC which would contract to have the work per- formed. The loans would have a term of 20 years including a grace period of up to 5 years and an interest rate of not less than 10% (Section 3.02 of the Loan Agreement). This minimum interest rate, although negative at the current annual price increases in Peru, is expected to be positive over the life of the loans and is compatible with the need to provide incentives to maintain production on newly settled small farms. 18. The project would be executed over six and a half years, 1977-1983, with 1977 and 1978 devoted to preparing final designs, specifications and con- tract documents and construction scheduled to begin early in 1979. Work would proceed on two fronts, i.e., the three northern valleys and the three southern valleys, on a staggered schedule commencing in one valley on each front with the other two valleys scheduled to follow at about one-year intervals. Based on the characteristics of the soils it is estimated that five years could be required following completion of construction to carry out leaching and re- establish fertility so as to achieve full production on all the affected areas in the 19,000 ha to be reclaimed. E. Procurement and Disbursement 19. Contracting for construction of major project works (US$8.2 million), on-farm development (US$5.2 million), and purchase of major items of imported equipment (US$5.6 million), would be carried out through international competi- tive bidding in accordance with Bank Group guidelines. For purposes of bid comparison, Peruvian manufacturers of material and equipment would be entitled to a preference of 15% or the applicable tariff, whichever is less. Contracts for construction of service centers, and for purchase of drainage pipe or tile and minor items of imported technical and office equipment which cannot be grouped in lots of at least US$50,000 would be done on the basis of competitive bidding advertised locally and in accordance with local proceddres which are satisfactory to the Bank. Vehicles and wheeled tractors would not be purchased with loan funds as under Peruvian law this equipment must be procured from local assembly plants without competitive bidding. 20. Since works in the six valleys are to be staggered, it would be necessary to let contracts on a valley-by-valley basis. This would reduce the value of the contracts and it is expected that these contracts would be awarded mostly to local contractors, who are well organized with staff and equipment, and are fully competent to perform the work. 21. Consultant services to assist with design and supervision of con- struction of drainage systems would be provided by the Government of the Netherlands under a bilateral agreement with the Government of Peru. Addi- tional consultants to be provided under the loan would be retained following  - viii - procedures satisfactory to the Bank. The average cost of consultant services to be provided under the loan has been estimated at about US$80,000 per man- year. 22. The proposed loan would be disbursed over a period of six years. The loan would be disbursed against (i) 60% of the cost for civil works including buildings; (ii) 75% of development credit loans for on-farm development; (iii) the foreign cost of directly imported equipment and 80% of the cost for imported equipment purchased locally; (iv) 90% of ex-factory cost of eligible equipment manufactured locally; and (v) 100% of foreign expenditures for con- sultant services or 100% of the salaries of locally recruited consultants. F. Cost Recovery 23. The impact of the project on its beneficiaries has been analyzed for three farm types considered to be typical for the area. The per capita income, including family labor, but after project charges and before property and in- come taxes, would increase in constant 1975 US dollars from US$206 to US$343 for a 3-ha farm, from US$262 to US$565 for an 8-ha farm and from US$337 to US$840 for a 15-ha farm. 24. Project charges would be introduced as facilities and on-farm devel- opment works are completed. Such charges will be sufficient to cover oper- ational and maintenance costs and will seek to assure reasonable recovery of investment costs. The extent of investment cost recovery will initially be determined in the light of socioeconomic studies to be carried out in each valley and reviewed with the Bank. The charges will thereafter be reviewed with the Bank at least once every two years to evaluate the effect of changes in prices on the value of the investment and to make adjustments in these charges as required (Section 3.06 of the draft Loan Agreement). For the purpose of the financial analysis, and on the basis of current operation and maintenance and investment cost estimates, it has been assumed that annual incremental development charges in constant 1975 terms would average US$10/ha/year for operation and maintenance, US$9.24/ha/year for capital recovery, excluding the on-farm development component, and US$38.22/ha/year for the on-farm development component, or a total of US$57.46/ha/year in case the farm invests in on-farm drains and leveling. Such assumed charges would cover operation and maintenance costs and allow full recovery of invest- ment cost in 40 years without interest and would represent 23 and 28% of incremental net farm benefits for small- and medium-sized farms, respectively. G. Economic Analysis 25. The project's principal aim is to increase agricultural production at low cost and in a relatively short period of time. This will result in increased earnings and improved living conditions for some 4,000 families in the area of 19,000 ha of reclaimed land and for another 13,200 families in the remaining 49,300 ha which would benefit from the project. It is ex- pected that out of the 4,000 families primarily benefitting from the project  - ix - investments, about 2,500 families presently have family incomes from the land of less than US$200 per capita which is considered as the poverty income level for 1975. Out of the 13,200 families benefitting from minor improvements, 9,000 families are considered to have present incomes from the land below the poverty income level. 26. Incremental production of crops, mainly cotton, basic grains and fruit and vegetables would amount to US$13.2 million annually at full devel- opment. There would be a net gain of US$11.3 million annually at constant US dollars in the balance of payments situation at full development, taking into consideration the increased export of cotton fiber and sugar, the re- duced imports of basic grains and the increased imports of project investment goods and farm inputs such as machinery, fertilizers, and chemicals. 27. The economic rate of return of the project is estimated at approxi- mately 18%. If investment costs were assumed to increase by 10% and benefits to decrease by 10%, the project's rate of return would still be a satisfactory 14%. 28. The project would also have substantial unquantifiable benefits through assisting in consolidating the Agrarian Reform Program, strengthening government institutions, and improving the capability to carry out similar future programs in other valleys. H. Conclusions, Recommendations, Risks 29. Peruvian agricultural performance has been poor in that output has lagged behind population growth and accelerated production is now critically needed to reduce food imports and increase rural employment and incomes. The best current opportunity for the Bank to aid in this objective is the first agricultural rehabilitation project because of its combined benefits in re- versing the trend of deterioration of soils and making more effective use of existing productive capacity and infrastructure in Peru's coastal zone. Project risks are no greater than can normally be expected with operations of this type. 30. The most important of the agreed covenants are concerned with (a) the establishment of water charges sufficient to cover operation and maintenance costs and to assure a reasonable recovery of investment costs; (b) ensuring that the agrarian reform in the project area will be completed, along the lines enunciated in current legislation, during the project execu- tion period; and (c) ensuring the Government's commitment to improve and strengthen agricultural supporting services and operation and maintenance services.   PERU APPRAISAL OF THE IRRIGATION REHABILITATION I PROJECT I. THE SECTOR* General 1.01 Although contributing only 15% of Peru's GDP, agriculture employs more than 40% of the labor force. In addition, agro-based industries account for around 30% of employment and 40% of value added in manufacturing. Agri- cultural output, and especially food production, has lagged behind population growth (3.2%) for at least the past 15 years. The resulting growth of food imports has placed increasing pressures on the balance of payments, and, furthermore, Government subsidies to agriculture and the agrarian reform program have been a serious drain on the public sector budget and national savings. Raising the sector's poor performance thus has become increasingly critical for future economic progress and for providing employment for the rapidly increasing rural population. This growing need is concurrent with progress of the agrarian reform which has taken on crucial political signif- icance as a demonstration of the Government's program for transforming Peruvian society. The Resource Base 1.02 Any discussion of Peruvian agriculture must distinguish between the very different conditions of the country's three major regions: (a) the narrow Coastal Zone along the western edge of the country; (b) the Sierra or Highland Zone that separates the coast from the western jungle; and (c) the jungle (Selva). Coastal agriculture encompasses only about one-fourth of the arable land but produces around two-thirds of the value of agricultural out- put. Rainfall is near zero, and virtually all the land is irrigated. The sector is highly productive and commercialized, offers good conditions for a variety of crops and livestock, and is close to the major urban markets. Prior to the agrarian reform, summarized below, coastal agriculture consisted of large sugar and cotton plantations (major export crops) using mostly wage labor, large rice estates, and small truck farms. Rapid mechanization in the 1960s resulted in increasingly serious problems of labor displacement and urban migration. The plantations and large estates have since been converted to worker-owned cooperatives. *Based on the April 1975 Report of a Bank agricultural sector mission to Peru (549a-PE) and the wcrk of a recent agricultural sector updating mission which is now preparing its report.  -2- 1.03 In contrast, the Sierra is characterized by very low productivity and subsistence agriculture. Climate, soils, and water availability are poor, and the man-land ratio is extremely high. Commercialization is further in- hibited by high transport costs to major markets, and opportunities for non- farm employment are limited. Prior to the agrarian reform, the land tenure pattern consisted of (a) large feudal haciendas in which the peasants (colonos) enjoyed usufruct rights to small plots of land in exchange for cash rents, labor and/or a share of the crop; (b) the communally owned lands of the Indian communities; and (c) smallholder cropping. Cereals, tubers, and livestock are the major products. In the past, Government has given minimal assistance to farmers in the Sierra even though most of Peru's rural population subsists there, often under the most precarious conditions. Although increasing numbers have left the Sierra in recent decades to crowd into the urban slums of the coast, the predominantly Indian peoples of the region remain segregated from the economic and political activities of the country. Very little land suitable for agriculture remains idle, although some productivity gains are possible. 1.04 The Selva covers two-thirds of Peru but currently accounts for less than 10% of total population. The region is becoming increasingly important economically because of oil discoveries. Improved access to the more developed parts of the country because of two trans-Andean highway projects, one already financed by the World Bank and the other is under consideration by the Inter- american Bank, are expected to contribute to the Region's development. Never- theless, partly because of the difficulties of transport, the jungle offers only limited long-term potential for agriculture with presently known tech- nology. The most promising area for development in the jungle region lies along the lower eastern slopes of the Andes. Land Reform 1.05 While topography and an overall shortage of good land are the main factors, the slow growth of agricultural output and the extreme poverty of Peru's rural masses, particularly in the Sierra, can in part be blamed on the unequal distribution of land and the feudal land tenure system. The first land reform law was passed in 1964, but its major result was to create uncertainty among landowners, with the consequent deterioration of investment and conservation, the expulsion of many colonos, and the frustration of peasant expectations. Large-scale land invasions became increasingly frequent. The land reform launched by the Miliary Government in 1969 has substantially reduced the amount of land in private hands and eliminated the hacienda or colonato system. By the end of October 1975, 7.3 million ha had been expro- priated, of which 6.1 million ha had been adjudicated and assigned to 251,000 families. By the end of 1976, a total of some 10 million ha are scheduled to be distributed in favor of the estimated 400,000 peasant families, or roughly one-third of the rural population. 1.06 The institutional structure of Peruvian agriculture has been drama- tically changed by the agrarian reform program. The results achieved in terms of employment and income distribution have thus far been positive but small. The best performance in absolute terms has been on those plantations  and estates which had been most efficiently run prior to the reform and which have kept their former management. Problems of decapitalization and ineffi- ciencies due to the lack of managerial experience and technical expertise were, of course, to be expected. In addition, the cooperative model imposed by Government planners has in many cases conflicted with the aspirations for independence of Peruvian peasants. The model was most easily accepted by the wage labor force of the old coastal plantations, but strikes have frequently disrupted production there, too, over issues of worker control. 1.07 Coastal plantation workers have improved their income shares with both increased output and the redistribution of the profits formerly accruing to the individual or corporate owners. Even as wage laborers, however, these workers were among Peru's best paid prior to reform. Gains also have been made by many former colonos in the Sierra livestock cooperatives. They now share in the profits and no longer pay rent. Although real incomes have also risen for the former colonos now organized in Sierra crop cooperatives, per- formance in this sector has been hampered by greater peasant resistance to collectivization, the poor resource base and the abject poverty of the Indians. The Incentive to Invest 1.08 A major problem currently in the agricultural sector is the uncer- tainty that the land reform has created for the remaining medium-sized private landowners, who still account for most of the food supplied to the urban markets. The Government has attempted to assuage their doubts by issuing certificates of exemption from expropriation, but these "guarantees" are heavily conditioned. 1/ Moreover, all public programs--e.g. credit, technical assistance--give preference to the reform sector at the expense of services previously provided the private farmers, and much of the Government's rhetoric continues to berate the private farmer. Production incentives and possibil- ities are also hampered by price controls at all levels of distribution. While, recent price increases for farm products are a step in the right direc- tion, the marketing system of crops for the domestic market needs improvement, and the Government's reaction to frequent bottlenecks tends to take the form of uncoordinated state intervention that complicates rather than solves problems and further weakens the investment climate. 1.09 A general criticism of the agrarian reform program is that while it was considered a necessary step too much attention and resources have been given to the process of expropriation and structural reorganization, at the expense of technical assistance and other programs in both the reform and private sectors. Longterm credit for investment, for example, has been severely constrained by the shortage of qualified field personnel in the national Agrarian Bank. In 1975 the Ministry of Agriculture (MAG) was divided 1/ The Government has recently issued a blanket exemption to private hold- ings of 15 ha or less. While thereby increasing the security of these farmers, the move may paradoxically have increased the uncertainties felt by the owners of larger farms, now limited by law to 50 ha.  into the Ministry of Food with basic responsibility for agricultural produc- tion programs and with NAG retaining responsibility for land and water develop- ment and agrarian reform. This has not had much effect in resolving the problems and has created additional difficulties of coordination. At the same time, little has been done to alleviate the plight of farmers with very small farms, who, particularly in the Sierra, represent the most extreme rural poverty. Government Policy 1.10 The national Development Plan for 1975-78 aims at consolidating the agrarian reform program initiated in 1968 and increasing the rate of growth of agricultural output with emphasis on import substitution. Meat imports have been significantly reduced through a combination of restrictions on con- sumption and the promotion of alternative foods. In addition, farmers are legally obliged to devote at least 40% of their arable land to foodcrops, regardless of comparative advantage. Nevertheless, despite these efforts, Peru's food imports are likely to continue to grow, at least through the medium term since Peru is not richly endowed for agriculture. 1.11 The Government has recently implemented a nationwide agricultural production acceleration program under the Direccion General de Produccion (DGP) within the Ministry of Food. In this new attempt to respond to the needs of the country for greatly increased agricultural output, "production nuclei" are being formed, consisting of farmers committing themselves to the production of certain agricultural products or crops. For farms larger than what is considered to constitute a "family unit" (larger than 3 ha), parti- cipation through the formation of a "nucleo de produccion" is mandatory; participation of smaller farms in the production programs is optional. Farmers who belong to "production nuclei" are to be provided with production- support services including agricultural extension, agricultural credit, and access to farm inputs, such as agricultural chemicals, fertilizers, seeds, machinery, and water. Once the production program proposed by a particular "nucleo" (which may be a farmers' cooperative or may even consist of only one farmer) has been approved and found to conform to the zonal and national production program and objectives, it is given priority to receive required production inputs and services, including crop insurance and marketing of the production. The emphasis under the new program is on farm units ranging in size from 3.5 ha to 15 ha; these receive the most complete production- acceleration "package" of services. II. THE SUBSECTOR 2.01 Of the total of 3.6 million ha of cropland in Peru, about one- third, or 1 million ha, are irrigated, of which 770,000 ha are located in 52 small coastal valleys representing the Coastal region of Peru. This region, where six of the 10 largest urban centers are located and where 40% of the total population live, produces about two-thirds of the country's total  - 5 - value of agricultural output. With precipitation in most of the coastal area close to zero, irrigation is essential for agricultural production. Maximum river flows are obtained during the months of December through Miarch when the average monthly temperatures along the coast are above 200C. This is the main cropping season for crops such as cotton, rice, and maize. Among second crops produced are beans, potatoes, garlic, squash, and the like. Sugarcane, with yields of over 150 metric tons of cane per hectare and a major export crop for the country, is grown extensively in the northern coastal areas. Where water is available conditions are generally favorable for high crop production due to potentially good soils and near optimal solar radiation and temperature regimes. 2.02 The irrigated valleys along the coast of Peru have for centuries been a primary source of food production in the country. The irrigated areas are usually located on the riverine lands in the lower part of the valleys adjacent to the sea, with water supply from rivers originating on the west slope of the Andes. In modern times a large part of these lands were culti- vated in large holdings; development of irrigation and drainage systems, together with on-farm development, was left to private owners with minimal intervention by Government. The irrigation systems are antiquated and generally inadequate to achieve efficient water management and optimum use of the land and water resources. Effective drainage systems were never con- structed, and over a period of many years dissolved salts from soils in the upper parts of the valleys have gradually contaminated the groundwater. This water has moved downstream by surface or underground flow causing an exces- sive accumulation of salts in the lower part of the valleys which, together with a high groundwater table, has resulted in moderate to severe waterlog- ging and salinization of large areas of previously productive land. It is estimated that a total of 150,000 ha, or 20% of all coastal irrigable lands, are severely affected, with an additional 100,000 ha affect,ed to a lesser degree. Fortunately the accumulated salts are neutral in nature (not alkali) and the lands may be reclaimed and restored to their original condition by flooding and leaching if coupled with adequate drainage to dispose of the leaching effluent. 2.03 In facing the problem of scarce land resources, a rapidly growing population and an unfavorable trade balance, the Government has decided to initiate a program involving rehabilitation of these intrinsically fertile lands in the coastal zones,as had been recommended in the report of the Bank's agricultural sector mission (549a-PE, paragraphs 54-60). The Government now considers rehabilitation of existing districts an important means of rapidly increasing agricultural output and of consolidation and deepening its agrarian reform program and is therefore giving much greater emphasis to rehabilitation of existing areas as compared with costlier, new irrigation schemes. Not only will rehabilitation bring back into full production lands which, over the years, had to be taken out of production, but it will also halt further deterioration and reduction of the presently cultivated area and of yields.  -6 - II ldTHE PROJECT A. The Project Areas Description of the Project Areas 3.01 There are 52 valleys on the Pacific coast of Peru, all with irriga- tion development on the riverine lands in the lower part of the valleys, usually adjacent to the sea, with water supply from rivers originating in the west slope of the Andes. These lands have been cultivated for centuries; in modern times irrigation development has been carried out mainly by private owners on large holdings. The systems are antiquated and inadequate for efficient use of the land and water resources. Drainage was never provided and over a period of many years dissolved salts in the upper part of the valleys have gradually contaminated the groundwater. These salts have moved downstream by both surface and underground flow causing an excessive accumula- tion in the lower part which, together with a high water table, has forced the abandonment of large areas of land for agricultural use. It is estimated that more than 150,000 ha out of the 770,000 ha of irrigable land in the coastal zone is seriously affected by salinity. This has grave implications for agricultural production since Peru suffers from a shortage of cultivable land due to the absence of rainfall in the coastal zone, the low productivity in the Sierra and the inaccessable Selva. Peru is therefore highly dependent on production from the coastal valleys, particularly the production of food for internal consumption. 3.02 The project area is located in six valleys along the coastal area in the south half of the country. Three of the valleys (Mala, Canete and Pisco) are about 150 km south of Lima in the Departments of Lima and Ica, in Agrarian Zones IV and V. The other three (Camana, Majes and Tambo) are located in the southern coastal area in the Department of Arequipa and in Agrarian Zone VI (Map - IBRD 12130). These six valleys were assigned highest priority by the Government for the first stage project, taking into account a number of factors which included: the programs for improvement already underway in other important valleys, the possibility to increase the area in cultivation and production in the short term, the high level of agricultural development at present in the six valleys, and the deficient water supply and lack of major infrastructure in other valleys which would require long-term programs and high investment to achieve a noticeable impact on pro(luction. The irrigable area in the six valleys is about 68,300 ha, all of which is under cultivation or has been cultivated in the past. Under the project the total irrigable area would benefit from improvement of operation and mainte- nance services and expansion and intensification of extension services. About 33,000 ha out of the total area would benefit from improvement or reconstruc- tion and consolidation of main river intake structures and existing irrigation systems and construction of primary and secondary drainage systems. About 19,000 ha, comprising those most seriously affected by salinity, would be reclaimed. These lands, which are located in 16 selected areas, with two or three areas in each valley, range in size from 250 ha to 3,000 ha are mostly situated in the lower part of the valleys near the sea, and cover those lands  -7- on which the high groundwater table and salinity are having a serious effect on yields or as regards the types of crops that can be grown, or those lands which have been abandoned due to excess salts in the soils. With reclamation these abandoned lands would be available for new settlers. Salinity occurs to varying degrees throughout the valleys but adequate irrigation combined with a lower groundwater level keeps the concentration of salts within the tolerance limits of most crops. The feasibility report for the proposed project includes more detail on the size and distribution of these areas and the information on the conditions in each valley and the areas to be reclaimed, together with maps showing topography, soils classification, salinity levels and groundwater conditions. A summary table of land areas involved in the project is presented below: Table 1 Land Areas in Project Benefitted by Abandoned Irrigable Improvements to To be Land to be Valley Area Major Works Reclaimed Reclaimed 1/ ------------------------ ha ----------------------- Mala 4,800 2,000 1,250 260 Caneta 24,000 9,200 3,680 525 Pisco 19,000 4,900 5,370 966 Camana 6,000 6,800 3,000 952 Majes 5,900 3,350 3,350 547 Tambo 8,600 7,000 2,350 839 Total 68,300 33,250 19,000 4,089 /1 Part of 19,000 ha to be reclaimed. Present Land Use and Production 3.03 The irrigable area in the six valleys comprising the project area is 68,300 ha. Of this total, 19,000 ha are considered for rehabilitation, including full recuperation of 4,000 ha which presently are out of production due to serious drainage and salinity problems, caused by over-irrigation in the upper valleys and lack of adequate drainage infrastructure throughout the valleys. Cropping intensity in the 19,000 ha project area varies from 70% in the southern areas to about 125% in the north. Major crops are Egyptian (long staple) cotton presently grown as a ratoon crop together with maize and potatoes in one basic cropping pattern, and rice (medium-tall IR-8)  - 8 - followed by beans in another basic rotation. On a minor scale the area produces lima beans, garlic, fruits (olives, pears, peaches, grapes, bananas), sugarcane and alfalfa. Further details are given in Chapter VI herein. Although agricultural production systems in the area are already at a rela- tively high level of technology yields, except for rice, are generally low and are reportedly decreasing for most of the crops due to worsening salinity problems. The estimated present net value of production in the 19,000 ha is S/. 179.5 million (US$4 million) using financial prices. Population and Employment 3.04 Population in the six valleys was about 205,000 in 1970, the year of the last census, of which about 53,500 or 26% were classified as rural. The growth rate is estimated at 3.3 to 3.5% p.a. so that the population in the project area is now estimated to be 242,000. 3.05 Country-wide unemployment and underemployment also affect the project area. It is generally believed that, in recent years, unemployment has decreased in the agricultural sector through the employment of more members of cooperatives and/or laborers but many of these newly employed are underemployed in their present jobs. However, most of the underemployment is of seasonal nature and would be reduced by diversification programs being initiated by the cooperatives. Land Tenure 3.06 About 21,600 ha out of the 68,300 ha in the six valleys are culti- vated by production cooperatives of more than 50 ha with about 2,500 members and an average farm size per family of 7 to 10 ha. The rest of the project area of 46,700 ha is in individual farms. About 87% of the families and 31% of the area cultivated is in farms with less than 5 ha and 17,900 ha, or 38% of the area is in farms of more than 20 ha. The Government has issued certi- ficates of exemption from expropriation to private holdings of 15 ha or less and presently land in farms exceeding 50 ha is being expropriated. Assurances were obtained from Government during negotiations that the on-going agrarian reform program for acquisition and settlement of land in excess of 50 ha in individual holdings would be completed during the course of the project, in accordance with existing laws and to achieve the objectives of the program. A summary table of the land tenure pattern in the project area is presented in Table 2.  -9- Table 2 Land Tenure Pattern in Pro ect Area in 1975 Farm Size Farms Area Average Farm Number Percent Ha Percent Size Ha Less than 3.5 ha 11,778 78.3 10,000 14.6 .8 3.5 to 5.0 ha 1,027 6.8 4,600 6.7 4.5 5.0 to 10.0 ha 1,109 7.5 6,400 9.4 5.8 10.0 to 20.0 ha 530 3.6 7,800 11.4 14.7 20.0 to 50.0 ha 242 1.6 7,000 10.3 28.9 50.0 to 100 ha /1 86 0.6 6,150 9.0 71.5 More than 100.0 ha A1 78 0.5 26,300 38.6 337.8 Total 14,850 100.0 68,300 100.0 4.6 /1 Includes cooperatives. Agricultural Credit 3.07 Agricultural credit in the Project area is provided by the Banco Agrario del Peru (BAP), the sole public supplier of agricultural credit in the country. Short term credit is allocated according to crop input needs and can be considered as adequate. Medium- and long-term agricultural credit funds are also sufficient through World Bank Agricultural Credit Loan 933-PE, BAP's own funds and possible follow-on loans by the World Bank and other foreign lenders. The limiting factor in the past has only been BAP's inability to handle sufficient subloan requests but this should be improved with the help of the on-going World Bank Credit Loan and the proposed project. It is the Government's policy to maintain a very low rate of interest on credit loans to beneficiaries of the agrarian reform program. The Government takes the posi- tion that this is an essential investment in agrarian reform to promote an income incentive and to maintain a level of production on the newly settled small farms at least equal to the level prior to redistribution cf the land. Loans at subsidized rates have been accepted policy in the past. The mission recognized the validity of the Government's policy to provide as much support as possible to the settlers during the first years of the transition period since the ability of farmers to pay higher interest rates would be limited tntil a stage of full production is reached. A minimum interest rate of 10%, based on the repayment capacity of the farmers, has been accepted for the present for development loans; however, it is generally  - 10 - recognized that this rate will have to be increased in the future. Within the project this rate of interest would apply to those farms located in the 19,000 ha to be reclaimed and which would be receiving development credit loans for on-farm leveling, drainage and other works. A majority of these farmers are or would be beneficiaries of the agrarian reform program with farm size limited to five ha. The 4,000 ha of abandoned land would also be distributed following reclamation to new or existing cooperatives in new farms of five ha or to increase the size of existing small farms to five ha. These loans would benefit a range of farms from less than 3 ha up to 15 ha, in which about 60% of the families have incomes below the national poverty level of US$200 per capita (para 8.02). Soil Surveys and Land Classification 3.08 Since 1960, the Oficina Nacional de Evaluacion de Recursos Naturales (ONERN) has carried out semi-detailed soil surveys at a scale of 1:25,000 in all the major valleys along the coast of Peru, using modified US Bureau of Reclamation standards to determine the irrigability class for a number of soil types which occur in these valleys. While the methods and criteria for land classification were not always consistent, the classifications of lands in the six valleys in the project area are reasonably accurate. In general, the soils in these valleys are derived from recent alluvium (with little profile development and organic content due to the complete absence of rain- fall), range to the coarser side in texture, are highly permeable and have a moderately low water holding capacity. Salinity, ranging from slight to highly saline is found throughout the valleys; however, the critical condi- tions are concentrated in the lower part of each valley. Natural fertility is low but the soils are easily managed and the response to fertilizers is good. Aside from the problems of salinity and waterlogging most of the soils in the project area are suitable for irrigated agriculture and in fact are producing good yields on a variety of crops at the present time. With reclamation of the seriously affected areas (19,000 ha), it is expected that more than 95% of the lands (68,300 ha) will be restored to Class III or better, since saline conditions can be corrected and are not a permanent constraint in determining the land classes. Other factors such as texture, internal drainage, slope, depth of profile, moisture holding capacity and groundwater conditions are generally favorable. Source and Cause of Salinization 3.09 The soluble salts that occur in soils consist mostly of sodium, cal- cium, magnesium, chloride, sulfate, and bicarbonate. Constituents that ordi- narily occur only in minor amounts are potassium, iron, carbonate, nitrate, silicate and boron. The original and, to some extent, the direct source of almost all the salt constituents are the primary minerals found in soils and in the exposed rocks of the earth's crust. During the process of chemical weathering, which involves hydrolysis, hydration, solution, oxidation, reduc- tion and carbonation, the rock constitutents are gradually released and made soluble. Most saline soils however occur in areas that also receive salts from other locations, and water is the primary carrier. Most commonly, the source of salts is inflowing surface and groundwater, including those used for irrigation, the salt content depending upon the soils and geologic materials  with which the water has been in contact. Under humid conditions the soluble salts are carried downward into the groundwater and are transported ultimately by streams to the oceans. Saline soils are, therefore, practically non- existent in humid regions. However, in arid regions such as the project area the leaching and transportation of salts out of the soil may be incomplete, is usually local in nature and the salts may not be transported far. Lack of adequate drainage also contributes to the salirlization of soils and may in- volve the presence of a high groundwater level or low permeability of the soil. As a consequence, upward movement of water, very slightly to highly saline, and subsequent evaporation at or near the soil surface results in salt accu- mulation with deleterious effects on seed germination, crop growth and some- times on the physical properties of soils. 3.10 The coastal area of Peru in which the proposed project areas are located is characterized by fairly high atmosphetic humidity year around, but almost complete absence of rainfall (from none to a few millimeters per year). Hence although annual free-water evaporation is not very high (about 1.2 meters), there is no leaching of accumulated salts by rainfall. Accordingly deleterious amounts of soluble salts accumulated wherever salinity control was inadequate i.e., wherever groundwater levels were high or irrigation applications are inadequate or both. Groundwater levels tend to be high in the lower part of the valleys, because of the valley profile and because much of the diverted irrigation supplies in the upper part of the valleys percolate into the subsoil during conveyance and field application and with drainage facilities absent or negligible, gradually move downstream to the lower part of the valley. Irrigation applications may be ineffi- cient because of poor land leveling or application techniques leading to excessive use of water on the higher lands. It should be noted that (a) only a few hectares if any of these soils are alkali (i.e., high in exchangeable sodium) owing to the widespread presence of gypsum (calcium sulfate) and the fact that in most places the soluble salts are largely calcium and magnesium chlorides and sulfates, and (b) most of the saline soils are also moderately high to high in boron, more or less in proportion to the soluble salt content. The effects of excess boron on crop growth are indistinguishable in most cases from the effects of excess salinity, and fortunately the necessary remedial measures for their alleviation are identical. 3.11 There are indications that about half the soils to be reclaimed under the project are critically affected by salinity ranging from one third of the lands in Pisco and Camana to five-sixths in Mala. The soil salinity status in the valleys is shown below in Table 3.  - 12 - Table 3 Soil Salinity Status (0 to 30 cm depth) Area Slightly Moderately Valley Surveyed Saline S a I i n e Highly Saline (ha) (%) (ha) (%) (ha) (%) Mala 1,247 205 19 235 19 807 65 Canete 4,060 1,391 34 915 23 1,754 43 Pisco 5,370 3,563 66 897 17 91.0 17 Camana 3,260 2,132 65 492 15 636 20 Majes 3,350 1,791 53 597 18 962 29 Tambo 2,890 1,209 42 328 11 1,353 47 Total 20,177 10,291 51 3,464 17 6,422 32 3.12 It should be noted that the above data represent only surface soil samples to a depth of 30 cm and these data could be misleading; samples from the surface layer only tend to minimize the salinity problem where irrigation is being used and make salinity seem worse than it actually is where the soils are not being irrigated. Soils with electrical conductivities (EC) of the saturation extract of less than 8 millimhos/cm at 25 C are listed above as "slightly saline" (having little effect on the growth of most crops), those with conductivities 8 to 16 millimhos as moderately saline, and those greater than 16 as highly saline; these separations are reasonably well related to present actual or potential effects on crop growth in the project area. Soil Reclamation 3.13 Since little if any alkali soils occur in the project areas, recla- mation of the saline soils would require only leaching with water. Efficient desalinization requires (a) proper land preparation (leveling and bordering) to permit water control and prevent waste, (b) leaching or the passage of sufficient water through the soil to dissolve the soluble salts, (c) adequate drainage facilities, natural or man-made, to keep the groundwater at a safe depth, and (d) disposal of the saline drainage effluent. Leaching can be done by ponding, sprinkling or even by rainfall if it is sufficiently high. How- ever, ponding is usually more effective and costs less. As almost all of the saline soils in the area to be reclaimed are moderately to highly permeable and excess water is available for leaching during the high-flow periods (January through March), reclamation of the project soils should be done by  - 13 - ponding. A good rule-of-the-thumb as regards the amount of leaching required for desalinization is that passage at unit depth of water will reduce the salininty of unit depth of soil to 20% of its original value, and two units of water will reduce the salinity to 10% of its original value. That is, 30 cm of water will reduce the average EC of the top 30 cm of soil from 50 to 10 or from 20 to 4, and 60 cm of water will reduce the EC of the top 30 cm of soil form an EC of 50 to 5 and of the second 30 cm of the same soil from 50 to 10, and so on. In practically all cases, from 1.0 to 1.25 meters of water would be sufficient to reduce the concentration of salts to a level most crops would tolerate. It should be noted that once the salinity of the soil is reduced to an acceptable level, good irrigation practices alone (where drain- age facilities are adequate) would provide satisfactory salinity control. Groundwater Situation and Need for Drainage 3.14 It is generally conceded that the groundwater level of irrigated lands should be more than a meter below the soil surface during the cropping season, and where there is no rainfall, as in most of coastal Peru, the groundwater level should be kept low throughout the year. Owing to down- slope seepage of water from upstream usage, high soil permeabilities, large irrigation water conveyance losses from canals and ditches, poor water management practices and virtual absence of drainage facilities, about 80% of the lands to be reclaimed are underlain by groundwater at a depth of less than 2 meters (Table 4). Almost half (9,071 ha) of the lands included in the groundwater and salinity survey (20,177 ha) clearly are in need of drainage and perhaps half of the lands with a water table between 1 and 2 meters also would benefit from drainage facilities. Many areas in the six valleys out-, side the areas to be reclaimed, as in all valleys along the coast, need pri- mary and secondary drainage systems, not so much to control the groundwater levels as to discharge the effluent from irrigation into the river in the lower part of the valleys and hence into the sea. This would eliminate the reuse of this saline water by intakes downstream, which has collected disolved salts from soils in the upper part of the valleys. There is also a need to consolidate the several intakes and primary irrigation canals into one or two main systems which could deliver fresh water to all lands in the valleys. Some improvement of this situation would be carried out under the project; however, a complete reconstruction of irrigation systems and pro- visions of adequate drainage in the six valleys, as well as in all valleys along the coast with approximately 770,000 ha requiring the same treatment, would be a program of such magnitude in time and cost that it must be under- taken step by step over a period of many years and is clearly beyond the scope of the present project, which gives highest priority to the reclamation of only the most seriously affected land. 3.15 In a review of the design criteria for drainage outlined in the feasibility report, it appeared, on the basis of available field data, that some modifications should be considered in preparing final designs. Most of the soils have high to very high permeabilities, and experience elsewhere indicates that in many places the recommended drain spacings are much closer than necessary despite the fact that a widely accepted drainage spacing  - 14 -- formula (Houghoudts) was used for calculations. It is recommended that most spacings for on-farm drains should be doubled, at least in the first stage of construction, and intermediate drains installed later if it becomes clear that closer spacings are required. Cost estimates, however, are based on drain spacings as initially recommended in the feasibility report. Most of the drainage problems arise from upslope seepage, and in a number of areas it is almost certain that construction of deep "interceptor drains" across the prevailing slope would intercept large volumes of seepage water from upslope and considerably decrease the need for drainage facilities below such drains. In some of the low lying coastal areas, it would not be possible to lower the water table sufficently to prevent salt accumulation without pumping drainage water from collector canals into higher lying lagoons or the ocean, and drainage pumping stations would be required in Canete, Camana and Tambo. A summary table of water table depth in the project area is presented in Table 4. Table 4 Depth to Water Table Area Surveyed Less than 1 m 1 to 2 m Greater than 2 m (ha) (ha) (%) (ha) (%) (ha) (%) Mala 1,247 568 45 629 51 50 4 Canete 4,060 1,091 27 2,343 57 629 16 Pisco 5,370 1,542 29 1,386 26 2,442 45 Camana 3,260 2,503 76 757 24 - - Mejes 3,350 1,434 43 1,499 45 417 12 Tambo 2,890 1,933 67 670 23 287 10 20,177 9,071 45 7,284 36 3,822 19 Water Supply and Irrigation Requirements 3.16 Water supply for irrigation in the six valleys, with the exception of Pisco, is dependent on the natural flow of the river. Pisco obtains some benefit from limited storage in lagoons high up in the watershed. Since the amount available for diversion depends on stream flow, the valleys of Mala, Canete and Pisco suffer from temporary deficits for double-cropping during the course of a year, usually during the low flow period from June through September and variations in flow from year to year. However, due to the steep slope of the river valleys on the west side of the Andes, it is impractical in many valleys to provide regulatory storage reservoirs and therefore the only feasible solution is to provide more efficient diversion and distribution  - 15 - systems for the irrigated areas and to adjust the types of crops and cropping schedules to the water availability. The most serious deficits are in Canete, Pisco and Tambo however, the high average diversion in ha-m/ha in Tambo does not correlate with the indicated deficit, which is probably unrealistic because of the poor data on the actual amount of water applied to the land. It is definite that the three northern valleys of Mala, Canete and Pisco suffer from a temporary deficit each year and irrigation efficiencies are probably higher than in the other three valleys due to the necessity of using the available supply more prudently. The average diversion in Camana, Majes and Tambo, where the available supply greatly exceeds the requirements for the arable land area, indicate an overuse of water and a correspondingly low efficiency. As an example the average diversion in Camana would be sufficient to meet the annual water requirements of double the 6,000 ha presently irri- gated in the valleys. The summary in Table 5 indicates the irrigation water supply and demand: Table 5 Irrigation Supply and Demand Average Annual Area to be Irrigation Indicated Average Valley River Discharge Irrigated Demand Deficit Diverted Supply (ha-m) (ha) (ha-m) (ha-m) (ha-m/h) Mala 10,320 4,800 4,130 138 0.86 Canete 154,500 24,000 45,960 2,700 1.92 Pisco 80,600 19,000 30,530 9,160 1.12 Camana 270,000 6,000 26,000 0 4.33 Majes 270,000 5,900 13,600 0 2.30 Tambo 109,000 8,600 34,400 4,471 3.47 Total of average 68,300 154,620 16,469 2.02 Water Rights 3.17 The General Water Law of 1972 establishes that all waters from what- ever source are the property of the state and that their control and use for urban, industrial, agricultural and other purposes must be authorized by the state. Within Irrigation Districts, following overall authorization by the state, responsibility for allocation and control of the use of water by the farmers is vested in the Ministry of Agriculture. Water rights permanently inherent to the land or an individual landowner do not exist. Each farmer is required to submit a request for an annual or semi-annual allocation to the Administrator of the Irrigation District, based on a proposed cropping pattern and evidence that the land and irrigation faciltiies are in suitable condition  - 16 - for using the water. The Administrator has authority to approve these requests, taking into account the estimated water supply for a cropping season in the valley and the priority for the crops to be grown in accordance with the national policy for land use under the agrarian reform program. Proposed cropping patterns must be formulated and approved by the administration of the Zona Agraria (Agrarian Zone) in which the valley is located, in full consulta- tion with officials of the Distrito de Riego (Irrigation District) and the Junta de Usuarios (Water Users' Associations), and these are subject to the national policy to devote 40% of the land to food crops to meet the country's needs for internal consumption. Exceptions to this policy are granted only in cases where the water supply, soils, climatic conditions or other factors make it more feasible to use a lower or higher percentage of the lands for either food crops or export crops. In the three southern valleys, a much higher percentage of the land is used for rice, mainly because of the greater avail- ability of water and favorable growing conditions, while the deficient water supply in the three northern valleys makes it more feasible to use a greater proportion of the land for cotton, which is more tolerant to moisture stress and short periods of deficiency in water supply. Since administration of both the Agrarian Zones and the Irrigation Districts, which also involves partici- pation of the Juntas de Usuarios in the planning process is the responsibility of the Ministry of Agriculture, correlation of production and operational policies at the project level are effective and coordinated with national policy, which reflects the needs and goals for agricultural production in the country. In general the system appear to work satisfactorily. 3.18 The Water Law also empowers the Ministry of Agriculture to impose water charges, based on the volume of water used, to cover the costs of ope- ration and maintenance and recovery of capital investment in development or improvement works within Irrigation Districts. The administrations of both the Agrarian Zone and the Irrigation Districts (para 4.03), with the assis- tance of headquarters staff in the Ministry, jointly establish the level of the charges (tarifas), and the Agrarian Zone has responsibility to collect these charges and transfer the monies to the Banco de la Nacion and utimately to the national treasury. The law also provides that Juntas de Usuarios may legally borrow and expend funds for specific improvements, protection or maintenance works and recover these costs by imposing special charges (cuotas) which are collected separately from the tarifas and remitted to the Banco Agrario del Peru. Water Quality 3.19 The quality of stream flow in the upper part of the valleys where diversions begin is excellent, showing an average EC of 0.36 for 15 valleys, or about 250 ppm of dissolved salts. However, return flow to the river as seepage from lands in the upper part of the valleys and subsoil drainage into irrigation canals farther downstream results in a deterioration of the quality of water available to the lower parts of the valleys. Measurements in canals and laterals in the lower parts of the valleys have revealed an EC of 3.1 in Canete, 5 in Tambo and up to 6 in Pisco; however, there appears to be no wide- spread crop damage from using these waters. While investigations in the six  - 17 - valleys on groundwater are limited, there appears to be significant quantities usable from aquifers in some areas at depths of 10 to 25 meters; however, the EC from the few tests made to date range from I to 8, indicating that exploit- ing this source as an additional supply for irrigation would require a compre- hensive exploration program and very selective development to insure that water of suitable quality would be developed. B. The Project Components General Scope and Purpose of the Project 3.20 The project would be the first stage in a long-term plan to rehabi- litate irrigation and drainage systems and reclaim salt-affected lands in the irrigated valleys along the coast of Peru. The main purpose of this first stage, to be carried out in six valleys with an irrigated area of 68,300 ha, would be reclamation of 19,000 ha of the most seriously affected lands where waterlogging and salinization has significantly reduced the producti- vity and actually caused abandonment of more than 4,000 ha. This phase of the project would directly benefit about 4,000 families, including some 500 families which could be settled on the abandoned 1anee d following reclamation. In addition, the project would include the rehabilitation and construction of main and secondary irrigation and drainage systems for about 33,000 ha, in- cluding the 19,000 ha to receive on-farm development. This would improve the delivery and use of irrigation water on approximately 7,000 farms and provide some needed drainage facilities. The project would also benefit the overall area by improving operation and maintenance services for the entire 68,300 ha. The project would provide support and help to consolidate the agrarian reform program to which the Government has directed its major efforts for improve- ment in the rural sector during the past seven years. With this program, due to be completed at the end of 1976, the Government would be in a position to undertake improvement of physical infrastructure in these valleys, which is required to increase production and to conserve and protect the land and water resources vital to the economy of the country. The project would also improve agricultural supporting services to both cooperative associations and indivi- dual farmers. A description of the main components follows: Improvement of Main and Secondary Irrigation and Drainage Systems 3.21 The lands in the coastal valleys have been cultivated with irriga- tion for centuries and in modern times irrigation development has been carried out and managed before land reform mainly by private owners on large holdings. The systems are however antiquated and basically inadequate for efficient use of both the land and water resources. Drainage systems were not provided, so that large areas in the lower parts of the valleys now have a high groundwater table and are either waterlogged or heavily salinized and production has been markedly reduced in recent years. While complete modernization of the systems in the six valleys would be beyond the financial capability of the Government  - 18 - at present, the project would include some improvement, reconstruction or construction of main works to take care of the most critical needs and to correct outstanding operational problems. This would include the following: (a) construction of 11 new permanent-type river intake structures to replace temporary structures now being used; (b) construction of 340 km of new main and secondary irrigation canals and rehabilitation of 65 km of existing canals, which, in part, would consolidate certain of the canal systems and eliminate temporary intakes; (c) construction of 235 km of open drainage canals and rehabili- tation of 109 km of existing drains; (d) construction of four drainage pumping plants for areas to be reclaimed in Canete, Camana and Tambo; and (e) construction of 16 bridges or culverts where main and second- ary drainage canals cross the Pan-American highway and other improvements on main highways. Agricultural Development Credit (On-farm Development) 3.22 On-farm development for reclamation of 19,000 ha would consist of the following: (a) construction of 527 km of open or buried pipe/tile on-farm drains to lower the groundwater level to a minimum of 1.5 meters below ground surface; (b) construction of 44 km of open or pipe collector drains; (c) land clearing, leveling (8,000 ha) and preparation, in- cluding the construction of bunds for the flooding and leaching process, deep plowing if required and planting of windbreaks; and (d) construction of tertiary irrigation canals and structures. 3.23 The on-farm works would be financed by development credit loans to individual farmers or groups of farmers in cooperatives or other forms of associations. Under the agrarian reform laws, settlers are obligated to develop their lands and use them for optimum production. Failure to do this could lead to the farmers' losing their land, so there is a strong incentive for the farmers to take advantage of these loans. Funds for these loans would be provided under the project from both the Bank loan and the Government's contiibution-.- These funds would be channeled through the Banco Agrario del Peru (BAP) as the banking agent and a specific fund for this purpose would be established. BAP would earn a service charge of not more than 4% p.a. and the  - 19 - Government would assume the risk on the loans. The Direccion General de Aguas (DGA) would be responsible for carrying out investigations and surveys, pre- paring plans and estimates, arranging for contracting the work, and super- vising construction. BAP would grant loans on the basis of these plans and DGA's recommendations. Because of the time required by the farmers, a large proportion being new settlers, to reach a stage of full development following reclamation of the land, the loans would be for a period of twenty years with reasonable grace periods of up to five years, which would take into account the farmer's net income during these years and his ability to begin repaying the loan, as well as paying for operation and maintenance costs and some part of the investment costs in project works. In accordance with the Government's policy to keep interest rates low on loans to beneficiaries of the agrarian reform program a rate of at least 10% has been proposed (para 3.07). During negotiations, assurances were obtained from Government that the interest rate on these loans would not be less than 10%. Assurance were also obtained that Government would enter into a legally binding agreement appointing the Banco Agrario del Peru as the banking agent to administer the sub-loans to farmers for on-farm development and that signing of this agreement would be a condition of loan effectiveness. Service Centers 3.24 The Government had planned to construct small Service Centers in each of the reclamation units for the use of administrative and technical staff, both during and following implementation of the projects. However, with acceptance of the proposal to expand and improve operation and main- tenance for all of the irrigated areas in each valley (para 3.27), it would appear more feasible to construct a new headquarters in each valley which would provide an operating base for all activities carried out by the Irrigation District, including office space, machinery repair shop and park- ing yard, and a warehouse for spare parts and construction materials. It would be possible to expand this headquarters to accommodate the staff of other offices in the Ministry of Agriculture and other agencies participating in the project, such as the new Production Zones of the Ministry of Food. This would serve to concentrate and coordinate all activities bearing direct- ly on implementation and management of the project. This proposal was dis- cussed with Government during negotiations and an agreement reached on con- struction of the new headquarters in each valley. Consultant Services 3.25 Consultant services would be provided from two sources for several phases of the project on which the Government requires assistance. An agree- ment has been negotiated whereby the Government of the Netherlands would provide consultants to assist with investigations, design and construction of drainage systems. Under the terms of the agreement, it is envisaged that three consultants from the Netherlands would be made available under contract for a period of three years, subject to further extension as required. These three consultants, one to be assigned to the main office in Lima and one each to field work in the three northern valleys and the three southern valleys, would  - 20 - assist with additional field investigations, final design and specifications, preparation of tender documents, evaluation of tenders, preparation of con- tracts and supervision of construction of the drainage systems. 3.26 In addition consultants would be recruited under terms and condi- tions satisfactory to the Bank for the following activities: (a) Operation and Maintenance (one or two years from July 1977) - to assist in establishing an organization for operation and main- tenance in each of the six valleys and to train local staff in methods and procedures and also to assist in selecting and purchasing equipment and training of local staff in proper operation and maintenance of equipment; (b) Land Reclamation (two years starting in July 1978) - to assist with the reclamation of salt-affected areas following construction of the on-farm irrigation and drainage systems, with specific emphasis on clearing, leveling and preparing land; constructing bunds and leaching the soils by flood irrigation; testing soils and groundwater to determine the effectiveness of drainage works and reclamation methods; adopting of suitable crops and cultivation practices; and using fertilizers maintain proper fertility levels and obtain optimum production; (c) Groundwater Investigations (one year, starting in July 1977) - to assist with groundwater investigations, particularly in the valleys of Mala and Pisco, to determine the effect of under- ground flow on the salination of lands in the lower parts of the valleys and to evaluate the feasibility of developing groundwater as an additional source of water for irrigation; and (d) Extension Organization and Training (two years, starting in July 1978) - to assist the Direccion General de Produccion of the Ministry of Food in organizing of the Production Zones in each of the six valleys, as envisaged in Law 21169 of October 6, 1975 for establishment of a new national agricultural production system, specifically to organize the extension services within the zones and to conduct programs for training of extension agents. Operation and Maintenance 3.27 In the past operation and maintenance of existing irrigation systems in the coastal valleys has been left largely to private landowners or loosely organized groups of farmers. With establishment of the Irrigation Districts and creation of the Juntas de Usuarios and Comisiones de Regantes, the  - 21 - situation has improved but the standards of operation and maintenance in these valleys are still far from what is required to obtain efficient and dependable operation and to properly maintain and improve the works. Under the project the Ministry of Agriculture would, for the first time, initiate a program to provide adequate maintenance services in the six valleys. This would be achieved by purchasing equipment totaling about US$5.0 million and entering into an agreement with the Serviclo Nacional de Maquinaria Agricola (SENAMA), an agency of the Ministry of Food with responsibility for promoting and providing agricultural mechanization services in the country, to perform the maintenance work under the technical direction of the Irrigation Districts and the Direccion General de Aguas (DGA). SENAMA would also carry out small- scale improvement works for the conveyance and measurement of water deliveries, and DGA, through the Irrigation Districts and the Juntas de Usuarios, would initiate a program to improve water use and irrigation practices through creation of a Technical Service for Irrigation and Drainage. The extension service for crop production, to be established by the Ministry of Food would not provide this special service, which is needed to provide technically trained staff to control and measure water deliveries and to prevent overuse and waste of water. This service, with technical staff stationed in each valley, would also work with farmers to train them in better water management and preparation of their land and on-farm delivery systems so as to achieve higher efficiencies in water use. The Ministry of Agriculture plans to ex- pand this service on a national scale as time and resources permit. Optimum efficiency in water use cannot be achieved until complete modernization of the irrigation and drainage systems throughout the valleys is carried out; however, the project, with some improvement of infrastructure and strengthen- ing of both extension and technical services, is an essential first step in reaching this long-term goal. A list of equipment to be purchased for opera- tion and maintenance is presented on page 25. Feasibility Study for a Stage II Project 3.28 During the course of the project, DGA would continue work on inves- tigations and field surveys and studies for preparation of a feasibility study for a Stage II project. It is envisaged at present that the Stage II proj- ect would include rehabilitation of existing irrigation systems, construction of drainage systems and land reclamation in the lower Piura valley (36,000 ha) and rehabilitation of existing irrigation systems, construction of drainage systems, reclamation of salt-affected lands and exploration and development of groundwater resources in other valleys to be selected on the basis of national priorities. Flood protection in critical areas along river channels should also be considered in these studies. Government is planning to request a loan from the Bank for the Stage II project, which is expected to be prepared by DGA with support of the FAO/CP and could be ready for appraisal in CY 1978.  - 22 - C. Project Costs and Financing Cost Estimates 3.29 Cost estimates for thne project are based on estimates in the feasi- bility report prepared by DGA, dated January 1976, and represent costs as of the end of 1975. These costs were updated to January 1977 to reflect the increase due to inflation during calendary year 1976. Unit costs for civil works used to prepare the estimates are based on past experience for similar work in the country and on having local contractors do the construction which would most likely be the case (para 3.32). Costs of imported equipment are estimated CIF Peru, free of duty and taxes as the purchaser would be a Government agency. Costs for equipment which would be purchased locally are based on on-going prices of local suppliers during 1975; those for local services for administration, engineering and supervision reflect salary levels during the last half of 19755 with all costs updated to 1977 by an increase of 40%. The estimates for foreign consultants are based on costs in recent contracts for these services in Peru and other Latin American countries. Physical contingencies are estimated at 10% for civil works. Expected cost increases during the six and one half year term of the project, from mid-1977 through 1983, are calculated using the rates projected by the Bank. The rates used for civil works are 9% during 1977-79 and 8% thereafter. For equipment, the rates are 7.5% during 1977-79 and 7% thereafter. Price contingencies for local costs were based on the Lndex of international inflation for developed cotntries whLch Ils estimated to be 8.4% in 1977, 8.0% in 1978-79, 7.5% in 1980 and 7.0% thereafter. This index was used since It may be assumed that the higher estimated local inflation will be offset by periodic devaluations of the Peruvian Sol, as has been the case since June 1976 when the rate changed from US$1.000 = s/. 45 to S/. 65 and the subsequent adjustments. The esti- mated project costs are presented in the attached Table 6 and an estimated expenditure schedule In Table 7.  Table 6 PERU Page 23 IRRIGATION REHABILITATION I PROJECT Project Cost Local Foreign Total -US$ Million----------- Project Works Major Irrigation and Drainage Structures 2.44 0.50 2.94 Main Irrigation Canals 1.47 0.51 1.98 Drainage Canals (open) 1.87 1.23 3.10 Drainage Systems (pipe) 0.18 0.04 0.22 Rights-of-way (land acquisition) 0.18 - 0.18 Service Centers (buildings) 0.35 0.05 0.40 Sub-total 6.49 2.33 8.82 On-Farm Development Land Leveling 1.51 1.17 2.68 On-farm Drains 1.26 0.32 1.58 Land Preparation 0.87 0.06 0.93 Sub-total 3.64 1.55 5.19 Equipment Administration, Engineering and Supervision 0.18 0.38 0.56 Feasibility Study - Stage II 0.05 0.08 0.13 Operation and Maintenance 0.81 4.42 5.23 Technical Service for Irrigation and Drainage 0.07 - 0.07 Pumps and Irrigation Equipment - 0.33 0.33 Sub-total 1.11 5.21 6.32 Management and Technical Services Administration, Engineering and Supervision 4.05 - 4.05 Consultant Services - 0.54 0.54 Feasibility Study - Stage II 0.88 - 0.88 Netherlands Technical Assistance 0.36 0.67 1.03 Technical Service for Irrigation and Drainage 0.46 - 0.46 Sub-total 5.75 1.21 6.96 Base Cost Estimate 16.99 10.30 27.29 Physical Contingencies 1.70 1.03 2.73 Expected Price Increases 6.96 3.93 10.89 Total Expected Cost of Project 25.65 15.26 40.91 March, 1977  PERU IRRIGATION REhABILITATION I PROJECT Estinted Schedule of E.Rendituraa CaleId-r Ye-rs 1977 1978 1979 1980 1981 _192 1983 TotAl Ite Local Foreign Total Lcal Foin Total Local Poreign Ttal Local Fo-ig. Total Loca. Foreign Totol Locol Lorei-c Total _Loco F-oigo Total Lo aI Foreign m-Tl