Peru - Lima Water Supply and Sewerage Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3280-PE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SERVICIO DE AGUA POTABLE Y ALCANTARILLADO DE LIMA A WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR A LIMA WATER SUPPLY PROJECT April 22, 1982 This document has a restricted distribution and may be used by recipients only in their official duties. Its contents may not otherwise be disclosed without World b I  CURRENCY EQUIVALENTS The exchange rate is being adjusted daily roughly in line with the differen- tial between domestic and international inflation. The exchange rate and currency equivalents in 1981 and as of March 31, 1982 were as follows: Currency Unit = Sol (S/.) Calendar 1981 March 31, 1982 US$1 S/. 426.60 Si. 575.284 S/. 1 US$0.0023 US$0.0017 SI. 1,000 US$2.34 US$1.74 FISCAL YEAR January 1 to December 31 ABBREVIATIONS COFIDE - Corporacion Financiera de Desarrollo (State Development Finance Bank) ESAL - Empresa de Saneamiento y Alcantarillado de Lima (Lima Water and Sewerage Company, now SEDAPAL) ERP - Economic Recovery Program IDB - Inter-American Development Bank IRR - Incremental rate of return lps - liters per second M3 - cubic meters MVC - Ministry of Housing PSU - Project Supervisory Unit t SEDAPAL - Servicio de Agua Potable y Alcantarillado de Lima (Lima Water and Sewerage Service, former ESAL) SENAPA - Servicio Nacional de Abastecimiento de Agua Potable y Alcantarillado (National Water Supply and Sanitation Service) USAID - United States Agency for International Development  FOR OFFICIAL USE ONLY PERU LIMA WATER SUPPLY PROJECT LOAN AND PROJECT SUMMARY Borrower: Servicio de Agua Potable y Alcantarillado de Lima (SEDAPAL). Guarantor: Republic of Peru. Amount: US$40.6 million equivalent, including a capitalized front-end fee of US$0.6 million. Terms: Repayable in 17 years, including four years of grace, at 11.6 percent per annum. Project Description: The project's main objectives are to expand the capacity of the Lima water supply and sewerage system; to increase the system's population coverage by end-1986 from 76 per- cent to 86 percent for water supply and from 67 percent to 79 percent for sewerage; and to strengthen SEDAPAL, the Lima Water and Sewerage Service. The project would, by end-1986, provide 370,000 mainly low-income persons with direct access to water and sewerage service and include wells that, with complementary private invest- ments, would allow another 610,000 persons to be connected to SEDAPAL's water supply system. The project is based on a water and sewerage master plan and includes the following major components: (a) extension of water supply and sewerage systems to low income areas; (b) development and improvement of groundwater resources; (c) improvement in the operation of the water distribu- tion system and reduction of unaccounted-for water; and (d) provision of technical assistance for a survey of water and sewerage connections and for better water resource management. The project faces no special risks except for possible delays in the timely increase of tariffs. However, revenues are not expected to deviate significantly from those projected, since the largest share of the tariff increases projected are in 1982 and are already being implemented, and since the projected tariff increases are well within the capacity of Lima's population to pay. The project presents no hazard to the environment. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii - Estimated Costs: Local Foreign Total -----US$ millions----- A. Water Supply and Sewerage Works 18.7 12.1 30.8 (i) Water supply 6.9 7.5 14.4 (ii) Sewerage 11.8 4.6 16.4 B. Groundwater Development 5.6 10.2 15.8 (i) New wells 4.0 6.3 10.3 (ii) Well Rehabilitation 0.9 2.6 3.5 (iii) Infiltration Galleries 0.7 1.3 2.0 C. Metering Program 4.6 5.3 9.9 D. Equipment 0.4 3.1 3.5 E. Technical Assistance 4.3 1.5 5.8 (i) Users' survey 1.1 0.5 1.6 (ii) Groundwater management 0.5 0.5 1.0 (iii) Engineering supervision 2.7 0.5 3.2 Base Costs (excluding local taxes) 33.6 32.2 65.8 F. Physical Contingencies 4.5 4.4 8.9 G. Price Contingencies 9.4 8.7 18.1 Total 47.5 45.3 92.8 H. Front-end Fee on Bank Loan - 0.6 0.6 Total Financing Required 47.5 45.9 93.4 Financing Plan: Local Foreign Total ----US$ millions- Bank - 40.6 40.6 Co-financing 2.4 5.3 7.7 SEDAPAL 45.1 - 45.1 Total 47.5 45.9 93.4 Estimated Disbursements: 1983 1984 1985 1986 1987 1988 -------US$ millions by Bank FY--------- Annual 1.8 1/ 7.2 12.4 11.2 6.4 1.6 Cumulative 1.8 9.0 21.4 32.6 39.0 40.6 Rate of Return: About 16 percent Staff Appraisal Report: No. 3744a-PE of April 14, 1982. 1/ Includes US$0.6 million as a capitalized front-end fee.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SERVICIO DE AGUA POTABLE Y ALCANTARILLADO DE LIMA (SEDAPAL) WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR A LIMA WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed loan to Servicio de Agua Potable y Alcantarillado de Lima (SEDAPAL) with the guarantee of the Republic of Peru for the equivalent of US$40.6 million to help finance a Lima water supply project. The loan includes a capitalized standard front-end fee and would have a term of 17 years, including four years of grace, with interest at 11.6 percent per annum. PART I - THE ECONOMY _ 2. An economic report entitled "Peru-Major Development Policy Issues and Recommendations" (Report No. 3438-PE) was distributed to the Executive Directors on May 4, 1981. This part is based on the report's findings and on those of economic missions to Peru in June and September 1981. Country data sheets are attached as Annex I. Natural and Human Resources 3. Peru, the fourth largest country in Latin America, is divided by the Andes mountains into three distinct regions: the coastal region (Costa), with 46 percent of the population and most of the country's modern economic activity; the mountain region (Sierra) with 44 percent of the country's population; and the sparsely populated tropical rain forests east of the Andes (Selva). The country's rugged topography limits trade between the three regions. 4. Peru's natural resources include large deposits of minerals-- particularly copper, iron, silver, and zinc--located mainly in the Sierra and the southern Costa. There are also large phosphate deposits, located in the northern Costa. Petroleum resources found in the jungle areas and offshore are also substantial, but their full extent has not yet been ascertained. Another major natural resource is the large fishing potential in coastal waters, although the magnitude of the catch is subject to sharp fluctua- tions. Only a small portion of Peru's total land area is arable, and most of the soils suitable for intensive agriculture are already being farmed. 5. Although Peru's energy resource base is relatively diverse, with scope for expanding hydro and coal based power generation, petroleum is expected to remain the major energy source in Peru through the rest of this century. Peru increased domestic oil production almost threefold between 1/ This part is substantially unchanged from Part I of the Petroleum Refineries Engineering Project President's Report of March 3, 1982 (Report No. 3230-PE).  - 2 - 1976 and 1979 to about 190,000 barrels per day and became a net exporter of about 60,000 barrels per day. To enable Peru to remain a net petroleum exporter, the Government has embarked on a strategy of accelerated secondary recovery and exploration efforts to increase production and of rational pricing policies to contain demand growth. Prices for domestically consumed petroleum products have been increased at regular intervals. In addition, new legislation was enacted offering special tax incentives to domestic and foreign investors (see para. 18) and the response has been positive. The Government strategy is already bearing fruit with petroleum output expected to increase in 1982 to an average level of 207,000 barrels per day. 6. As a result of three decades of rapidly falling mortality rates, Peru's population growth accelerated during the 1930-1960 period. Since the early 1960s birth rates have fallen gradually, mainly caused by the urbaniza- tion process and improved education. But with declining death rates, popula- tion has continued to grow at about 2.7 percent p.a. and is currently esti- mated at about 17 million. It is expected that population growth will fall only slightly to about 2.4 percent p.a. over the next 20 years, unless an effective population control policy is adopted. The Government is conscious of the need to slow down Peru's demographic growth rate and is now developing a primary health care program which would contain a family planning compo- nent. The urban population is increasing at 4.3 percent p.a., and about a quarter of all Peruvians live in the Lima area. Given the structure of Peru's population, the labor force is expected to grow in excess of 3 percent per year during the next 20 years. Past Development Policies and Performance (1968-78) 7. Two successive military Governments, in office from October 1968 until July 1980, followed a development strategy aimed at promoting economic growth and improving distribution of income and wealth, not only between individuals but also between regions. The pattern of asset ownership in the economy changed drastically through nationalization and a sweeping land reform. The Government took direct control of key economic sectors and imposed complex legislation to control the private sector. Many of the policies carried out after 1968, had an excessive cost and their implementa- tion was inefficient. 8. Between 1968 and 1977, Peru's Governments followed expansionary fiscal and credit policies. As a result, aggregate demand considerably exceeded aggregate supply resulting in strong inflationary pressures and widening external gaps. Inflation accelerated from 5 percent per year in 1970 to 38 percent in 1977. Interest rates, however, remained substantially negative in real terms, discouraging financial savings and stimulating capital flight. Moreover, the exchange rate remained practically constant between 1968 and 1975, thus contributing to the overall disequilibrium. 9. The growing disequilibrium was reflected in the balance of pay- ments. The current account deficit averaged US$1.1 billion per year in 1974-77, equivalent to nearly 9 percent of GNP. To finance this deficit, Peru accumulated a massive external debt, which at year-end 1977 stood at almost US$8.4 billion (including short-term indebtedness), equivalent to two-thirds of GDP and almost four times annual exports of goods and non-factor services.  - 3 - 10. Following the 1968-74 period of rapid expansion, during which GDP grew by more than 6 percent per year, the growth rate dropped progressively and became negative in 1977 and 1978. In this two-year period, GDP per capita dropped by over 6 percent and unemployment and underemployment rose to almost 60 percent of the labor force, up from less than 50 percent during the early 1970s. Stabilization Policies and the Economic Recovery Program (1978-80) 11. From 1975 on, several unsuccessful attempts were made to cope with Peru's deteriorating economic situation. By mid-1978 the economic crisis had reached grave proportions, with a drop in real GDP and inflation approaching 100 percent on an annual basis. Moreover, the private sector was finding it increasingly difficult to open letters of credit for new imports and the banking system's net international reserves had dropped to a negative level of US$800 million. 12. Beginning in May 1978, the Government adopted a number of important measures aimed at strengthening public finances, improving the balance of payments and curbing inflation. The Government also negotiated a stand-by arrangement with the IMF in support of the stabilization program. Peru's debt outstanding to the IMF as of December 31, 1981 amounted to SDR 578.9 million. 13. Major debt-relief operations carried out through the Paris Club and with the Soviet Union and commercial banks in 1978 enabled Peru to reduce the debt service burden for 1979 and 1980 by postponing repayment of about US$1 billion to the 1982-1986 period. In view of the strong balance of payments performance in 1979 and 1980 (para. 15), the Government decided to forego parts of the rescheduling options in exchange for slightly better conditions for new loans from commercial sources. 14. To overcome the economic recession, in late 1978 the Government adopted a comprehensive Economic Recovery Program (ERP), which, in addition to the above-mentioned stablization actions, included measures to open up the economy, promote non-traditional exports, strengthen the tax system by broadening its base, and generally improve the efficiency of resource allocation in the private and public sectors. These policy changes -- together with a declining domestic market because of the recession -- resulted in a major reorientation of industrial development, with a large increase in the value of manufactured exports from about US$200 million in 1977 to the US$750-800 million range in 1980-81 (equivalent to about 8 percent of output). The Government also drew up a public sector investment program that aimed at redirecting investment towards projects of clear economic priority and with positive effects on production and employment. In support of the ERP, the Bank approved a US$115 million Program Loan in May 1979. 15. The Government's stabilization-cum-economic recovery program resulted in a strong improvement in public sector finances in 1979. Public sector current account savings rose from -0.5 percent of GDP in 1978 to about 3.7 percent of GDP in 1979, and the overall deficit was reduced from 5.7 percent of GDP in 1978 to 1.7 percent in 1979. In spite of Peru's improved fiscal performance, inflationary pressures remained strong with consumer price increases of 67 percent in 1979. The more careful management of public finances also had a positive impact on the balance of payments. Moreover, an increase in petroleum exports, and a substantial improvement of Peru's terms of trade, contributed to high overall surpluses of the balance  - 4 - of payments in 1979 and 1980. At year-end 1980, the net reserve position had improved to about US$1.3 billion, equivalent to about 4 months of imports. Peru also made greater use of assistance from official bilateral and international sources, thus improving the structure of its external debt. Real GDP growth rebounded to 3.7 percent in 1979; in 1980, however, growth dropped to 3.1 percent owing, in part, to a drought which affected the agricultural sector. Moreover, because of a relaxation in fiscal discipline, the public sector deficit increased in 1980 to six percent of GDP, keeping inflation for the year at a high level -- 59 percent. Recent Developments and Outlook 16. In July 1979, the military Government promulgated a new constitu- tion, written by a popularly elected constituent assembly. Elections were held in May 1980, and following his electoral victory, President Fernando Belaunde was inaugurated on July 28, 1980. His Government faced a challenging economic and social situation with a number of acute problems which had been disguised by the apparently solid financial situation. These included: high levels of under- and unemployment, particularly in urban areas; higher underlying inflation than had been reported because of price controls and deferred price adjustments for public goods and services; a public sector deficit that had been reduced by freezing expenditures for economic and social services (including education, health and housing), combined with a rigid expenditure structure which did not leave much margin for any significant reallocation of funds to these and other high priority areas; a balance of payments situation which showed a substantial surplus, but which was partly due to high commodity prices and to the fact that import levels were depressed; and, finally, deteriorated income distribution over the past several years resulting in increased social unrest. 17. The Government named an economic team committed to economic effi- ciency, decontrol of the economy (including divestiture of some of the State-owned enterprises), promotion of the private sector (including foreign investment), and policies aiming at a more equitable sharing of the benefits of development through job creation and specifically targeted social programs. Its reliance on, and promotion of, private initiative, in parti- cular, distinguish the present Government's philosophy and economic program from that of its immediate predecessors. 18. The Government has made important headway in a number of areas. It was successful in accelerating import liberalization by eliminating non- tariff barriers and lowering tariffs. At the same time, export incentives were streamlined and revised to eliminate abuse and make the system more responsive to exports of products with high manufactured content. The Government also enacted new legislation for the agricultural, mining and petroleum sectors offering greater financial incentives to investors. Finally, it made significant institutional changes in the financial sector, revised the interest rate structure through substantial upward adjustments, and is preparing a new banking law which would allow further rationalization and liberalization of the financial system. 19. In an effort to improve resource use, the Government made progress in correcting major price distortions. Food subsidies were greatly reduced and most controlled agricultural prices were adjusted to international levels. The marketing of agricultural products was liberalized, and public utility and petroleum prices were adjusted at regular intervals. Moreover, the Government endeavored to rationalize public investment and its financing -- an effort that was supported by a Bank sponsored Consultative Group meeting in May 1981.  - 5 - 20. The above efforts were complemented by measures to strengthen public sector institutions. The important public enterprise sector, for example, was granted greater autonomy by transforming these enterprises into State-owned limited liability corporations operating under private law. This measure gives these companies, inter alia, greater freedom in fixing staff compensation and, thus, helps them to recruit or to retain capable personnel. Many of the above measures have already had positive short-term effects, and they have laid the ground for medium-term structural adjustments of the Peruvian economy. 21. In spite of the above policy initiatives, economic performance in 1981 lagged behind expectations. GDP grew only at about 4 percent and employment generation was also sluggish. The balance of payments deteriorated substantially as a result of declining export prices, high interest rates on the country's debt with commercial banks, and a rapid expansion of imports. The loss in net reserves is estimated to have amounted to over US$700 million, equivalent to about 3 percent of GDP. A major factor in the deterioration of the balance of payments was the large public sector deficit which is estimated to have reached about 8 percent of GDP. On the positive side, some progress was achieved in reducing inflation: while inflation on a December 1980-December 1981 basis reached 73 percent, during May-December 1981 it decelerated to an annual rate of about 50 percent, mostly because of the openness of the economy and the price dampening effects of an increase in imports. The Government is aware that this level is still too high, however, and is following actions which it expects will result in a further drop in inflation in 1982. 2-2. Reducing the public sector deficit has, once again, become the major challenge facing Peru's economic managers. While the deteriorated export situation has had a negative impact on tax revenues, the deficit is mostly the result of steep increases in expenditures and somewhat lagging adjustments of petroleum and rice prices. Excess expenditures over initial budget allocations were incurred mostly for investment projects of lesser priority. To tackle the difficult public finance situation, the Government is drawing up a restrictive financial program for 1982 with tight credit ceilings and limits to foreign indebtedness. It is also expected that the Government will trim the public investment program in line with its investment priorities. The Bank has an ongoing and frank dialogue with the Peruvian Government on these issues. Moreover, it is expected that the IMF will consider a sizeable EFF in the near future to support Peru's stabilization efforts. 23. Based on cautiously optimistic assumptions with regard to economic management, through medium term the country is expected to have economic growth of about 4-5 percent per year and a manageable balance of payments situation. Peru's balance of payments could, however, become precarious if the exportable surplus of oil declines. While measures are being undertaken to speed up petroleum exploration and to increase manufactured exports, the results of these endeavors may not come in time to countervail the potential foreign exchange shortfalls. Against this background, there is a continuing need for official development assistance. Taking the above factors into account, considering an expected debt service ratio hovering around the 30 percent mark and assuming that the authorities continue the initiated course of economic policies, Peru is creditworthy for Bank lending.  - 6 - PART II - BANK GROUP OPERATIONS IN PERU 24. The Bank has approved 46 loans to Peru for a total amount of US$1,058.7 million, net of cancellations. About 35 percent of the Bank's lending to Peru has been for transportation (mainly highways and ports), 17 percent for agriculture, 16 percent for the energy sector, 17 percent for mining and industry, about 4 percent for education and urban development and 11 percent for a program loan in support of the ERP in 1979. 25. Annex II contains a summary statement of Bank loans and their disbursement status as of March 31, 1982 and notes on the execution of ongoing projects. As of this date, US$440 million was undisbursed. Disbursements on Bank-financed projects moved slowly in the late 1970s, primarily because of weak project execution capacity and a shortage of counterpart funds that worsened as the economy deteriorated during this period. Disbursements have improved, however, with vigorous efforts by the Bank and Government to correct the situation by, inter alia, (i) opening a Bank resident mission in Peru; (ii) restructuring a number of slow moving projects; (iii) Government provision of adequate counterpart funds; and (iv) Government creation of a special commission to monitor loan execution and resolve administrative problems. These actions are bearing fruit. About US$44 million was disbursed on project loans in FY80 and US$70.5 million during FY81. This compares with average yearly disbursements of US$27.5 million during FY77-79. 26. The main objectives of Bank lending-to Peru are to assist in (i) the creation of the physical infrastructure needed to sustain and foster economic development; (ii) the expansion of productive capacity in crucial sectors, i.e., petroleum, agriculture and mining; (iii) the strenghening, through technical assistance loans and regular operations, of local capacity to prepare, implement and operate projects effectively; and (iv) the improve- ment of living conditions for the urban and rural poor. In the past, Bank lending concentrated on infrastructure in the transportation and power sectors. More recently, the Bank's emphasis has shifted to more directly productive fields--mining, petroleum, agriculture and industry--to help Peru to strengthen its balance of payments. Lending for social projects has also grown and will be further stepped up in the future. As part of its assis- tance strategy, the Bank convened a Consultative Group Meeting for Peru on May 25-26, 1981 to help the Government arrange financing for its public investment program. The next operations that would be ready for the Executive Directors' consideration include projects in petroleum production, power and agricultural research and extension. These would be followed by projects in rural development, health, education and housing. The Bank is also considering a loan to help strengthen public sector management. 27. Bank loans constituted an estimated 5.8 percent of Peru's total public external debt outstanding and disbursed at the end of 1980, and absorbed about 2.6 percent of the country's public external debt service in 1980. Assuming increased recourse to long-term bilateral and multilateral aid by Peru, the Bank's share in the country's outstanding public foreign debt by 1985 could reach about 10 percent, *and its share of debt-service would be around 4.5 percent.  28. IFC commitments as of March 31, 1982 were US$37.3 million (including US$15 million to the Southern Peru Copper Corporation for the Cuajone Copper Mining Project) of which US$18.9 million is held by the Corporation. A summary statement of IFC investments as of March 31, 1982 is presented in Annex II. The IFC is now considering assistance for a palm oil project and a venture capital company. 29. The other principal lending agencies active in Peru are the Inter- American Development Bank (IDB) and the United States Agency for Interna- tional Development (USAID). Their total commitments as of December 31, 1981 were US$849 million and US$348.8 million, respectively, and their shares of public debt service as of end-1980 were estimated at 0.6 percent and 0.5 percent, respectively. In its future lending, IDB is expected to emphasize lending for agriculture, industry, mining, roads, and small scale irrigation. USAID is expected to stress rural development and health. ( PART III - THE WATER SUPPLY AND SEWERAGE SECTORS Water Resources and Population 30. Peru's water resources are abundant but the major rivers flow east from the Andes into the Amazon Basin. About 46 percent of Peru's population, on the other hand, is concentrated west of the Andes, where desert conditions predominate. Most of the country's major cities including Lima, the capital, are located here. Their water supply comes from small rivers flowing to the Pacific and from groundwater. River flows, however, fluctuate greatly throughout the year, and while groundwater resources have not been fully assessed, preliminary studies indicate that in a number of cities the aquifers are being used at close to their safe yield and are probably being depleted in Lima. With an urban population growth rate of 4.3 percent, the provision of an adequate water supply for the coastal cities is a difficult and costly task. 31. Lima is Peru's major city with a population of 4.6 million, growing at about 3.8 percent yearly. It accounts for almost one-half of the country's urban population. Moreover, its relative economic importance is greater, accounting for two-thirds of Peru's industrial output and employ- * ment. 32. About half of Lima's water supply (about 18 M3 per sec) is provided * by the Rimac river, with the rest coming from groundwater and other small rivers. The Water Supply and Power Engineering Project (Loan S-11-PE of 1978) discussed in para. 43 below, has financed water resource management assistance for SEDAPAL, preparation of a water development master plan for Lima and the feasibility study of the Mantaro Transfer project. The water development master plan laid down the framework for choosing the best investment alternatives to satisfy Lima's water and sewerage needs. It was based on a water optimization study that explored the possibilities for stretching existing surface and groundwater resources. Its main results were that improved management of the presently available water resources could be expected to satisfy Lima's needs until the late 1980s. Beyond that date, water from the Mantaro river, on the eastern slope of the Andes, would be transferred to Lima via a transandean tunnel and canal system at a high cost.  -8- Service Levels and Past Investments 33. In 1981, about half of Peru's population had access to potable water and 40 percent was connected to sewerage systems. This was little different from the shares of a decade earlier and below the Latin American average. In urban areas, coverage was about two thirds for water supply and 60 percent for sewerage; coverage in Lima was 76 percent for water supply and 70 percent for sewerage. Conditions in rural areas were much worse; less than 20 percent of the population had access to potable water (only two percent through house connections) and very few people had access to sewerage. 34. Between 1971-1980 water and sewerage investment averaged only US$33 million per year (in 1981 prices) and over 80 percent of it went to urban areas. This represented an annual per capita expenditure of less than US$2 dollars and was one of the lowest in Latin America. The resultant slow progress in extending service coverage stemmed mainly from inadequate sectoral financial policies, which limited the resources available for investment, and the weakness of sector institutions, which had a limited capacity to prepare and implement projects. 35. The slow development of the water and sewerage system has been partly responsible for the relatively low health standards and high mortality rates in Peru. Li-fe expectancy is estimated at 58 years compared to an average of 64 for Latin America. Infections, parasites and respiratory diseases remain the principal causes of deaths and there are indications that the incidence of infectious diseases may have increased during the 1970s. Government Objectives and Strategy 36. The Belaunde Administration has given a high priority to expanding coverage of water supply and sewerage service. Its strategy aims at resolving the most urgent short term supply problems, while laying down the institutional basis necessary to raise the coverage and quality of water supply and sanitation services throughout the country. Its quantitative goals for 1990 are; (a) to provide potable water for 90 percent of Lima's population, 85 percent-of the population of other urban areas and 50 percent of the population in rural areas; and (b) to provide sanitation services for 85 percent of Lima's population, 75 percent of the population of other urban areas and 30 percent of the rural population. In order to achieve these ambitious goals, which will require annual invest- ments about ten times higher than in the past, the Government has embarked on a program of institutional improvement and financial strengthening designed to deal with the sector's principal problems. Institutional Reorganization 37. In September 1981, the Government reorganized the water supply and sewerage sector to increase efficiency. A new public institution, the  -9- National Service for Water Supply and Sanitation (SENAPA) was set up to plan, coordinate, and provide technical assistance for all urban areas. Although the Government is endeavoring to expand the role of the private sector in Peru (see para. 17), it did not consider private participation in water supply because of the social sensitivity of this activity. SENAPA will construct and operate local systems on a selective basis depending on the capability of local institutions. The water companies of the largest cities (Lima, Trujillo and Arequipa) are now subsidiaries of SENAPA, but have financial and administrative autonomy. Companies in medium-sized cities will be created and become independent when they develop acceptable technical and administrative capability. As their capacity increases, these companies are expected to extend their jurisdiction to smaller cities within their region. Although its operational role should shrink in the future, SENAPA will retain the responsibility for defining sector policies, establishing priorities and defining and setting financial and tariff policies. It will also continue to provide water supply and sewerage services in small cities where the creation of independent companies is not justified. SENAPA has good top-level management and is now in the process of building its organization and staff. 38. In September 1981, the Lima Water and Sewerage Company (ESAL) was also reorganized and renamed the Lima Water and Sewerage Service (SEDAPAL). While it remains a public enterprise, it has been given greater operational flexibility, particularly in regard to setting salaries. SEDAPAL is responsible for planning, constructing and operating all water supply and sewerage facilities in the metropolitan area. It also has been given full authority to manage and charge for water consumption from private wells, which many industries now use to tap Lima's groundwater resources. SEDAPAL is governed by a six-member Board of Directors appointed by the President of Peru. As the parent company, SENAPA must approve SEDAPAL's investment and tariff policies. 39. In the past, ESAL's performance was seriously constrained by a variety of problems. Because of inadequate salaries, it had difficulties in retaining qualified managers and technical personnel. Conversely, it was overstaffed with low level and unskilled employees (8.1 per thousand connections in June 1981 compared to 5.6 in Bogota and 3.7 in Santiago). Deficiencies in technical and commercial operations resulted in about half of the water produced not being accounted for (about two-thirds because of illegal connections or deficient meters and one-third because of physical leaks). SEDAPAL tariffs were insufficient to generate the resources necessary to maintain the system and undertake the most urgent investments. Finally, SEDAPAL lacked a master plan that identified a least-cost expansion program. 40. During the last year, action has been taken in all these areas. Based on the recommendations of a management consulting firm, SEDAPAL has been reorganized. Salaries have been increased and the general manager and other top managerial positions have been filled with qualified personnel. The Board is committed to continue improving managerial salaries in real terms. Overstaffing is being reduced and SEDAPAL now aims at having 5.7 employees per thousand connections by 1986, which would be a satisfactory level. SEDAPAL has also completed, with financing from Loan S-11-PE, a draft master plan for its investment program over the next decade, which provided the basis for the proposed project.  - 10 - Financial Policies 41. In the last quarter of 1980, the Government began increasing water and sewerage tariffs in real terms throughout the country. SEDAPAL's tariffs were increased by 30 percent in September 1980 and by an average of 5 percent per month thereafter. During 1982, SEDAPAL's tariffs have been increased by five percent in January and by 15 percent in March. As a result of these tariff increases, the average revenues per M3 sold increased 17 percent in real terms between 1979 and 1981. In 1981 a new service improvement fee (indexed to the Lima minimum wage) was approved and implemented essentially replacing the negligible connection fee that existed before. With these measures, SEDAPAL covered all its cash operating and maintenance costs in 1981, and generated about US$10 million for investment (see paras. 59-66 for a discussion of SEDAPAL's financial situation). Bank Role in the Sector 42. The first involvement of the Bank in the water supply and sewerage sector was through the Urban Sites and Services Project (Loan 1283-PE of 1976). The project included a US$13 million component (of which the Bank financed half) to provide about 7,200 water and 11,300 sewerage connections in poor areas of Lima and Arequipa. SEDAPAL is executing the Lima part of this component. After a slow start, the project is now progressing satisfac- torily and is expected to be completed before June 1982. 43. The first Bank operation directly with SEDAPAL was the 1978 Water Supply and Power Engineering Project (Loan S-11-PE), which aimed at streng- thening SEDAPAL and preparing it to better meet its medium and long term goals. In addition to a master plan for Lima and preparation of the Mantaro Transfer project to satisfy Lima's long-term water needs, the project included an organizational study, a pilot survey to detect leaks and illegal connections, and a program to install new meters. After a slow start because of delays in selecting consultants, all components of Loan S-11-PE are being implemented satisfactorily. SEDAPAL is in compliance with all loan cove- nants. 44. The Bank supports the Government's new emphasis on water supply and sewerage, and the strong measures that it is taking to mobilize financial resources and to make sector institutions more efficient. The proposed loan would support the most urgent programs for water generation and distribution in Lima, with emphasis on institution building and service to low income areas. The Government is now preparing another project for Bank considera- tion to strengthen SENAPA and support programs in smaller cities. PART IV - THE PROJECT 45. The project was identified by a Bank mission in January 1981, and was prepared by SEDAPAL with the help of consultants and Bank missions. The project was appraised in September-October 1981. Negotiations were held in Washington, D.C. on March 23 to 30, 1982 with a Peruvian delegation led by Mr. Juan Orellana, President of SEDAPAL. The appraisal mission report,  - 11 - entitled, "Staff Appraisal Report - Peru Lima Water Supply and Sewerage Project" (No. 3744a, dated April 14, 1982) is being distributed separately. Annex III contains a supplementary project data sheet. Project Objectives and Description 46. The proposed project would expand the capacity of the water supply and sewerage system in Lima and help attain the Government's coverage expan- sion targets (see para. 36). The project is based on the water and sewerage master plan mentioned in para. 40. The production aspects of the project will focus on expanding the capacity and improving the management of Lima's groundwater resources. The distribution component of the project would expand coverage in Lima's low-income areas. To make possible the attainment of the production and distribution goals, the project provides for extensive technical assistance in water management and project execution, and for continuation of the leak detection and metering programs begun under Loan S-11-PE. 47. The project includes the following major components: (a) extension of water supply and sewerage systems in low-income areas; (b) development and improvement of groundwater resources; (c) improvement in the operation of the water distribution system and reduction of unaccounted-for water; and (d) provision of technical assistance for a survey of water and sewerage connections and for better water resources management. 48. Water Supply and Sewerage Works. The largest component of the project (47 percent of total costs) would consist of expanding the coverage of the water supply and sewerage systems in low-income areas. The water supply works would include the construction of: (a) about 450 Km. of water distribution networks, about 20,000 M3 of storage capacity, and installation of 43,000 house connections to serve about 70 low-income settlements; (b) a 5 Km. water main and 200 lps pumping station at Canto Grande, a poor area of Lima with a population of 120,000 now served by standpipes and watertrucks; (c) about 7.5 Km. of transmission pipeline from the Lima distribution system to improve water service in two of the largest low-income settlements, Comas and Carabayllo. 49. Sewerage works would include the construction of about: (a) 430 Km. of sewage collectors and 46,000 house connections; and (b) 10 Km. of sewage interceptors to serve an area of 3,000 ha at Canto Grande. 50. Groundwater Development. About 24 percent of project costs would be for development of groundwater resources to increase water production by 4.4 M3/sec and would allow more efficient operation and maintenance of exist- ing wells. The additional output would improve water service within the city's densely populated areas and would allow for expansion of service to low-income areas. New wells would be drilled in high-yield aquifers and near high consumption zones, and existing wells located in such areas would be repaired. The construction program would include: (a) drilling and  - 12 - equipping 76 wells and repairing 80 existing wells; and (b) building about one Km. of infiltration galleries along the Rimac River and rehabilitating the existing galleries to increase yield by about 1 M3/sec. These works would consist of widening, leveling and building small dikes across the streambed of the Rimac River. 51. Metering Program. This component would absorb about 15 percent of project costs and aims at doubling meter coverage from 35 percent in 1981 to 70 percent by 1986. The metering program, combined with the leak detection and repair program, would be expected to reduce unaccounted-for water to about 30 percent by 1986, a level that would compare favorably with other Latin American water companies. This is an ambitious but realistically achievable target. 52. The metering program includes: (a) the installation of about 180 master meters in existing wells and main pipelines; (b) the purchase and installation of about 164,000 household water meters and the repair of about 136,000 damaged meters; and (c) the improvement and expansion of the meter repair shop. 53. Equipment. About five percent of project costs would be for expanding laboratory facilities at Lima's water treatment plant and purchas- ing essential equipment and vehicles. About 190 new pick-ups and trucks would be purchased, including spare parts and vehicle shop equipment, to replace SEDAPAL's old fleet (85 percent more than eight years old). In addi- tion, radio communication equipment would be purchased to cover operation and maintenance needs. 54. Technical Assistance. The technical assistance component would absorb about nine percent of project costs and focus on reducing unaccounted-for water and on better management of the water resources. A pilot house connection survey was financed under Loan S-il-PE. This would now be followed by a complete survey of Lima to identify connections not yet registered and provide the basis for planning SEDAPAL's metering program. The technical assistance for groundwater management would focus on: (a) planning and managing the joint use of ground and surface water resources; (b) organizing a data collection system and installing monitoring indicators for wells; (c) recommending procedures for transferring private wells to SEDAPAL's management; (d) updating groundwater modeling techniques; (e) reviewing the designs and specifications for deep wells and for the rehabilitation of existing wells; (f) recommending a well operating and main- tenance plan; and (g) recommending techniques for supervision of well construction. Project Execution 55. SEDAPAL would carry out the project. The Project Supervisory Unit (PSU), created to coordinate and monitor project execution under Loan S-11-PE, would be charged with supervising the execution of the proposed project. While the PSU has gained considerable experience in project imple- mentation, it is being reorganized and strengthened with more professional staff to enable it to oversee execution of the project recommended in this report (Section 3.05 of the draft Loan Agreement). SEDAPAL agreed during the negotiations to provide the funds, facilities and other resources that the  - 13 - PSU may need (Section 3.05(b) of the draft Loan Agreement). The reorganiza- tion of the PSU, in a manner satisfactory to the Bank and the appointment of its manager and deputy manager, with qualifications acceptable to the Bank, expected to be completed by June 1982, would be conditions for loan effec- tiveness (Sections 3.02, 3.05 and 8.01(b) and (c) of the draft Loan Agreement). By the end of March 1982, final designs for investments representing about 40 percent of total project cost had been completed by SEDAPAL, with the help of outside consultants. Completion of all final designs and tender documents is expected by September 1982; this should ensure a fast start-up of the project. 56. SENAPA will be a party to the loan agreement since it has responsi- bility for approving SEDAPAL's tariff policy and investment program. Project Cost and Financing 57. --te Lotal estimated cost of the project is US$92.8 million, excluding taxes and duties (see para. 62) but including contingencies. Of project costs, an estimated US$45.3 million (49 percent) would be in foreign exchange with the balance (US$47.5 million or 51 percent) for local costs. Cost estimates are based on recent bids for similar civil works, materials and equipment, updated to March 1982 prices. The average allowance for physical contingencies is 13.5 percent, varying from 10 percent for well defined components-to 15 percent for works at the design stage. Price contingencies are based on a 4.5 year construction schedule. International inflation is forecasted to drop from 8.5 percent in 1982 to 6 percent in 1986. Domestic inflation rates applied to local components are projected to fall gradually from 50 percent in 1982 to 20 percent in 1986. Variations of the exchange rate were assumed to compensate for the difference between the local and international inflation rates. 58. Total financing required for the project is US$93.4 million, including a US$0.6 million capitalized front-end fee. The proposed Bank loan of US$40.6 million would cover the US$600,000 capitalized front-end fee and would finance 88 percent of the estimated foreign exchange costs. In addition, US$7.7 million of parallel financing is being sought by SEDAPAL to cover the costs of construction of 50 deep wells. On February 28, SEDAPAL invited international bids for the financing and construction of the 50 wells (bids will be judged on both price and financing terms offered). SEDAPAL would provide the remaining US$45.1 million in local costs. Financial Analysis 59. The projections of SEDAPAL's finances for 1982-86 reflect the objective of substantially improving its financial condition in preparation for a major investment program. Average water and sewerage tariffs would increase by about 28 percent in real terms during 1982-86 (from about US$0.11 per M3 in 1981 to about US$0.14 per M3 in 1986, at 1981 prices). The recently approved service improvement fees and charges on private wells (see paras. 38 and 41) should increase revenues by an additional 15 percent. SEDAPAL's operating ratio is expected to drop from a high 0.87 in 1980 to a satisfactory 0.55 in 1986 and thereafter. SEDAPAL's capital structure is expected to remain conservative with the debt-to-total-capitalization under 35 percent. The debt service coverage ratio is projected to drop from a hig!h 16.4 in 1981 to 5.5 in 1986. The estimated debt service does not include,  - 14 - however, payments on the long-term borrowing to be secured to complete SEDAPAL's contribution to the Mantaro Transfer scheme and to finance sewage treatment and disposal investments scheduled for 1984_and thereafter. To ensure that debt service does not place an excessive burden on SEDAPAL's finances, during the negotiations it was agreed that SEDAPAL would obtain the Bank's concurrence before incurring any long term debt if its net revenues before interest and depreciation are less than 1.5 times its maximum future debt service requirements (Section 5.06 of the draft Loan Agreement). During project implementation, SEDAPAL would also exchange views with the Bank every year (not later than August 31) on its investment plans for the subsequent five years (Section 5.08 of the draft Loan Agreement). 60. SEDAPAL's current investment program for 1982-86 would total about US$444 million, including the cost of the proposed project, additional sewage treatment and disposal investment, and its estimated share of the Mantaro Transfer project. Since the Mantaro Transfer project would provide water for urban consumption and for power generation, present arrangements are for SEDAPAL to pay half of the costs of the common elements of the project (excluding the power generation facilities) and for ELECTROPERU (the National Power Company) and ELECTROLIMA (the Lima Power Company) to pay the rest. 61. The feasibility of carrying out this investment program and meeting the financial targets discussed above depends critically on adequate tariff policies. To this end, a revenue covenant was agreed during the negotiations (Section 5.04 of draft Loan Agreement), under which SEDAPAL would take all steps necessary to produce revenues from tariffs, service improvement fees and charges on use of private wells to cover operating and maintenance costs, taxes, and debt service (or depreciation charges whichever is larger) and to provide an adequate contribution toward its capital expenditures. The contribution would be determined on an annual basis and expressed as a percentage of the sum of SEDAPAL's revalued average net fixed assets, including work in progress, and SEDAPAL's revalued average accumulated contributions toward the capital costs of the Mantaro Transfer project. Based on the recently completed revaluation of fixed assets, the percentages agreed during the negotiations would be 2.0 in 1982, 3.5 in 1983, and 4.0 in 1984 and thereafter. This contribution should allow SEDAPAL to generate sufficient funds to attain a rate of return of 6 percent starting in 1985 and to cover during the construction period its working capital requirements plus about 40 percent of the cost of its investment, including about 20-25 percent of its estimated share in the Mantaro Transfer project. SEDAPAL would revalue its fixed assets and its contribution to the Mantaro Transfer project annually using methods of valuation acceptable to the Bank (Section 5.04(c) of the draft Loan Agreement). Also, SEDAPAL would submit to SENAPA and to the Bank before August 31 of each calendar year a proposed schedule of tariff adjustments for the following year to enable it to achieve the agreed revenue target for that year (Section 5.04(d) of the draft Loan Agreement). 62. Until 1980, SEDAPAL was exempt from taxes on income, equity and on surplus on asset revaluation, but it is currently subject to taxation. Legislation is now being considered to continue SEDAPAL's tax exemption and the financial projections have been prepared on the basis of a continued tax exemption. The timing of action on this exemption, however, is uncertain.  15 - 63. SEDAPAL's tariff scale is not sufficiently progressive. Consumers in the lowest consumption levels pay a lump sum tariff, while intermediate and high level consumers pay progressive tariffs based on the amount of water they use. As a result, consumers in the lowest consumption levels tend to pay a higher unit price for actual consumption than consumers in the inter- mediate consumption levels. At the same time, water and sewerage services are not charged for separately, so that consumers benefitting from only water are required to pay for both. During the negotiations, it was agreed that SEDAPAL would prepare not later than March 31, 1983 a comprehensive tariff study (under terms of reference satisfactory to the Bank) and a timetable for its implementation not later than July 1983 and that, after review by the Bank and SENAPA, SEDAPAL would implement the recommendations of the study (with such changes as may be reasonably requested by the Bank or SENAPA). (Section 5.05 of the draft Loan Agreement). The terms of reference of the proposed tariff study would also include an analysis of how SEDAPAL's finan- cial targets and requirements relate to estimated long-run marginal costs. 64. SEDAPAL's billing process and the collection of late payments has been slow and inefficient in the past. As of June 1981, accounts receivable from water sales amounted to a high 4.5 months of sales. SEDAPAL is now introducing a new billing system that includes a policy of water shut-offs and of charges for late payments that should help resolve this problem. It was agreed during the negotiations that the ratio of accounts receivable to average monthly sales would be reduced (by end-year) to 3.5 in 1982 and 2.5 in 1983 and thereafter (Section 5.07 of the draft Loan Agreement). 65. SEDAPAL's insurance coverage has not been reviewed in many years and may be inadequate for its present requirements. During the negotiations it was agreed that SEDAPAL would prepare before December 31, 1982 a compre- hensive insurance program which, after review by the Bank, would be put into effect not later than June 30, 1983 (Section 4.03(b) of the draft Loan Agree- ment). 66. Finally, given SENAPA's authority over SEDAPAL's tariff and invest- ment policies, during the negotiations it was agreed that SENAPA would: (a) approve periodic tariff adjustments as required to enable SEDAPAL to meet its undertakings to the Bank (Section 6.01 of the draft Loan Agreement); (b) allow SEDAPAL to keep the share of profits necessary to carry out its five-year investment program (Section 6.03 of the draft Loan Agreement); and (c) exchange views with the Bank on the recommendations of the tariff study discussed in para. 63 and authorize SEDAPAL to implement them with due regard to the Bank's recommended changes (Section 6.02 of the Loan Agreement). Procurement and Disbursement 67. All contracts (except for the 50 wells mentioned in para 58) would be awarded under international competitive bidding in accordance with the Bank guidelines, except for civil works contracts of less than US$1.5 million and equipment contracts of less than US$200,000 each. These smaller contracts would be awarded under local competitive bidding procedures, which permit the participation of foreign bidders and which are satisfactory to  - 16 - the Bank. In the aggregate contracts awarded in accordance with local competitive bidding would not exceed the equivalent of US$6.0 million. Contracts for goods and services under US$50,000, subject to a maximum aggre- gate of US$500,000, would be procured directly on the basis of a minimum of three price quotations. In the evaluation of international bids, both domestic and regional preferences would apply. Local suppliers would receive a margin of preference of 15 percent or the prevailing duty whichever is lower. For purposes of comparison among foreign suppliers bids from suppliers from countries which are members of the Cartagena agreement (or any other such regional trade agreement acceptable to the Bank) would be accorded a preference representing the difference between the prevailing duty actually applicable and the duty applicable to goods imported from non-member countries, or 15 percent, on the c.i.f. price, whichever is lower. Civil work contracts are expected to be won mainly by local contractors and most equipment supply contracts by foreign firms. 68. Engineering and other consulting services for the PSU, for assis- tance on management of groundwater resources and for the user's survey, are estimated to require 2,766 staff-months, of which 616 would be for profes- sional and technical staff and 2,150 for support staff. The average cost per staff-month (including salaries, international travel and subsistence) is estimated to be US$10,000 for expatriate technical staff (76 staff-months), and US$2,380 for locally hired professional staff, including salaries and administrative costs (540 staff-months). All consultants provided under the project would have qualifications satisfactory to the Bank and would be hired under terms and conditions acceptable to the Bank (Section 3.02 of the draft Loan Agreement). 69. Loan disbursement is projected to take up to six years running from mid-1982 through mid-1988, somewhat faster than the average eight-year disbursement period for previous Bank supported water projects in Latin America (which is eight years). However, since final designs are advanced and since no unusual implementation difficulty is expected, this estimate is reasonable. Loan disbursements would be made against: (a) 36 percent of total expenditures for civil works (excluding the retentions for performance guarantee) representing the estimated foreign exchange component; (b) 100 percent of foreign expenditures and 54 percent of local expenditures for materials and equipment; (c) 100 percent of total expenditures for consulting services for the PSU; and (d) 40 percent of total expenditures for consulting services for the management of groundwater resources and for the user survey. 70. Retroactive financing for expenditures incurred after April 30, 1982 on the Canto Grande project component up to a maximum of US$500,000, would be provided. Canto Grande is a poor and densely populated area of Lima where water is severely rationed. This is resulting in a serious health hazard and there are periodic epidemics. The Government, therefore, wants to proceed urgently with the construction of a proposed water transmission main that would resolve the problem. The estimated cost is US$1.6 million, of which the foreign exchange component is US$1 million. Benefits, Justification and Risks 71. The project would, by end-1986, provide 370,000 persons with access to potable water and sewerage service. The wells that it would provide would, with complementary investments, allow an additional 610,000 people to  - 17 - be connected to SEDAPAL's water supply system. SEDAPAL's sewerage system would, with only minor additions, be sufficient to accomodate this additional population with sewerage services. Service coverage in Lima would then increase from 76 percent to 86 percent for water supply and from 67 percent to 79 percent for sewerage. 72. The project would benefit mainly the lower income groups of Lima. About 38 percent of the project beneficiaries earn less than one-fourth of Peru's GNP per capita and about an additional 20 percent earn less than one- third the GNP per capita. The impact would be particularly large in the first group where service coverages would increase from 50 percent to 76 percent for water supply and from 31 percent to 62 percent for sewerage. Most families would pay less for safe water with the project than they now pay for unsafe water. Therefore, they would be able to afford the monthly payments without difficulty and would see their welfare improve markedly. 73. The incremental rate of return (IRR) on the project as a whole is conservatively estimated to be 16 percent. Since most of the incremental population to be served would receive both water supply and sewerage service, a combined IRR was calculated for these two project components. This calcu- lation is based on total project costs, including components designed to improve SEDAPAL's efficiency such as metering and technical assistance. In addition, the cost of minor complementary investments to be undertaken by SEDAPAL during the project construction period were estimated and included in the calculations. Expected revenues were used as a proxy to value economic benefits. The IRR was calculated by comparing the costs and benefits of water consumption and sewerage services "with the project" and the situation "without the project." Two-thirds of the increase in water consumption due to reduction in unaccounted-for water was excluded from the calculation of benefits since it is estimated that it corresponds to water already being consumed, although not paid for. Since positive externalities (such as better health) and consumers' surplus are not fully reflected in revenues, the resulting rate of return is bound to underestimate the project's economic benefits. 74. Another major benefit of the proposed project would be the insti- tutional strengthening of SEDAPAL. As noted above, the lack of an adequate institutional structure and inadequate financial policies were the principal causes for the unsatisfactory development of the sector. If the institu- tional objectives of the project are achieved, SEDAPAL by 1986 should be an institution capable of servicing most of the population of Lima efficiently, at a low cost and without depending on Central Government subsidies. More- over, the development of SEDAPAL may serve as a model for institutional development in other cities in Peru. 75. Sensitivity analysis shows that the IRR would still be equal to the estimated opportunity cost of capital in Peru (about 13 percent) even if one of the following events occurred: operating costs increased by 48 percent, construction costs increased by 20 percent, incremental demand was 16 percent lower than expected, water and sewerage tariffs were 12 percent below the projected level, or project benefits were delayed two years. 76. The project does not face any special risks of execution, except for possible delays in the timely increase of tariffs. However, revenues aye not expected to deviate significantly from those projected, since the largest  - 18 - share of the real tariff increases projected are in 1982 and they are already being implemented, and since the projected tariff increases are well within the capacity of Lima's population to pay. Project works are conventional in design and well within the implementing capacity of SEDAPAL and the local construction industry. The substantial technical assistance included in the project will minimize further the implementation risks. PART V - LEGAL INSTRUMENTS AND AUTHORITY 77. The draft Loan Agreement between the Bank, SEDAPAL, SENAPA and COFIDE (the State Development Finance Bank, which under Peruvian law must be a party to all external loans to public enterprises), the draft Guarantee Agreement between the Republic of Peru and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 78. These draft agreements conform to the normal pattern for loans for water supply and sewerage projects. The main features of the draft Loan Agreement are discussed in Parts III and IV of this report. Special conditions of the Loan are listed in Section III of Annex III. A condition of effectiveness is that SEDAPAL complete, to the Bank's satisfaction the reorganization of the PSU and appoint its manager and deputy manager (para. 55). 79. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 80. I recommend that the Executive Director approve the proposed loan. A.W. Clausen President By Ernest Stern Attachments April 22. 1982 Washington, D.C.  - 19 - ANNEX I TABLE 3A Page 1 of 5 PERU - SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVERAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 1285.2 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 305.5 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US$) 230.0 410.0 730.0 * 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 436.3 691.8 736.9 1324.1 2368.4 POPULATION AND VITAL STATISTICS TOPULATION, MID-YEAR (THOUSANDS) 10181.0 13461.0 17149.0 URBAN PUPULATION (PERCENT OF TOTAL) 46.3 57.4 66.5 64.2 53.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 28.5 STATIONARY POPULATION (MILLIONS) 55.0 YEAR STATIONARY POPULATION IS REACHED 2085 POPULATION DENSITY PER SQ. KRH. 7.9 10.5 13.3 34.3 80.6 PER SQ. KM. AGRICULTURAL LAND 33.0 44.0 54.6 94.5 133.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YKS. 43.6 44.3 42.8 40.7 30.1 15-64 YRS. 52.0 51.8 53.6 55.3 61.5 65 YRS. AND ABOVE 4.4 3.9 3.6 4.0 8.3 POPULATION GROWTH EATE (PERCENT) TOTAL 2.4 2.8 2.7 2.4 1.5 URBAN 5.1 5.0 4.3 3.7 3.1 CRUDE BIRTH RATE (PER THOUSAND) 46.4 41.8 37.8 31.4 22.9 CRUDE DEATH RATE (PER THOUSAND) 19.7 14.5 11.1 8.4 9.1 GROSS REPRODUCTION RATE 3.4 3.0 2.6 2.3 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 96.0 10Z.0 86.0 108.3 119.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF lEQUIREMENTS) 95.0 99.0 97.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 62.0 61.0 59.0 65.8 92.5 OF wHICH ANIMAL AND PULSE 27.0 25.0 24.0 34.0 39.7 CHILD (AGES 1-4) MORTALITY RATE 28.5 19.6 13.7 7.6 3.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 47.7 53.5 58.0 64.1 68.9 INFANT MORTALITY RATE (PER IHOUSAND) *- 122.0/c 86.0 70.9 25.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 14.6 35.0 48.3 65.7 UKBAN 30.2 58.0 60.0 79.7 RURAL 0.8 8.0 25.0 43.9 ACCESS TU EXChETA DISPUSAL (PERCENT OF POPULATION) TOTAL .. 36.0 34.0 59.9 URbAN .. 52.0 51.0 75.7 RURAL .. 16.0 .. 30.4 POPULATION PER PHYSICIAN 2011.7 1904.9 1545.1 1728.2 973.3 POPULATION PER NURSING PERSON 2205.0/d 738.0 745.0 1288.2 896.6 POPULATION PER HOSPITAL BED TOTAL 425.1/e 469.6 542.7 471.2 262.3 UKBAN .. 524.8 430.1 558.0 191.8 RURAL .. 3055.3 5747.6 ADMISSIONS PER HOSPITAL BED .. 19.0 23.0 .. 18.2 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 4.9 4.8/f URbAN 4.8 4.916/f RURAL 4.9 4.61ff AVERAGE NUMBER UO PERSONS PER ROOM TOTAL 2.3 1.9/ff URBAN 2.0 1.7/1. RURAL 2.7 2.4 ..ff ACCESS TO LLECTRICITY (PERCENT OF DWELLINGS) TOTAL 26.0 32.1/ff URBAN 50.7 54.3/f RUKAL 4.2 2.7/f  - 20- ANNEX I TABLE 3A Page 2 of 5 PERU -'SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE) - MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 83.0 103.0 112.0 101.7 105.9 MALE 95.0 111.0 116.0 103.0 109.6 FEMALE 71.0 96.0 106.0 101.5 102.2 SECONDARY: TOTAL 15.0 30.0 50.0 35.3 66.3 MALE 18.0 34.0 53.0 34.9 73.2 FEMALE 13.0 26.0 46.0 35.6 59.5 VOCATIONAL ENROL. (D OF SECONDARY) 20.0 17.0 16.0 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 34.0 35.0 40.0 29.6 26.8 SECONDARY 12.0 17.0 29.0 15.7 23.6 ADULT LITERACY RATE (PERCENT) 61.0 72.5/f 79.7 80.0 75.4. CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 8.0 17.1 18.5 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 108.0 135.1 135.4 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 3.2 29.3 50.8 89.0 131.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION .. 123.3 51.0 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.2 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3193.9 3896.8 5079.7 FEMALE (PERCENT) 21.1 20.7 22.8 22.6 32.9 AGRICULTURE (PERCENT) 53.0 44.8 37.8 35.0 34.0 INDUSTRY (PERCENT) 19.0 20.1 20.0 23.2 28.7 PARTICIPATION RAIE (PERCENT) TDTAL 31.4 28.9 29.6 31.8 42.3 MALE 49.6 45.8 45.6 49.0 56.5 FEMALE 13.2 12.0 13.6 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.6 1.4 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 39.. .. HIGHEST 20 PERCENT OF HOUSEHOLDS 64.4Zi 61.0/f LOWEST 20 PERCENT OF HOUSEHOLDS 2.5/g 1.9/f LOWEST 40 PERCENT OF HOUSEHOLDS 8.07( 7.07? .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 235.0 RURAL .. .. 180.0 187.6. ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 293.0 513.9 RURAL .. .. 200.0 362.2 385.1 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 49.0 RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1970-75; /d 1964; /e 1962; /f 1972; /g Personal income within labor force. * The updated 1980 GNP per capita shown in the 1981 Bank Atlas is $930 (at 1978-80 prices) and the 1980 population is estimated at 17,625,000. May 1981  -21 - ANNEXI _____________ P~~~a-ge ~3 o f 5 DEFINITIONS iF SOCIAL ISDICATORS Notes: Although the data are dran from soures genraly judged the nest auhrtaiead reliable,it should also be notd that they may out be inte- thress usfl odesrb reso etd,I -diu ererds, cod ohur-t-i-e oetutu mejor differences bnte.e... atrie.. She rearru toos raIl hesameconrygr. I