Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4724-PE STAFF APPRAISAL REPORT PERU CHANCHAMAYO-SATIPO RURAL DEVELOPMENT PROJECT March 6, 1984 Projects Department Latin America and the Caribbean Regional Office { This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1 Peruvian Soles S/. 2,070 S/. 1,000 = US$0.48 WEIGHTS AND MEASURES 1 hectare (ha) 10,000 m2 = 2.47 acres 1 kilogram (kg) = 2.2 pounds 1 metric ton (m ton) = 1,000 kg = 0.98 long ton ABBREVIATIONS BAP Agrarian Bank of Peru CAS Agricultural Service Cooperative CENFOR Forestry Center of INFOR CIPA Center for Agricultural Research and Extension DF Forestry District DGFF General Directorate of Forestry and Fauna DGRAAR General Directorate of Agrarian Reform and Rural Settlement DPF Forestry Police ED Executive Directorate ENACO National Enterprise for Coca ENCI National Enterprise for Marketing Inputs INAF National Institute for Expansion of Agricultural Development INADE National Institute for Development INDA National Institute for Agroindustrial Development INFOR National Forestry Institute INIPA National Institute for Agricultural Research and Extension MA Ministry of Agriculture MTC Ministry of Transport and Communications OGCR General Office of Rural Cadaster PD Project Directorate PEPP Pichis-Palcazu Special Project UNA National Agrarian University UNCP National University of Central Peru FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY PERU STAFF APPRIASAL REPORT CHANCHAMAYO-SATIPO RURAL DEVELOPMENT PROJECT Table of Contents Page No. I. THE AGRICULTURAL SECTOR Land Resources .................. . . 1 Population and Production.... 2 Government Policies ........................ . .. 2 Regional Development of the Selva . . .................... 2 Previous Bank Participation ..... i . ..................... 3 II. THE PROJECT AREA Location and Access .......... .. *... 4 Regional Context . .................... . . ...... 4 Resource Base .............................. 4 Settlement and Land Tenure. . . 6 Present Agricultural Situation .. ....................... 7 Infrasl:ructure. . . 9 Agricultural Services . . ........................ 10 Institutional Aspects .. . . ......................... 11 III. THE PROJECT A. Introduction . ...................... 13 B. Project Description ....................... 13 C. Detailed Features .14 Credit ..................................... 14 Marketing ... .......... 15 Extension ............................... 15 Research .15 Forestry .16 Roads .17 Land Titling .18 Native Communities ................ 19 Project Directorate .19 D. Project Costs ............... 19 E. Project Financing .20 F. Procurement .............. 21 G. Disbursement .23 This report is based on the findings of an Appraisal Mission which visited Peru during May/June 1983. The mission comprised Messrs. D. Myren, R. LeBreton, W. Beattie, G. Russell and W. Matthey (Bank) and Messrs. S. Romanoff and M. Dourojeanni (consultants). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (continued) Page No. IV. ORGANIZATION AND MANAGEMENT Executive Directorate (ED) ............................. 24 Project Directorate (PD) ............................... 24 Credit ............ ..................................... 25 Extension and Research ................................. 26 Forestry .......... ..................................... 26 Roads and Civil Works .................................. 27 Land Titling ........................................... 27 Native Communities ..................................... 27 Agreements with Implementing Agencies .... .............. 27 Accounts and Auditing .................................. 28 Monitoring, Evaluation and Reporting ................... 28 V. AGRICULTURAL PRODUCTION, YIELDS' MARKETING AND PRICES Production and Yields .................................. 29 Marketing ......... ..................................... 30 Prices ............ ..................................... 31 VI. BENEFITS AND JUSTIFICATION Benefits .......... ..................................... 32 Economic Rate of Return ................................ 32 Project Risk ........................................... 34 Environmental Impact ................................... 34 VII. SUMMARY OF AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ANNEXES Annex 1 - Key Indicators for Monitoring and Evaluation Annex 2 - Selected Documents and Data Available in Project File SUPPORTING TABLES 1 Credit: Nominal and Effective Rates of BAP 2 Credit: Detailed Cost 3 Agricultural Extension: Detailed Cost 4 Research: Detailed Cost 5 Forestry: Detailed Cost 6 Roads: Detailed Cost Table of Contents (continued) 7 Roads: Improvement and Construction Standards 8 Land Titling: Detailed Cost 9 Native Communities: Detailed Cost 10 Project Unit: Detailed Cost 11 Marketing: Detailed Cost 12 Project Component Costs by Time 13 Summary Project Account by Component 14 Summary Project Account by Time 15 Disbursement Schedule 16 Financial Prices (Annual) 17 Coffee Farm Model - Production and Inputs 18 Coffee Farm Model - Financial Budget 19 Citrus Farm Model - Production and Inputs 20 Citrus Farm Model - Financial Budget 21 Avocado Farm Model - Production and Inputs 22 Avocado Farm Model - Financial Budget 23 Pineapple Farm Model - Production and Inputs 24 Pineapple Farm Model - Financial Budget 25 Total Farm Budgets 26 Economic Analysis 27 Feeder Roads: Economic Analysis of First Year Program 28 Economic Analysis of La Florida Cooperative and Yurinaki Bridge 29 Summary Economic Analysis: Feeder Road Component CHART 1 - Project Organization MAP IBRD 17482 PERU STAFF APPRAISAL REPORT CHANCHAMAYO-SATIPO RURAL DEVELOPMENT PROJECT I. THE AGRICULTURAL SECTOR Land Resources 1.01 Peru has a limited natural resource base for agriculture. Of the country's 128.5 million ha, it is estimated that about 40% has no agricultural potential, 40% is suited only for forestry, 15% is best suited for pastures, and about 5% is suiitable for intensive agriculture. About 3 million ha are presently in agricultural use, including about 1.2 million ha under irrigation and 1.8 million ha rainfed. Of the remainder, about 22 million ha are under natural grass and the rest is either suitable for forestry or unsuitable for cultivation because it is too dry, too poorly drained, or too steep for any form of food or fiber production. There are three well-defined topographic and climatic zones in Peru - the Costa, the Sierra and the Selva. 1.02 The Costa, which constitutes the Coastal zone in the west of the country, consists mainly of flat desert plains, sand dunes and the dry heavily eroded Andean foothills. It is a narrow 3,000-km-long belt, covering about 13.1 million ha (10.2% of the total land area), where about 46% of the country's population lives. Coastal agriculture is limited to the river valleys where irrigation is possible; these valleys produce over 40% of the country's gross value of crop production, including sugar, rice, cotton, maize, potatoes, citrus, olives and grapes. The region enjoys relatively close proximity to the urban markets, a good transportation network, and other infrastructure and is relatively prosperous. 1.03 The Sierra, which constitutes the Andean highland zone, covers over 33.4 million ha (26% of the total land area) and accounts for about 44% of the population. It consists of steep mountains reaching over 5,000 m and high valleys located between the mountain ranges. Some 2.3 million ha in the Sierra are cropped and about 17.3 million ha are used for grazing, mostly under marginal conditions because of steep slopes and high altitudes. Severe topography, erratic rainfall and extreme changes in temperature make farming difficult and limited to a short season, leading to low agricultural productivity. 1.04 The Selva, which constitutes the tropical forest zone east of the Andes mountains, covers about 82 million ha (63.8% of the total land area) and accounts for 10% of the total population. It comprises two subzones: the eastern slopes of the Andes at medium altitude - the Ceja de Selva; and the Amazon jungle - the Selva Baja (Lower Selva). Although most soils in the Lower Selva are classified as marginal and suitable primarily for grazing and forestry, soils in the Ceja de Selva are generally of better quality. With the construction of the Trans-Andean Highway System and oil exploration, the -2- Selva has been gaining in economic importance over the last two decades, and the related migration of farmers from the Sierra to the Ceja de Selva in particular has provided considerable impetus to agricultural development. Population and Production 1.05 The percentage of rural population in Peru declined from 53% to 33% between 1961 and 1981. Registered unemployment in the rural sector is almost nil, but underemployment (as measured by income below the minimum wage rate) is about 61% compared to about 48% in the urban sector. Agricultural productivity is low, which explains the disproportionately low 12% contribution of the agriculture sector to the country's GDP. 1.06 As a result of population increases, the massive migration of the rural population into the cities, and the slow development of agricultural production during the last decade, Peru's agricultural balance of trade has become significantly negative. At the beginning of the 1970s, the trade surplus was typically in the order of about US$100 million, but by 1981 there was a trade deficit of about US$230 million. Government Policies 1.07 The most significant change in policy under the present civilian Government compared to military Government policy during the 1970s is in the greater emphasis on private versus public initiative and on incentives versus control measures. A new Agricultural Promotion Law (Ley de Promocion y Desarrollo Agrario) was enacted in November 1980 to tackle some of the constraints to agricultural development. It provides special fiscal incentives to agriculture and agro-industries and opens the way for commercial banks and other financial institutions, in addition to the Agrarian Bank of Peru (BAP), to extend credit to the agricultural sector by eliminating prohibitions on the mortgaging of land. The law also ended agrarian reform actions such as transfer of private farms into production cooperatives, and freed domestic and foreign marketing of farm products by allowing private marketing channels to develop. Furthermore, the present Government decontrolled prices of most commodities, which until 1980 were highly regulated, and eliminated direct subsidies on most food products and inputs. Regional Development of the Selva 1.08 With respect to regional development, the most significant initiative of the new Constitutional Government has been its support for orderly development of Peru's vast land area beyond the Andes. Over the past five years, 10 projects have been designed and initiated, or scheduled for initiation in early 1984. These Special Projects are located for the most part in the piedmont area of the Selva and cover a total area of 7.7 million ha considered to have great potential for near-term impact on food production and balance of payments. Within this area, 1.6 million ha have been assigned priority for crop, livestock and forestry production, and investments would benefit about 125,000 families. -3- 1.09 The total cost of these projects is estimated at US$522.5 million, including Government funding and the support of international organizations, such as IDB, IJSAID, the Governments of Spain, Canada, Belgium and Switzerland the Federal Republic of Germany's KfW, and the World Bank (Loan 2219-PE - Alto Mayo and the proposed Chanchamayo-Satipo project). 1.10 These projects, initially administered under the Presidency of the Council of Ministers and now under the Cabinet-level National Institute for Development (INADE), have four main objectives: (a) increased production and productivity through expanding the agricultural frontier and rational use of the natural resources of the Amazon region; (b) planned colonization and channeling of spontaneous migration through planned highway construction; (c) increased regional employment and income; and (d) conservation of natural resources and maintenance of the Amazon eco-system. 1.11 To achieve these objectives, the projects typically contain several of the following components: (a) road construction and maintenance; (b) farm credit, (c) research, extension and training; (d) agricultural and Forestry development; (e) evaluation and management of natural resources; (f) energy; (g) land titling; (h) social infrastructure; (i) technical and administrative coordination; and (j) monitoring and eval-uation of the project. Previous Bank Participation in the Agricultural Sector 1.12 The Bank has made 15 agricultural loans to Peru, totalling US$379 million. Five of them, in the 1954-73 period and totalling USS55 million, were for agricultural credit (Loans 105-PE, 162-PE, 257-PE, 415-PE, and 933-PE) and were channelled through BAP and its predecessors. In general, BAP's performance in executing these operations was good. The Performance Audit Report (Sec M81-465 of June 2, 1981) for the fifth project (Loan 933-PE of 1973) concluded that the project's rate of return exceeded that estimated in the appraisal report (30% vs 26%), but it noted that the Bank did not use the loan as an effective instrument in discussions on interest rate levels with the Government. This was done, however, during preparation and appraisal of the Sixth Agricultural Credit Project (US$130 million) in 1983. 1.13 Two loans (Loans 67-PE of 1952 and 98-PE of 1954), totalling US$3 million, were for farm machinery imports and another two (Loans 114-FE of 1955 and 418-PE of 1965), totalling US$24.4 million, financed irrigation works and land settlement in the San Lorenzo area within the Chira-Piura basin on the coast. The Performance Audit Report (Sec M78-43 of January 18, 1978) for the San Lorenzo project financed by Loan 418-PE concluded that the project achieved its basic goals of increasing agricultural production and the incomes of rural poor, but the need for better maintenance of works, a strong project unit, and agricultural support programs for irrigation projects was noted. These findings were taken into account in the design of the two most recent Bank-financed irrigation rehabilitation operations: the First Irrigation Rehabilitation Project and the Lower Piura project (Loans 1403-PE of 1977 and 1771-PE of 1979 for US$25 million and US$56 million, respectively). In 1980, the Bank approved its first rural development loan in Peru, a US$15 million operation for the Puno zone in the Sierra (Loan -4- 1812-PE) which is now progressing satisfactorily after a slow start. Finally, the Bank provided a US$40.6 million loan to support the re-establishment of the agricultural research and extension system and a second rural development loan of US$30 million for the Alto Mayo area of the Ceja de Selva (Loans 2150-PE and 2219-PE), which became effective in 1983 and are now operational. II. THE PROJECT AREA Location and Access 2.01 The project area is located in the provinces of Chanchamayo-Satipo in the Department of Junin on the lower slopes of the Andes in the Central Selva (map IBRD 17482). It extends from about 300 km to 400 km east of Lima, and lies between 100 and 110 latitude south. It comprises the zones of influence of the main road system (carretera Marginal de la Selva) San Ramon-La Merced-Satipo and is connected by a highway from San Ramon in the project area through Tarma and La Oroya in the highlands to Lima on the coast. The Tarma-San Ramon portion of this highway, as well as the main road through the project area from San Ramon to Satipo, will be improved and paved under the Eighth Highway Project (Loan 2091-PE) which became effective in early 1983. Regional Context 2.02 Although Peru's undeveloped land is located mainly in the Low Selva, the most practical opportunities for near-term impact on food production and balance of payments are through intensification of agricultural production in areas which are already accessible and occupied. 2.03 After about 50 years of spontaneous colonization, the Chanchamayo-Satipo area has reached a critical point in its development. Much of the forest wealth has been harvested, soils have been depleted through slash and burn agriculture, and systematic maintenance of fertility is not yet common practice. Only a few farmers have achieved high levels of technology and yields and managed to fully develop their farms. The combined spontaneous migration and natural population growth presently total more than 7% per year and careful attention is needed to develop a pattern of sustainable agriculture if a social and ecological crisis is to be avoided. Resource Base 2.04 Topography. The project area, approximately 730,000 ha, covers much of the watershed of the Perene river and its tributaries. In altitude, the project area ranges from about 500 meters above sea level to over 3,000 meters in the highest mountain areas. It consists basically of two parts: (a) the main project area of about 400,000 ha of largely settled land on the lower slopes and valleys along the Perene and its tributaries; and (b) about 330,000 ha of higher slopes on the north, east, and south with few inhabitants which the Government has proposed to set aside in three reserves for forest protection and production. (Map IBRD 17482). -5- 2.05 Soils, The soils of the project area consist broadly of four types: (a) recent alluvials of small extent, in narrow discontinuous strips along the main rivers, flat and fertile, but subject to flooding; (b) old alluvials on river terraces at higher levels, of lower fertility, moderately fine texture and usually free-draining; (c) residual soils on hillsides, usually clays or silts, some moderately acid (pH 5.0-7.0); and (d) humic gleys in small isolated depressed areas of poor drainage, sometimes highly acid. 2.06 Climate. The climate is tropical and the annual rainfall in the main agricultural area ranges from about 1,100 mm at Pto. Ocopa in the driest zone (located in the northeastern boundary of the project area) to about 1,800 to 2,300 mm in the area around San Ramon. However, certain areas of steep slopes, where forest protection will be of higher priority, receive from 3,000 mm to over 5,000 mm of rainfall annually. The lowest rainfall period is between June and August, but still high enough to allow the development of permanent crops, without irrigation. Mean annual temperature ranges from 220 C to 260 C. Thus, conditions are favorable for plant growth throughout the year, limited only by low insolation during the rainy season. 2.07 Water Resources and Drainage. The area is well watered, with numerous streams and rivers rising in the Andes and draining toward the Amazon basin. The hydro-electric potential is high, but up to now little exploited. There are no navigable rivers within the project area, but Pto. Ocopa on the perimeter has access to the navigable rivers, Ene and Tambo. Drainage presents no general problem owing to topography and to the free-draining character of most of the soils. 2.08 Land Use and Forestry. Approximately 14,000 ha are in annual crops each year, 45,000 ha in permanent crops, 11,000 ha in pasture, and 96,000 ha in fallow for the slash and burn system of crop production; the remaining 564,000 ha are classified as forest area, most of it on land either too steep or too poor for agricultural use. The forests are of the tropical moist hardwood type. Average yield per hectare of commercial species is about 40 m3 roundwood. There has been considerable temporary cultivation of excessively steep slopes and land is sometimes cleared simply to establish ownership rights. Given the limited areas of flat lands and a population growth rate estimated at 7% per annum, these steep slopes are under increasing pressure. It is urgent to enforce existing laws to avoid burning and cropping the areas least appropriate for cultivation and most susceptible to erosion. Further details of the forestry resource can be found in the Forestry Component Working Paper and in the forest inventory carried out by UNA Forestry Faculty, in the project files (Annex 2). -6- Settlement and Land Tenure 2.09 Population. The project area has been colonized by immigrants from other parts of Peru, mainly the High Andes (Sierra). Total population in the area is estimated at about 160,000 of which about 77% is rural. Although precise income data are not available, it is estimated that at least 65% of rural population is below the poverty income level of US$300 per capita. There are about 20,000 farmers in the area, of whom some 2,000 are natives distributed in about 90 native communities. Most of them are partially integrated in the market economy of the regi6n, though with very low commercial production per family. The native population belongs mainly to the Ashaninca, also known as Campa, ethnolinguistic group, with a few small communities of Amuesha. 2.10 Tenure and Land Titling. About 46% of the native communities and only about 5% of the other farmers in the project area have titles to their land. In addition a large number of farmers have a variety of claims including: pre-agrarian reform titles, agrarian reform "contracts", forest concessions, certificates of possession, and unofficial claims and bills of sale. However, the number of titles (including old titles and agrarian reform "contracts") that are valid is estimated by the project staff to be only about 1,000 (with an additional 2,000 cancelled or in the process of being cancelled). Disputes over land are common among colonists and between native communities and colonists. 2.11 According to an MA survey, 67% of farm production units are between 10 and 50 ha, 28% of holdings are smaller than 10 ha, and 5% are units larger than 50 ha. Land holdings per family for native communities are similar to those for colonists. Within the project area, the holdings of 49 communities with titles or with plans for titles (including forest land) average 897 ha. It is estimated that the median community has 14 ha per family, that 24% of communities have less than 10 ha per family, and that 12% of the communities have 50 or more ha per family. 2.12 Individual and native community titles to agricultural land are granted under the provisions of Decree Law 22175 (Law of Native Communities and Agricultural Development of Low Selva and Piedmont Regions, 1978). Land titles of individuals may be sold; on the other hand, the title is invalidated if the parcel is abandoned for two years, ceded to a third party, sold without notifying the General Directorate of Agrarian Reform and Rural Settlement (DGRAAR), or left unworked for 12 months after title is granted. Land titled to native communities is inalienable and may not be mortgaged. The title is communal and, while informal parceling to individuals occurs, land may be divided into individually titled lots only if two-thirds of the members of the community request it. 2.13 Under a special agreement with the Ministry of Agriculture (MA), covering the forestry, cadastral and agrarian reform work of the General Directorate of Forestry and Fauna (DGFF), and the General Office of Rural Cadaster (OGCR), and DGRAAR agrarian region, respectively, these institutions have delegated to the Pichis-Palcazu Special Project (PEPP) until 1989 the responsibility for coordinating the field work and -7- various functions previous to the granting of titles which is then done by the Lima office of MA. This was initiated in the project area in 1983 and has had good results. The Ministry of Justice (General Office of Public Registers) is responsible for maintaining the official registry of land titles but has not had an office in the project area; consequently changes in posession are frequently not recorded. The project will help to rectify this (para 4.08). 2.14 Native Communities. The size of the native communities varies from a half dozen families to 50 or more. In the western part of the project area, where there has been in-migration of colonists for several decades, the communities lost part of their land prior to passage of Law 22175 (para 2.12), and are now more involved than before in cash crop production. Many speak primarily Spanish and in some cases have accepted colonists into their communities. Further west and at the periphery of the area, the communities have larger holdings; more forest land; more traditional hunting, fishing and gathering; less cash production; less use of Spanish; and less integration with the colonists. This project facilitates application of Law 22175. 2.15 Most: native communities have a community center, including the houses of part of the population, which is generally located near the closest road. Internal roads are largely those constructed for timber extraction and a common use of the funds which communities earn from selling their timber is construction of an improved school or community center. The Amazonic Center for Anthropology and Practical Applications, a church-related group, funds the work of specialists (agronomist, sociologist, social worker) to assist native communiLties. Most of the groups do not have access to credit or technical assistance for crop production. A detailed study of the native communities in the project area is included in the project file (Annex 2). Present Agricultural Situation 2.16 For reasons of topography, about 74% of the project area (para 2.08) is forest, mostly on steep slopes and already logged over. The 26% of the project area that comprises soils of lesser slope and better quality, produces important volumes of coffee and fresh fruits, particularly citrus, papaya and avocado, and subsistence crops, mainly maize, beans, rice and yuca. 2.17 Coffee. Coffee is the single most important crop, with about 35,000 ha under Arabica varieties. The area once produced about 20 to 22,000 tons of coffee annually, or about 30% of the country's total production of coffee in the mid-1970s. Since 1979, however, the region has been badly affected by leaf rust and production has declined drastically, reaching a level of only about 12,000 tons in 1982. The negative effect of leaf rust on the region's coffee output has been further aggravated by failure to replace over-age trees with high yielding varieties, low use of inputs, and lack of financial and technical assistance. -8- 2.18 Citrus. Citrus, mainly Valencia oranges, but also mandarins, lemons and limes, is the second most important crop covering 5,700 ha of which 4,600 ha are in production. Annual production is estimated at about 40,000 tons, which represents about 60% of total sales of citrus in the Lima market. In general, citrus, which is grown under rainfed conditions in the region, is well cared for and shows little evidence of pests, diseases or nutritional deficiencies. Despite the good market potential for citrus from Chanchamayo and Satipo, the expansion of citrus planting has been constrained by problems of obtaining medium-to-long-term credit, by the uncertainties resulting from lack of titles over farm land in the area, and by the low quality of feeder roads. 2.19 Papaya. Up until 1980 there were over 2,000 ha under papaya in the region, producing about 41,000 tons of fresh fruit for the Lima market. The plantings, however, have been affected by a virus, causing significant losses, and the combined effect of this virus plus nutritional deficiencies of the plantings led to a sharp decline in yields and area under papaya between 1980-82. As a result, production fell to about 6,000 tons over the same period. The introduction of virus-resistant varieties and improvement of cultural practices, however, could bring papaya production back to its earlier levels. 2.20 Avocado. Avocado orchards total over 2,000 ha, largely concentrated in Chanchamayo. Except for a problem of root rot present in some plantings, the trees appear healthy and the regional production (about 9,000 tons) represents nearly 50% of the total Lima market consumption of avocados. Chanchamayo avocados are of good quality and production in the region could be increased, provided varieties resistant to root rot are introduced and long-term credit is made available to farmers, together with the solution to their land titling problems. Present plantings are located along the rivers and main roads but an expansion of the production area would require an improvement of connecting feeder roads. 2.21 Pineapple. The region is also a major supplier of pineapple to the Lima market (over 90%). Plantings covering about 1,300 ha are in Chanchamayo and produce about 15,000 tons per annum. The local varieties are not well suited for processing, with the result that only about 2,000 to 3,000 tons are processed each year by INDALSA, the local factory. A change in variety to the more suitable Smooth Cayenne would increase the demand of pineapple for processing. Thus, there is a potential demand for both fresh fruit and fruit for processing, but farmers in Chanchamayo are not likely to introduce any changes in their cultural practices and varieties or expand the area under pineapple unless adequate technical and financial assistance is provided. 2.22 Bananas. The third most extensively grown crop (4,500 ha) after coffee and citrus is bananas (including plantains), with the bulk of production being sold in the Lima market (about 70%) without much regard to quality and prices. The remainder is used on the farm, either for direct consumption or as feed for small animals, or sold in the local market. Bananas are usually grown together with other crops and receive little special attention. This practice, plus some pests and diseases (nematodes and insects), has led to rather low yields of 4 to 6 tons/ha. Total production in the region fluctuates around 27,000 tons per year. -9- 2,23 Subsistence Crops. There are about 4,000 ha under maize, with a production of about 7,000 tons per annum, and some 3,000 ha of yuca, with an annual production of approximately 21,000 tons, as well as smaller areas of rice and beans. Yields are low largel'y because of inadequate fertilization and cultural practices. 2.24 Livestock. The modest livestock production in the region is directed mainly to the local market or used for on-farm consumption. The cattle population is estimated at 13-15,000 head, mostly criollo or zebu-criollo crosses. Cattle are raised on natural pastures, with little herd management. Many farmers keep a few chickens and hogs but there is practically no commercial production at present. This may be expected to develop over time through use of plaintain, banana and yuca as carbohydrate sources. 2.25 Yields and Production. Although the area is already settled and much of the land with productive potential is occupied, only a few farmers have achieved high levels of technology and yields. Producers in the area are responsive to commercial demand, as indicated by the range of crops already produced, but are presently constrained by lack of financial resources, particularly long-term credit, and lack of technical assistance. Consequently, further development of the region is feasible, provided the credit constraint is removed and better technological support is made available. 2.26 Farm Labor, Although the average farm in the region is small and basically a family enterprise, most of those producing coffee and fruit for sale have short periods of peak labor demand, principally at harvest time. This is hand-Led through an established tradition of seasonal migration from the highlands which also helps to ameliorate the under-employment problem in the highlands. Eventually some of these workers adapt to the conditions of the Selva and decide to remain and obtain land or permanent employment in the region. Infrastructure 2.27 Roads. Responsibility for planning, design, construction and mainitenance of all roads in the country resides in Peru's Ministry of Transport and Communications (MTC). However, it is a weak institution with serious capability constraints. Although now being strengthened under the Eighth Highway Project (Loan 2091-PE), it focuses primarily on expanding and improving the main road network; as a result, minor provincial roads receive only sporadic emergency maintenance from MTC. Thus, by default, minor road improvement and/or maintenance work has passed to local authorities. 2,28 The outlet for the whole of the project area is the road from San Ramon through the Sierra to Lima via Tarma and La Oroya. The distance from San Ramon to ima is about 300 km and, except for the first 39 km, the road is asphalted. Traffic is, however, occasionally interrupted by landslides in the Sierra. Internal communications are based on a main road system emanating from San Ramon through La Merced then forking with a southern branch running through Pichanaki to Satipo and Mazamari while the other -10- branch continues eastward to Villa Rica (Map IBRD 17482). The primary road network in the area consists of gravel roads, which would be paved as far as Satipo and Villa Rica under the Eighth Highway Project. Feeding into the main roads are about 1,200 km of access roads and tracks, constructed originally as logging roads. Some have been somewhat improved by communal effort, but, in general, they are narrow, unsurfaced, poorly constructed and frequently impassable during the rains. The poor access adversely affects delivery of services, use of modern inputs, and marketing of products. 2.29 Health Services. Only La Merced and Satipo have general hospitals; San Ramon, Pichanaki and Mazamari have health centers and mDst rural families use these health services only in cases of emergency. The most serious health problem throughout the area is the lack of potable water which, along with the lack of latrines, contributes greatly to the spread of parasites and disease. Agricultural Services 2.30 Input Supply. Over 60% of the fertilizer consumed in Peru is manufactured within the country by three state enterprises and two privately owned enterprises. Domestic production represents about 80% of the nitrogen used, 40% of the phosphorus and 24% of the potassium fertilizer. The National Enterprise for Marketing Inputs (ENCI) controls the import and commercial distribution of fertilizers, with 380 registered fertilizer sales outlets, of which 58% are private and the rest are cooperatives that handle a number of commodities, including fertilizer. Only 8% of the sales outlets are in the Selva. 2.31 Plant protection materials are readily available in the agricultural areas from private business sources. Large-scale farmers tend to be aware of the virtues of particular disease and insect control products, but many farmers in the Sierra and the Ceja de Selva are completely dependent on the advice of salesmen. An informed extension service could greatly assist in ensuring efficient and cost-effective use of plant protection. 2.32 Marketing. Food crops, mainly maize and yuca, are sold locally or consumed on the farm; ENCI purchases maize at a guaranteed price. Coffee is generally marketed through marketing companies; 10 Agricultural Service Cooperatives (CAS) handle 80% of the coffee produced in the project area, and the remainder is marketed by intermediaries. The CAS either export the coffee directly or through ENCI. Peru is a member of the International Coffee Organization, which fixes the export quota; administration of the quota in Peru is done by the Junta Nacional del Cafe. The export quota for 1982/83 was 40,740 tons, accounting for about 71% of the year's production. 2.33 Fresh fruit passes through a complex system of intermediaries before reaching the consumer. Producers sell to itinerant traders at the farmgate if they have poor access to local commercial centers, or they sell to local privately owned collection centers which arrange transport to and sale in Lima, or they entrust their produce to a transporter who sells on a commission basis in Lima. Except for bananas, which are sold in a separate -11- central market, all of the fruit passes through the wholesale market in Lima; the largest price mark-ups occur between this point and the consumer. At no point in the system is there any Government intervention; however, prices fluctuate considerably. A small proportion of the fresh fruit production is also sold to INDALSA, a private fruit processing plant located between La Merced and San Ramon which processes about 4,000 tons per annum into fruit juices and concentrates, largely citrus, and some jams and canned fruit. 2.34 Only in the area of fresh fruits can the present marketing system be significantly improved, mainly by better sorting , grading and packaging which would reduce losses considerably and enable farmers to obtain better prices. The Government has recently introduced some measures to improve the marketing of rural produce nationwide, including establishment of PROCOMPRA, a semi-autonomous unit with funding from a bilateral agreement with Spain and responsible to the Vice-Minister of Agriculture. Institutional Aspects 2.35 The Pichis-Palcazu Special Project (PEPP). PEPP, which would be the implementing agency for the proposed project, was established by the Government in 1980 for the purpose of planning and implementing the development of a specific area in the Low Selva: the watersheds of the Pichis, Palcazu and Pachitea rivers. PEPP is currently in charge of the implementation of the IDB-financed rural development project in the Pichis Valley, the USAID-financed rural development project in the Palcazu Valley, the KfW project in Oxapampa, and the Chanchamayo-Satipo project fcr which this loan is proposed. Although these projects have all been initiated during the past three years, PEPP has rapidly established a good reputation for its strong competent administration and the practical accomplishments of its field staff. PEPP and the other Special Projects have broad multi-sectoral powers and can enter into contracts and agreements with public and private entities. Because of its administrative location, previously in the Presidency of the Council of Ministers and now in the new National Development Institute, PEPP is able to deal effectively with the various Government agencies involved in project design and implementation in the Central Selva, Among these entities are MTC, mentioned above, and various directorates and institutes of MA as constituted under the new organic law for the agricultural sector issued on January 18, 1981. 2.36 Ministry of Agriculture. Under the new structure, since 1981 MAG has retained responsibility for policy planning, administrative, regulatory, and control functions in the agricultural sector. However, direct responsibility for technical and support functions and activities were placed in four semi-autonomous institutions and two public enterprises. The four institutes are: the National Institute for Agricultural Research and Extension (INIPA), the National Institute for Expansion of Agricultural Development (INAF), the National Forestry Institute (INFOR), and the National Institute for Agroindustrial Development (INDA). The two public enterprises are ENCI and the National Enterprise for Coca (ENACO). -12- 2.37 The MA regional organization in the project area includes Agrarian Zone VIII, San Ramon, which covers the Oxapampa and Chanchamayo regions, and Zone XII, Huancayo, which covers the Satipo area. The zone officials are mainly concerned with enforcement of agricultural and forest legislation, veterinary immunization campaigns, land titling and cadastral survey, and compilation of statistics. In forestry, district personnel with normative guidance of DGFF and administrative control of the agrarian region, are responsible for law enforcement and for approving extraction contracts, INFOR provides technical support, and the Forestry Police, an arm of the Civil Guard, supervises extraction and transport of timber, all within serious staff and funding constraints. In agriculture, INIPA has recently begun to provide research and extension services in the area, but activities are still limited by shortage of funds. Additional qualified staff, facilities and support services are needed. 2.38 The Agrarian Bank of Peru (BAP). BAP is a Government-owned institution with 19 branch offices, 65 agencies and 25 inspectorates nationwide. It provides about 93% of the total institutional credit to the agricultural sector and recently received a US$130 million loan from the Bank to support a four-year lending program. BAP's policy currently provides lending autonomy for agencies to approve up to SI. 30 million (US$15,000) for individual subloans and S/. 200 million (US$100,000) for subloans to cooperatives and for branches to approve up to S/. 120 million (US$60,000) for individual subloans and SI. 1,000 million (US$500,000) for cooperatives. Where the subloans are for new borrowers, the lending autonomy is reduced by 50%. In addition, all subloans in excess of S/. 14 million (US$7,000) require crops or other assets as security, and copies of documentation are sent to the head office for supervision. BAP's current rates for the Selva are shown in Table 1. Crop loans and long-term loans for tree crop farms, equipment and livestock establishment receive some subsidy. These rates are required to be reviewed and adjusted, if necessary, at bi-annual intervals to reflect changes in market rates. 2.39 BAP's audited financial statement to December 1982 showed BAP to be financially sound, with total assets of S/. 441,000 million (US$294 million). In addition, under the Sixth Agricultural Credit Project (Loan 2302-PE), the Government guaranteed to maintain the value of BAP's equity in real terms. The Sixth Project also provides technical assistance for the upgrading of BAP's staff and the development of an information system. 2.40 BAP's operation in the Chanchamayo-Satipo project area is currently centered at the La Merced branch, with two outlying agencies and two more planned to become operational. Apart from loans for coffee marketing, denominated in US dollars at interest rates varying from 18% to 21%, in which the private banks participate, BAP is the sole provider of institutional agricultural credit in the area. In 1982 BAP loaned SI. 24,400 million (US$16 million) in the area, maintaining its 1979 level of lending in real terms. Of this, 77% (vs 95% in 1979) represented subloans for coffee, of which 59% (1979, 81%) was for marketing loans. The reduced percentage of subloans for coffee reflect the recent diversification of agricultural development in the area, mainly fruit crops. Because BAP's allocation of resources for the area is directed mainly to coffee marketing (59% for marketing at La Merced compared to 7.5% nationally) and is largely to repetitive and larger borrowers, the small scale producers in the area perceive BAP to be negative toward new borrowers, restrictive in loan size -13- and selective in loan processing. Consequently, without the promotion, technical assistance and the general support of the project, very little increase could be expected in the use of institutional credit by these producers. 2.41 BAP's staff in the La Merced zone of operation includes 20 professionals who processed 3,433 subloans in 1982, or an average of S/. 1,219 million (US$813,000) per professional annually. The staff in the area is expected to increase proportionately with the two new offices planned and the anticipated increase in subloans. III. THE PROJECT A. Introduction 3.01 In support of its agricultural development strategy, the Government of Peru has requested Bank assistance to finance a rural development project in the provinces of Chanchamayo and Satipo in the Department of Junin. The project was prepared by the Executive Directorate of the Pichis-Palcazu Special Project assisted by FAO/IBRD CP. Bank participation in the project would continue the Bank's strategy of supporting development of Peru's Ceja de Selva. B. Brief Description 3.02 The project would aim at increasing agricultural and forestry production in an area of about 730,000 ha. Most of the 20,000 rural families in the area, including about 2,000 native families, would benefit under the project. The components listed below were selected to maximize productive impact while minimizing tensions between colonists and native communities during the development process. To accomplish its objective, the project would: (a) provide credit to about 5,500 farmers; (b) reinforce extension services in the project area; (c) support research to develop and field test improved agricultural technology; (d) modify forest exploitation to permit regeneration and sustainable production; (e) improve about 427 km of access roads and establish a viable system for maintenance; (f) improved marketing of fresh fruit; (g) support a program to provide legal titles for about 15,000 individual farmers and 85 native communities; and (h) assist native communities by introducing measures to improve their security of tenure, level of skills and potable water supply; and (i) strengthen the executing agency. -14- 3.03 The thrust of the agricultural development program is to increase productivity by obtaining broad adoption of improved technology that has already been proven in the region and to reinforce technical support services to be able to anticipate and respond to new problems that can be expected to occur in the course of development. The project would provide agricultural extension and credit to about 5,500 farmers, including 500 to 600 members of native communities, to assist them to gradually rehabilitate about 14,000 ha of coffee and 3,800 ha of perennial fruit (citrus, avocado, papaya) and semi-perennials (pineapple, banana) and to expand the plantings of tree crops other than coffee by 4,200 ha. Technology packages have been defined for each crop, based on the experience of progressive farmers and agronomists in the project area. In all cases these packages include increased fertilization and in most cases better control of insects and diseases with which immediate yield response can be obtained. Major components are as follows: (1) for coffee rehabilitation, introduction of improved lines, systematic control of leaf rust by spraying, removal of excess shade, and improved pruning practices; (2) for papaya, liming and testing of new varieties to locate virus tolerance; (3) for avocado, field testing of additional commercial varieties and establishment of new plantings only on deep light soils to avoid problems with root rot; (4) for pineapple, introduction of the best clone of Smooth Cayenne because of its market potential, and pre-planting control of soil insects and nematodes; and (5) for citrus, introduction of higher yielding varieties and involvement of all producers in fruit fly control. 3.04 The project would be implemented over six years and would be administered by PEPP's Executive Directorate in La Merced (with a liaison office in Lima) and its Chanchamayo-Satipo Project Directorate also located at La Merced in the project area. Most of the project activities would be managed through implementation agreements with relevant governmental and private agencies, strengthened for purposes of the project. C. Detailed Features Credit 3.05 Medium- and long-term credit would be provided (Table 2) for land clearing, procurement of small equipment (fumigators, depulpers) and tools, on-farm development and purchase of draft animals and would be based on farm investment plans elaborated with the assistance of extension personnel (para 4.04). Incremental short-term credit would be provided for about 3,000 ha of subsistence crops annually and to help producers meet the operating expenses of caring for existing tree crops during the initial years of the new tree crop establishment. Items to be financed would include seeds and seedlings for replacement, fertilizers, chemicals, machinery rental, labor costs, and marketing and transport of farm products. Medium-and long-term resource requirements are estimated at about US$17.8 million and short-term requirements at about US$2.8 million over the project period. In view of BAP's increased resources, including funds from the Bank's recently approved agricultural credit loan for US$130 million to BAP (Loan 2302-PE), BAP would provide the credit for the project from its ownconsolidated resources (para 4.04). -15- Marketing 3.06 Two rural marketing centers for grading and packing fruit would be opened in the project area--one to be constructed in La Merced and one at Sat-po (Table 11). The production would be destined primarily for the Lima market. Each center would have a capacity of about 14,000 tons per year of citrus, pineapple, papaya, bananas, avocado and other products. The Executive Directorate would arrange for construction of the centers either through PROCOMPRA or directly. The centers would be owned and managed by the local producer associations when completed. Assistance for the associations in marketing would be financed under the project. The project includes the costs of construction of the two new marketing centers in the project area as well as incremental operating costs and a four person implementation group whose role will be defined by agreement between PEPP and the producers association. This group would work the first year at each center with the producers to get the fruit packaging plants in operation and effectively market the produce. Extension 3.07 The project would finance reinforcement of existing extension services of INIPA in the project area (Table 3) including: (a) rehabilitation of the zone office at San Ramon and an agency at Pichanaki (2,200 m2); construction of zone offices at Satipo and agency offices at Pampa Silva and San Martin Pangoa (2,200 m2); and construction of simple dwellings for extension workers in 26 villages (1,248 m2); (b) the purchase of 27 pickups and 52 motorcycles; four 4-wheel drive vehicles; and office and field equipment for the facilities shown above; (c) incremental salaries (20 professionals, 27 non-professional technical staff, eight clerical and 17 support staff) and operating costs of the program; and (d) the costs of farmers' short courses, in-service staff training and external training. Research 3.08 Research to design and test improved agricultural technology would be carried out in a coordinated program by UNA and INIPA with UNA taking main responsibility for on-station research and INIPA carrying out on-farm trials (para 4.05). The project would strengthen the research capacity of UNA at Satipo (Santa Teresa) and at San Ramon (La Genova). The on-station research under the proposed project would focus on variety trials to test new material and studies of disease and pest control. Station nurseries would also produce the initial stock of improved plants for distribution to private nurseries and farmers. Financing (Table 4) would be provided for: -16- (a) construction of laboratories, classrooms, library and housing (1,580 m2) at La Genova; (b) purchase of technical, scientific, office and farm equipment for both stations, including also a fruit grader, two pumps, two greenhouses and a limestone crusher; (c) purchase of six pickup trucks; and (d) incremental salaries and travel costs for a project coordinator, two soil scientists, three crop specialists, an agro-economist, eight assistants, two clerks and 10 laborers. Forestry 3.09 The project would have three principal forestry goals: (a) the protection and improvement of logged-over forest in preparation for a second cutting cycle; (b) the protection and/or replanting of abandoned agricultural land; and (c) the controlled development of the remaining block of virgin forest for timber production. To reach these goals, the project would: (a) expand INFOR's ongoing forestry research and reforestation program by hiring eight foresters, 10 forest technicians and support staff and supplying vehicles and infrastructure, including field offices in Pichanaki and Satipo, new nurseries at San Ramon and Satipo and expansion of the existing nursery at Pichanaki. The reforestation program would produce native and exotic seedlings in sufficient quantity to reforest approximately 4,000 ha; (b) enable DGFF and the Forestry Police (DPF) to initiate the protection of approximately 200,000 ha of forest areas and finance the preparation of a forest cadaster (files and maps of existing forest properties and concessions). To achieve this, seven foresters and 12 forest technicians would be hired and 18 additional forest guards will be provided by DPF, a new district office at Satipo and six forestry police posts would be built and supporting equipment and vehicles would be purchased. The DGFF, through its forestry districts at San Ramon and Satipo, would prepare studies of the forest reserve areas bordering the project area (see map) to determine areas of production forest and areas of protection forest. Issuance of new exploration concessions would be frozen until the DGFF completes these studies. Assurances on this point were obtained at negotiations (para 7.01). The production areas would then be opened to concessions and the companies winning those concessions would prepare the necessary management/utilization plans with DGFF supervision. The DGFF would prepare management plans for the protected areas. These latter plans would consist largely of patrol schedules and plans for research on fauna and flora; (c) establish a forestry extension service within INFOR with four foresters and four technicians; (d) finance a series of forestry courses and seminars for foresters, project personnel, forestry police, and skilled laborers; and (e) finance part of a study to determine methods of involving native communities in income generating forestry activities. Additional funding for this study would come from the project's native community budget. -17- Detailed investments are given in Table 5 and detailed background on the forestry component is on file in a working paper (Annex 2). Roads 3.10 The project would provide funds for the improvement of about 427 km of access roads in areas of high agricultural activity and population density; a bridge across the Rio Perene to connect the virtually isolated eastern bank area to the main highway, so as to provide year round access; and technical assistance, tools and equipment to develop and support a system of access road maintenance by local communities. The objectives are (i) to improve and maintain farmers' access to markets which is very important in an area with a large marketable production of perishable crops, and (ii) to develop and expand local institutional capacity to organize, manage and execute labor based road maintenance practices which could continue to function with a minimum of assistance from departmental or national government agencies. To accomplish these goals, the project would finance (Table 6): (a) construction of a bridge (90 m) across the Rio Perene at Yurinaki; (b) consultant services for detailed engineering, preparation of contract documents, supervision of construction of the above and training in road maintenance; (c) purchase of road maintenance tools, and equipment; (d) construction of two workshops; and (e) operating and repair costs of maintenance equipment during the implementation period. 3.11 Road improvement standards are shown in Table 7 and road locations appear on the map. Since the roads in the project area traverse both the flat to rolling topography of the valley bottom lands and the sharply rising steep mountainsides leading to and through higher altitude agricultural area, there is considerable variation in road characteristics. In the flatter terrain road closure is due to inadequate drainage and weak soils which would be improved by raising the road beds, ditching and applying river gravel surfacing. On the narrow mountainous roads the improvements would consist of providing adequate drainage systems, passing bays as well as better traction and surface resistance through road surface improvement with the best available roadside materials. Transporting river gravels up hill would in general be prohibitively costly. Preliminary engineering of all road works has been completed as well as detailed engineering for roads to be constructed during year 1. 3.12 The road maintenance program would seek to expand and support community responsibility which is already in evidence in some parts of the project area. Local government districts would be required to enter into agreement with the project directorate to have the communities execute the necessary routine maintenance work, as a pre-condition to having any roads to the communities improved. In return the project would: (i) furnish an initial supply of tools; (ii) provide training in labor based maintenance -18- practices; (iii) assist the local government in organizing and managing maintenance; and (iv) provide some mechanized support, particularly in transporting suitable materials for use by community maintenance labor. Assurances were obtained during negotiations that a program of action for road maintenance, including budget requirements, would be forwarded to the Bank for review and comment not later than July 31, 1985 and updated annually thereafter. Maintenance support units managed by engineering staff who would be contracted by the project directorate, would be established to provide the necessary training, technical assistance and support to the communities. The staff of the units would be assisted by specialized consultants in organizing the necessary training and would provide at least three years of supervision of community efforts. The units would assist the project directorate in equipment procurement and workshop construction, and would operate the small equipment pools and the mechanical workshops which would eventually be transferred to an appropriate local government authority. During negotiations assurances were obtained that a program for the transfer would be presented to the Bank for comments not later than March 31, 1988 and made effective not later than March 31, 1989 and that adequate budgets would be provided for continued operation and repair of the maintenance equipment pools (para 7.01). 3.13 Training would be assisted by specialized consultants who would first teach project staff how to become effective trainers. A model labor crew financed by the project would be trained to test proposed procedures, crew productivity, work organization and management. The crews would be used to provide demonstrations to district officials and to give training to district foremen and crew organizers, who would be nominated by the district authorities. This training would be provided by project staff who would provide the subsequent supervision and evaluation of district efforts as well as on-the-job assistance in programming and managing maintenance works. The proposed training programs would be a part of the annual plan of action (para. 3.12). Land Titling 3.14 The project would finance incremental operating expenses for the entities working jointly under PEPP coordination on an expanded titling program (para 2.13). Its objective is to provide legal titles for farmers in the project area who do not have them -- about 15,000 individual farmers and 48 native communities -- and for 37 native communities at the periphery in the zone of influence of the project (20 in the Ene-Tambo area and 17 in the Gran Pajonal). In addition land registry would be established in the project area. Expenses covered under the project would include (Table 8): (a) salaries and travel costs of incremental staff; (b) purchase of vehicles and a boat; (c) purchase of office and field equipment; and (d) operating and maintenance costs for equipment purchased. -19-- Native Communities 3.15 Various components of the project would include act-ions to safeguard the land and the rights of native communities and to increase their participation in the regional economy and enable them to benefit from the project. These would include: (a) continued priority for native communities in land titling; (b) inclusion within the extension service of trained bilingual (Spanish and Campa) extension officers to give technical assistance and promote the use of credit among native communities; and (c) involvement as trainees and later as staff for implementing parts of the forestry component. In addition, the project would support a special native communities component including (Table 9): (a) an appropriate technology program covering nutritional improvement, handicraft production and small scale industries; (b) completion of about A00 potable water systems for native communities and neighboring small-scale farmers; (c) assistance to native communities for self-help construction of community buildings, particularly schools and health posts; and (d) training related to the above activities. Project Directorate 3.16 The Project Directorate (PD) would receive financial support (Table 10 ) for: (a) office construction (300 m2 total) and rehabilitation (600 i2), housing and dormitories (700 m2 total). (b) purchase of 18 pickups, office supplies and equipment; (c) contracting additional staff (39 professionals and technicians, 13 clerical and 22 support staff); and (d) operating and maintenance costs for vehicles, equipment and facilities. D. Project Costs 3.17 Total project costs, including contingencies, US$7.6 million of indirect taxes and the front end fee, are estimated at about US$67.5 million; of this total US$21.5 million would represent foreign exchange costs. Physical contingencies are estimated at 15% for civil works and 5% for machinery and equipment. Base costs are in October 1983 values. Although Peru continues to experience high domestic rates of inflation, it uses a system of regular adjustment in its exchange rates relative to hard currencies which approximately covers the differential between domestic and international inflation. Therefore, price contingencies in the project costs are calculated on US dollar base values and estimated at the following rates: 1984, 7.5%; 1985, 7.0%; and 1986-89, 6.0% yearly. Detailed project cost statements are presented in Tables 12, 13, and 14 and summarized below. -20- PERU CHANCHANAYO - SATIPO RURAM. DEVELOPMENT PROJECT PROJECT COST SUMNARY (S/. Nillioii) (US$ Million) ; of ------------------------ ------------------- Foseion ; of Total L.oel Foreiuc, Totil Locil Forei ., Total E>chanre Base Cos A. CREDIT 21,873,2 110719,9 33i593,1 10Q6 5.7 16.2 34.9 30.9 B. AGRICULTURAL EXTENSION 7Y186,1 1,556,6 9,742.8 3,5 0,8 4,2 17!8 8.0 C, RESEARCH 2,479.7 1902,17 3,982.4 1.2 0.7 1.9 37t7 3.7 D, FORESTRY 6,358.9 1,290.6 7?649.5 3.1 0.6 3.7 16.9 7.0 E. ROADS t9,891.9 14,196-9 34!088.8 9.6 6.9 16,5 41.6 31.4 F. LAND TITLING 6S600.6 724.? 7,325.3 3,2 0.4 3.5 9.9 6.7 G. NWrIVE COMMUNIT[ES 1,338,5 569.1 1907.6 0.6 0.3 0.9 29.8 1.8 H. PROJECT UNIT 50427.6 710.1 6i137.7 246 0.3 3.0 11.6 5.6 I. MARKETTNG 3f349.8 1,950.3 5,30)00 1,6 0.9 2,6 46.8 4.9 Total BASELINE COSTS 74f506.2 34!220,9 108,727;1 36.0 16.5 52,5 31.5 100.0 Physical Contingencies 4,075.7 2,87?98 6f955,4 2.0 1,4 3.4 41.4 6,4 Price Contingencies 16,759.2 7,076.9 23,836.1 8.1 3.4 1135 29,7 2119 Total PROJECT COSTS 95f341,0 44F177.6 139,518.6 46.1 21,3 67,4 31.7 128.3 Fron,t End Fee - 232.9 232.D9 0.1 0.1 100,0 0.2 Total FINANCING REQUIRED 95y341,( 44i410.5 139i751,5 46,1 21.5 67,5 31.8 12858 E. Project Financing 3.18 The proposed Bank loan of US$40 million would meet 59 percent of total financing requirements (66 percent of total costs net of all taxes), including US$15.6 million in foreign costs, the front end fee and US$24.3 million in local costs. The Government would be the borrower and would carry the foreign exchange risk. The loan would be for a term of 17 years, including four years of grace, at the standard variable interest rate. The remaining project costs, including contingencies, would be provided by Government, BAP and beneficiaries as shown in the following table. -21- Financing Plan (US$ million) Proposed Producers World Bank Government BAP Assoc. Farmers Loan Total Credit Long-term 15.0 2.8 - 17.8 Short-term 2.4 0.4 - 2.8 Subtotal 17.4 3.2 - 20.6 Marketing .4 1.4 - 1.3 3.1 Extension .5 - 4.7 5.2 Research .2 - 2.2 2.4 Forestry .5 - 4.1 4.6 Roads 3.1 - 19.3 22.4 Land Titling .4 - 3.9 4.3 Native Communities .1 - 1.0 1.1 Project Directorate .3 - 3.4 3.7 Front End Fee - .1 .1 Total 5.5 17.4 1.4 3.2 40.0 67.5 F. Procurement 3.19 Procurement arrangements are summarized in the Table below: (US$ millions) Procurement Method Total Project Element ICB LCB Other N.A. Cost Civil Works - 15.0 7.3 - 22.3 - (13.5) (6.6) - (20.1) Vehicles and Equipment - 9.1 13.9 23.0 - (8.6) - (8.6) Salaries and Operating Costs - 19.7 19.7 _ (8.9) (8.9) Consultant Services, Training, - 2.4 2.4 Studies _ _(2.4) (2.4) TOTAL 24.1 7.3 36.0 67.4 (22.1) (6.6) (11.3) (40.0) Note: Figures in parentheses are the respective amounts financed by the Bank Loan. -22- Civil Works 3.20 Contracts for improving access roads, totalling about US$12.0 million over four years, would be procured using local competitive bidding procedures (LCB). Because of the small scale of operations which would be required, particularly on the narrow mountainous road sections, Schedule of Rates contracting procedures would be used when appropriate as an alternative to unit price bidding. In some flatter areas, both types of contracting would be tried to permit a comparison of the prices obtained. Since the project area is large while work volumes on individual roads are small and, in addition, since overall project implementation would not be favored by grouping road improvements in each geographical area into larger annual contracting packages, the resulting individual contractor would tend to be small. In addition, the suitability of smaller equipment and labor intensive procedures for the type of work required, would probably make the work more attractive to smaller contractors than to Peru's traditional, larger road- contractors or to international firms already working in Peru. Both would be eligible to bid on combinations of several contracts, if interested, however, the contracts would not be advertised internationally. 3.21 Construction of the bridge across the Perene river at Yurinaki is estimated to cost about US$0.8 million equivalent, and would be contracted using LCB procedures, satisfactory to the Bank. Peru has experienced contractors capable of handling such works. The balance of civil works contracts for offices, housing, and research facilities are not of a scale which would interest foreign contractors; therefore, LCB procedures, satisfactory to the Bank, would be used. Any combined packages of works in excess of US$500,000 would be subject to the Bank's prior review of procurement documentation. PEPP would organize bidding and would supervise the construction of the works. Goods and Services 3.22 Workshop machinery, tools and maintenance equipment, as well as vehicles and motorcycles would be procured by locally advertised competitive bidding which is appropriate for the small volume of goods involved. Major suppliers of equipment have established agencies in Lima and all would be required to have, or to establish, equipment repair and spare parts supply services in or near the project area. Furniture and supplies, and scientific and technical equipment would be grouped; orders under US$50,000 would be placed after prudent shopping procedures in accordance with local regulations acceptable to the Bank, and packages over US$50,000 would be subject to LCB. The total value of scientific and technical equipment, as well as furniture and supplies procured through direct negotiations, is not expected to exceed US$350,000. Expatriate assistance and consultants would be selected on the basis of qualifications and experience and in accordance with Bank guidelines. Scholarships extending for one academic year or more and external travel associated with technical training financed under the loan would require prior approval of the Bank. Assurances were obtained at negotiations that the provisions of this and the preceding paragraphs on procurement would be followed. -23- G. Disbursement 3.23 Proceeds of the Bank loan would be disbursed as follows: Category Item Amount (US$ million) I Civil Works: 18.0 90% of total expenditures II Vehicles and Equipment: 8.0 100% of foreign expenditures 90% of local expenditures III Incremental Salaries and Operating Costs 8.0 80% until aggregate disbursements reach equivalent of $4,800,000 45% thereafter until aggregate reaches the equivalent of $2,700,000 10% thereafter until aggregate reaches equivalent of $500,000 IV Consultant Services, Training and Studies: 2.2 100% of total expenditures V Initial Deposit in Special Account 1.0 VI Front-end Fee .1 VII Unallocated 2.7 Total 40.0 3.24 The project would be implemented over six years and disbursements under the Bank loan would extend over six and one-half years (Table 15). Taking into account historical disbursement profiles for agricultural and rural development projects in the region, which have averaged eight years, the proposed period is justified because of: (a) PEPP's experience in coordinating similar projects in the region; (b) present status of design preparation for access roads and the bridge at Yurinaki as well as the initiation of land titling activities; and (c) strong Government commitment reflected in the project's special status under the new cabinet-level National Development Institute. 3.25 For all civil works carried out by local contractors, and for incremental salaries and operating costs, disbursements would be made on the basis of certified statements of expenditures. The supporting documentation would be retained by the respective implementing agencies and be available for inspection by Bank supervision missions, the Project Directorate and the auditor. Disbursements against other expenditures would be made upon -24- submission of the normal documentation. Assurances were obtained at negotiations on these points. Retroactive financing of up to US$350,000 (less than one percent of the loan amount) would be provided for costs incurred after January 1, 1984 for start-up including essential equipment and initiation of office construction and hiring of key project and extension staff. 3.26 In order to ensure timely payments of project costs, a working fund would be established in the Banco de la Nacion by the Government to cover estimated expenditures for two months. Simultaneously, in order to also accelerate disbursement, the Borrower would establish a Special Account in US dollars at Banco de la Nacion into which the Bank would make an initial deposit estimated to cover the Bank's share of three months of expenditures (US$1.0 million). The borrower would claim reimbursement of the Bank's share of expenditures from the Special Account upon presentation of withdrawal applications, which, in turn, would be forwarded to the Bank fully documented for replenishment of the Special Account. The Bank would require a monthly statement of the Special Account which would reflect transactions during the previous month. Similar facilities are included in the Bank's Eighth Highway Project (Loan 2091-PE) and the Alto Mayo Project (Loan 2219-PE). IV. ORGANIZATION AND MANAGEMENT Executive Directorate (ED) 4.01 The Chanchamayo-Satipo project organization has already been set up under the Executive Directorate of the Pichis-Palcazu Special Project (PEPP), originally in the Office of the President of the Council of Ministers, and presently under INADE. Chart I outlines the project organization. PEPP would have authority over this project as well as over three others in the Central Selva region (para 2.35), but would delegate day-to-day operation to the Chanchamayo-Satipo Project Director located in the project area at La Merced. The PEPP Executive Director's function with respect to Chanchamayo-Satipo would therefore be to: (a) ensure that planning, programming, and implementation conform to the provisions of the Loan Agreement with the Bank; (b) ensure that all resources necessary to carry out the project are available in a timely manner; (c) approve plans and programs of the Project Directorate (PD), and approve and sign contracts required for project execution. To ensure effective coordination of the project with the participating agencies, an assurance was obtained at negotiations that the ED would continue to maintain a liaison office in Lima. Project Directorate (PD) 4.02 The Project Director Chanchamayo-Satipo, who is already in place, would be responsible for the efficient implementation of the project, on behalf of the ED to whom he would report directly. The Project Directorate (PD) would head five sub-directorates: farm production services (FPS), land titling (LT), roads and buildings (RB), administrative services (AS), and -25- planning and evaluation (PE), (Chart 1). He would also be responsible for coordinating aspects related to the native communities. Specific responsibilities of the five sub-directorates are sumarized below: (a) FPS would implement: (i) the farm development and credit program, including extension and research, with the participation of BAP, INIPA and UNA; and (ii) the forestry development and protection program to be executed by DGFF, INFOR and the Forest Police. It would also be responsible for the training and native communities component and would prepare progress reports on all of the above; (b) LT would implement the land titling program, with the participation of DGFF, DGRAAR and OGCR under agreement with MAG (para 2.13); (c) RB would coordinate and control all civil works and related contracts for consulting services. Consultants would be engaged for detailed engineering, supervision of construction and technical assistance in training. Staff contracted directly by RB would manage the road maintenance units and conduct related technical assistance and training (para 3.12, 3.13) and would assist RB in procuring equipment. Consultants would assist RB in preparation of bidding documents, in evaluation of bids for civil works and in the preparation of progress reports on works for which it is responsible; (d) AS would be responsible for budgeting, accounting, personnel, supplies and support services; and (e) PE would produce and annually up-date an Integrated Rural Development Plan for Chanchamayo-Satipo, plan and execute systematic monitoring of the program, evaluate project impact, make appropriate recommendations, and modify plans and programs based on data gathered. 4.03 Although difficulties may occur in attracting qualified personnel to work in the field, the transportation and housing to be financed under the project should generally provide sufficient incentives. The key staff positions in the Project Directorate have already been filled by personnel on short-term contract. Assurances would be obtained at negotiations that, in the event Government removes the Executive Director or the Project Director, their replacements would have qualifications satisfactory to the Bank. Credit 4.04 Under a credit agreement between BAP and the ED (para 4.10), BAP would assume responsibility for channeling adequate development and production credit through its local agency at La Merced in the project area. The agreement would include a schedule of annual lending targets and provision for annual review of the targets. Under this agreement, a credit sub-committee, with representatives of BAP, the Center for Agricultural Research and Extension (CIPA), the PD and beneficiary farmers, would meet at quarterly intervals to analyze the supply, demand and delivery aspects of credit and production inputs. Terms and conditions of lending would be in -26- accordance with BAP's established norms, as agreed by the Bank for the Sixth Agricultural Credit Project. Farmers would be aided by the project's credit promotors in preparing long-term investment plans and in calculating seasonal credit needs, which would be appraised by BAP. Loan approval, supervision and recovery would also be the responsibility of BAP, assisted, if necessary, on technical aspects by INIPA personnel. BAP personnel would receive project-financed training formulated jointly by BAP and the ED. Extension and Research 4.05 INIPA and UNA would collaborate closely with the PD in implementing the extension and research components of the project. Their respective roles are being defined in a tripartite agreement with INADE (para 4.10). INIPA would establish a separate regional office (CIPA XIX) for the Central Selva, which would be staffed largely under the project and would have responsibility for the extension program. It would also have principal responsibility, in collaboration with UNA, for carrying out training, which would be a key part of the strategy to integrate research and extension. This training would satisfy specific project needs not covered by the INIPA loan (2150-PE) and would be planned by PEPP and CIPA XIX with assistance of expertise available under the INIPA loan. UNA would implement the design and testing of improved agricultural technology, utilizing its existing stations in the project area at Satipo (Santa Teresa) and San Ramon (La Genova). At Santa Teresa, the expanded program would utilize some of the improvements being made under the recently effective Bank loan (2208-PE) for the Peru Higher Agricultural Education Project. INIPA would have main responsibility for off-station trials and demonstration plots, in collaboration with the farmers and the UNA research staff. Forestry 4.06 The three institutions responsible for executing the forestry component are: INFOR, DGFF and the Forestry Police. The Forestry Faculty of UNA with the collaboration of INFOR/CENFOR will plan, organize and execute all forestry courses and seminars. Course/seminar outlines will include objectives, costs, course content, and number and type of participants. INFOR, through its CENFOR office in San Ramon, would execute the research, extension and reforestation activities and would participate in training. DGFF would be responsible for protection and production control activities related to forest concessions and shipment of forest products within and through the project area. DGFF would also participate in the elaboration of management plans for the estimated 60,000 ha of virgin forest concessions in order to better supervise harvesting and subsequent management. Each year the executing agencies would prepare detailed annual working plans specifying activities, personnel involved and detailed budgets for staff, equipment and materials. Salaries and other incremental costs for project activities would be transferred directly from PEPP to each executing agency. Each agency would be required to keep separate accounts of project-related expenses and periodically provide these to PEPP. Salaries would be standard salaries paid by the agencies to their permanent staff. The agreements signed by INADE and -27- the executing agencies would specify that the incremental staff hired for project-financed activities would be incorporated as permanent staff by the end of the sixth year. The purchase of vehicles and equipment and the construction of infrastructure would be carried out directly under PEPP supervision for the respective agencies. Roads and Civil Works 4.07 Road improvement works, the bridge, office and housing construction would be subject to competitive bidding. The responsibility for inviting bids for the construction of offices and housing and awarding contracts would rest with the Project Directorate assisted by consultants financed under the loan. In the case of feeder road improvement and bridge construction, the bids would be invited by PEPP assisted as needed by the Ministry of Transport and Communications (MTC). The supervision of works would be carried out by consultants to the PD Sub-directorate for Roads and Buildings. Land Titling 4.08 Titling was initiated in the area during 1983 with funds provided under the Eighth Highway Loan and would be accelerated in 1984 when the proposed loan becomes available. The existing convenio between PEPP and the Ministry of Agriculture, provides for a coordinated approach to the whole titling process for native communities and individual holdings. The LT Sub-directorate (para 4.02 b) has two units to carry out this work: (1) the Cadastre Unit which has responsibility for photo interpretation, listing of farmers with land rights, mapping of parcel boundaries and sketching parcel plans; and (2) the Titling Unit with responsibility for registering and surveying native communities, revocation of titles and agrarian reform contracts which are no longer legal, land classification and issuance of titles. These units are supported by administrative and legal staff. The final step, for both native communities and individuals, is registration of titles with the Ministry of Justice for which funding would be provided to help establish a land registry office in La Merced with a branch office in Satipo. PEPP would negotiate an agreement for establishment of this office with the Ministry of Justice. Native Communities 4.09 Implementation of the measures to assist the native communities would be the responsibility of each of the entities participating in the project. Coordination of these support activities would be the direct responsibility of the Sub-director for FPS who would also manage directly the native communities component described in paragraph 3.14 and Table 9. Agreements with Implementing Agencies 4.10 Although the PEPP Executive Directorate and its Project Directorate Chanchamayo-Satipo are fully responsible for all aspects of project implementation, overall coordination of the project would be facilitated by agreements which INADE would enter into with other institutions, some of which are legally autonomous. For these, specific agreements satisfactory to the Bank would be made with regard to: -28- (a) Farm Development Cred't: an agreement with BAP on provision of credit (para 3.05 and 4.04); (b) Agricultural Research and Extension: a tripartite agreement with INIPA and UNA (para 4.05); (c) Forestry: an agreement with INFOR (para 3.09). Execution of the above agreements would be conditions of effectiveness for the loan (para 7.02). Accounts and Auditing 4.11 The PD has its own budgeting and accounting facilities subject to PEPP's own internal audit. The PD would maintain separate records to reflect, in accordance with generally accepted accounting principles, its operations and financial conditions, reflecting the individual components of the project and incorporating the credit component to be executed by BAP. BAP also has adequate accounting and auditing arrangements. At negotiations, assurances would be obtained that: (a) the annual project accounts, including the working fund and special accounts, would be audited by independent auditors acceptable to the Bank, whose reports would be of such scope and in such detail as to include in their comments: (i) the accuracy of statements of expenditures submitted to the Bank for reimbursement; and (ii) such other information as the Bank may reasonably request; and (b) copies of PD's audited accounts and auditors' reports (including the long form report or a management letter with comments on aspects of internal control) would be submitted to the Bank within six months of the end of each financial year. A copy of the annual audited accounts of BAP showing separately the credit component of the project would also be submitted to the Bank. Monitoring, Evaluation and Reporting 4.12 A small monitoring and evaluation unit within the PE Sub-directorate would plan and coordinate with the executing agencies (particularly INIPA, UNA, INFOR and BAP) the systematic collection of data on project progress and impact. This unit would consist of professionals in agriculture, statistics, economics and sociology/anthropology, who would collect and analyze information that would provide a basis for decision and prompt action by executing units as well as a basis for annual planning and budgeting. If necessary, random sample surveys would be conducted to obtain data on crop yields, production and farm income. Indicators (Annex 1) established prior to project initiation would be adjusted during subsequent annual planning exercises. 4.13 The evaluation activities would focus on in-depth measurement of impact on production, natural environment, personal income and general welfare of the individual families and native communities that the project intends to assist. The major evaluation work would include: a mid-term review of program execution and impact to be carried out during year 3 and a completion study and analysis to be carried out in year 6. The unit may also carry out or contract special ad hoc studies on problems that arise during -29- implementation. To assess the effects of project action in the native communities, an information file would be established for each community showiLg social and physical characteristics, project activities, and effects on the community. Assurances were obtained at negotiations that an M&E unit satisfactory to the Bank would be established not later than six months after signing of the Loan Agreement (para 7.01). 4.14 Annual progress reports would be submitted to the Bank no later than 90 days after the end of each year. These reports would present project performance and disbursements by component and explain any significant deviations from objectives. The mid-term review and the completion report would be prepared and sent to the Bank within six months after the end of the third and sixth years, respectively. Assurances that the above reporting procedures would be followed were obtained at negotiations (para 7.01). V. AGRICULTURAL PRODUCTION, YIELDS, MARKETING AND PRICES Production and Yields 5.01 Incremental production under the project would result, on the one hand, from rehabilitated and expanded perennial and annual crop plantings financed through project-provided credit and, on the other, from an increase in average yields of perennial and annual crops due to the extension package. The increase in yield, expected to be achieved through the intensified extension and research efforts, will come from better pruning, fertilization and disease and insect control in coffee, improved grafting disease and insect control in coffee, improved grafting techniques and disease control in citrus and avocado, better fertilization and cultivation practices for papaya and banana, and improved planting material and management for pineapple. Better management, fertilization and planting material is also expected to raise yield levels in maize and yuca. The yield levels expected to be achieved and the incremental production are as follows: Incremental Production at Full Development Area (ha) Yields at FD Years to Annual Incre. Prod. w/o with w/o with full Volume Crops Proj Proj Proj Proj Devt (mt) S/.m US$m mt/ha mt/ha Coffee 14,000 14,000 0.4 0.7 9 4,200 7,938 5.3 Citrus 1,200 3,000 10.0 14.0 16 30,000 2,820 1.9 Avocados 240 800 4.0 6.0 12 3,840 422 0.3 Pineapples 400 1,000 12.0 16.0 12 11,200 885 0.6 Papayas 720 1,800 4.0 6,0 10 7,920 1,782 1.2 Bananas 3,900 3,900 6.0 8.0 10 19,500 2,340 1.6 Maize 2,750 5,500 1.7 2.0 7 6,325 1,423 0.9 Yuca 800 1,600 7.0 9.0 8 8,800 792 0.5 Total 18,402 12.3 -30- 5.02 Incremental production estimates assume that the present situation reflects the future without-project case and that there would be no change in total production over the project development period if project investments were not made. The justification for this position is that although the area under crop is likely to expand somewhat even if project investments are not made, the following serious constraints would tend to reduce production per hectare: (a) the inability to market products effectively due to poor feeder roads, hence post-harvest losses; (b) lack of technical assistance for disease control and sound soil conservation and fertilization programs, likely causing average yields per hectare to decline over time, as is already the case for coffee; and (c) lack of long-term credit for sufficient investments in on-farm development, thereby further slowing the intensification process. In the case of coffee, at full development (year 9) incremental production would reach about 4,200 tons (parchment coffee) or 35% more than the current (1982) level of production (12,160 tons) in the area. This increase in production, however, would only compensate the fall in production that has taken place in the area since 1978 as a result of leaf rust (first noticed in the area in 1979). 5.03 As shown below, the incremental incomes of project beneficiaries are considered sufficient to provide an incentive to participate in the on-farm development works and other project programs. Results are based on financial prices shown in Table 16 and farm models shown in Tables 17 to 25, which are considered representative, bearing in mind that the actual investment mix may vary. Full Development Farm Family Income Income Farm Type Without Project With Project
Группа Всемирного банка · Staff Appraisal Report
Peru - Chanchamayo - Satipo Rural Development Project
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