Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3292-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 .REPUBLIC OF PERU FOR AN AGRICULTURAL RESEARCH AND EXTENSION PROJECT April 28, 1982 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 The exchange rate is being adjusted daily roughly in line with the differential 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 SI. 426.60 S/. 575.28 S/. 1 US$0.0023 US$0.0017 S/. 1,00o0 US$2.34 US$1.74 FISCAL YEAR January 1 to December 31 ABBREVIATIONS ARE - Agrarian Reform Enterprises BAP - Banco Agrario del Peru (Peruvian Agricultural Bank) CGIAR - Consultative Group for International Agricultural Research CIPA - Centro de Investigacion y Promocion Agropecuaria (Agricultural and Livestock Research and Extension Centers) ERP - Economic Recovery Program IDB - Inter-American Development Bank INAF - Instituto Nacional de Ampliacion de la Frontera Agricola (National Institute for Expansion of the Agricultural Frontier) INIPA - Instituto Nacional de Investigacion y Promocion Agropecuaria (National Institute for Agricultural and Livestock Research and Extension) MA - Ministerio de Agricultura (Ministry of Agriculture) T and V - Training and visit extension methodology USAID - United States Agency for International Development FOR OFFICIAL USE ONLY REPUBLIC OF PERU AGRICULTURAL RESEARCH AND EXTENSION PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru Beneficiaries: National Institute for Agricultural and Livestock Research and Extension (INIPA) and the National Institute for the Expansion of the Agricultural Frontier (INAF) Amount: US$40.6 million equivalent, including a capitalized front-end fee of US$600,000. Terms: Repayable in 17 years, including four years of grace, at 11.6 percent interest per annum. The loan's proceeds would be transferred to the beneficiaries free of charges and repayment obligations. Project Description: The project's objective is to rebuild Peru's agricultural research and extension services. This would be accomplished through support for the program of INIPA at the national level and in the six northern departments of Peru. The project would include: (i) the construction and equipping of research facilities in northern Peru and, on a national level, training and the provision of technical services to develop research programs; (ii) the construction and equipping of facilities and the provi- sion of vehicles for the extension service in northern Peru and, on a national level, training and consulting services to introduce the "training and visit" (T and V) extension system; and (iii) institutional support for INIPA, including strengthening of its Planning Depart- ment, providing a computing and statistical service, constructing a documentation and training center and studies related to INIPA's operations. Finally, the project would include preparation of a follow-up research and extension operation and studies, to be carried out by INAF, for preparation of a third irrigation rehabilita- tion project for possible Bank financing. The project faces no special risks but the effectiveness of the research and extension service to be created will depend on the Government's future commitment to its support and the adequacy of agriculture sector policies. At present, both the degree of commitment and sector policies are satisfactory. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Estimated Costs: Local Foreign Total -----US$ millions----- A. Research Activities 12.5 10.7 23.2 (i) Civil Works 2.5 1.6 4.1 (ii) Vehicles, Equipment and Incremental Costs 9.4 6.2 15.6 (iii) Consultants'Services and Training 0.6 2.9 3.5 B. Extension Activities 16.9 8.8 25.7 (i) Civil Works 2.2 1.5 3.7 (ii) Vehicles, Equipment and Incremental Costs 14.1 6.1 20.2 (iii) Consultants' Services and Training 0.6 1.2 1.8 C. INIPA Administration and Services 5.6 9.4 15.0 (i) Planning 1.3 0.5 1.8 (ii) Statistical Services 0.4 0.5 0.9 (iii) Documentation and Training Center 2.2 1.4 3.6 (iv) Technical Assistance and Project Preparation 1.7 7.0 8.7 Base Cost 35.0 28.9 63.9 D. Physical Contingencies 1.5 1.1 2.6 E. Price Contingencies 9.2 7.6 16.8 TOTAL PROJECT COST 45.7 37.6 83.3 F. Front-end Fee on Bank Loan - 0.6 0.6 TOTAL FINANCING REQUIRED 45.7 38.2 83.9 Financing Plan: Local Foreign Total -----US$ millions…----- Government 43.3 --- 43.3 World Bank 2.4 38.2 40.6 TOTAL 45.7 38.2 83.9 - iii - Estimated Disbursements: 1983 1984 1985 1986 1987 1988 (US$ millions by Bank FY) 1/ Annual 5.4 14.5 6.7 6.0 5.0 3.0 Cumulative 5.4 19.9 26.6 32.6 37.6 40.6 Rate of Return: About 21 percent. Staff Appraisal Report Staff Appraisal Report No. 3789-PE, dated April 12, 1982. 1/ Includes US$0.6 million as a capitalized front-end fee. . I INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR AN AGRICULTURAL RESEARCH AND EXTENSION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Peru for the equivalent of US$40.6 million to help finance an agricultural research and extension 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. The Government would transfer the loan's proceeds, free of charges and repayment obligations, to the beneficiaries, the National Institute for Agriculture and Livestock Research (INIPA) and the National Institute for Expansion of the Agricultural Frontier (INAF). PART I - THE ECONOMY 1, 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's domestic oil production more than doubled between 1/ This part is substantially unchanged from Part I of the Lima Water Supply Project President's Report of April 22, 1982 (Report No. P3280-PE). - 2 - 1977 and 1981 to over 190,000 barrels per day (BD), and it became a net exporter of about 60,000 BD. 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, 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 BD. 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 urbanization process and improved education. But with declining death rates, population has continued to grow at about 2.7 percent p.a. and is currently estimated 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 component. 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 three 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 five 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 nine 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 six 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 six 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) II. 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 alloca- tion 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 eight 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 a consumer price increase 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. Because of a relaxation in fisical descipline, the public sector deficit also 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 constitution, 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 efficiency, 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 particular, 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 four 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 amounted to about US$700 million, equivalent to about three percent of GDP. A major factor in the deterioration of the balance of payments was the large public sector deficit which reached about eight 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, the price dampening effects of an increase in imports, and--to some extent--to a deceleration of the mini-devaluations. 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. 22. 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 35 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 four 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 and power. 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. - 7 - 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. In addition, a palm oil project was recently approved, and a venture capital company is now being considered. 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 irriga- tion. USAID is expected to stress rural development and health. PART III - THE AGRICULTURE SECTOR Land and Water Resources 30. Peru has a limited natural resource base for agriculture. Of the country's total land area of 1,285,000 km2, only about 3.7 million ha or 2.9 percent is arable and another 17 percent is natural pastureland. Additional land could be brought into production but only at a high cost--either by expensive new coastal irrigation schemes or by providing basic infrastructure for more remote areas, mainly in the Ceja de Selva, the jungle highlands in the Amazon region east of the Andes. 31. Of the country's three principal regions, the 130,000 km2 Costa, which consists mainly of desert terrain, is the major agricultural area. Agriculture in the Costa is limited to river valleys, and most of Peru's one million irrigated hectares are located in this zone. Most irrigation and drainage systems, however, are old and inefficient, and the Bank is currently financing two irrigation rehabilitation projects (Lns. 1403-PE of 1977 and 1771-PE of 1980 -- see para. 53). Where water is available, conditions are generally favorable for high crop production because of good soils and near optimal solar radiation and temperatures. Farmers in this region are more technically advanced and tend to use more production inputs and credit than farmers in other zones. The area also enjoys relatively close proximity to the main urban markets and a good transportation network. As a result of these conditions, productivity per hectare as well as incomes in the Costa are the highest in the country. This region produces over 40 percent of the country's crops, including the major export crops--sugar and cotton--as well as rice, maize, potatoes, citrus crops, olives and grapes. 32. The Sierra consists of rugged mountains and high valleys. Of the zone's 335,000 km2 about seven percent are farmed and 43 percent are used for grazing. The Sierra has about half the arable crop land in Peru, but-- because of the difficult topography, the severe climate and generally primitive farming techniques--productivity is low and there is little scope for putting new land into production. Most agricultural production is for subsistence, andthere is little use of fertilizers or other inputs. There is a potential, however, for improving crop and livestock productivity through research, extension and the increased use of production inputs. 33. The sparsely settled Selva region east of the Andes accounts for 64 percent of the total land area. The region has abundant water, since Peru's major river systems flow through the area and rainfall is high, but soils are generally poor, particularly in the lower Selva. In the Ceja de Selva, soils are of better quality, and agricultural and livestock development has begun. Arable land in this zone is estimated at 4.5 million ha of which 600,000 ha are currently being exploited. Fruits, coffee and tea are the main crops, although there is good potential for livestock, rice and oil palm in some areas. Development has been hampered, however, by poor transport and other infrastructure. The Government has begun to give priority to development projects in this area, since it offers one of the few prospects for expanding the agricultural frontier. The recently approved Eighth Highway Loan (Ln 2091-PE of February, 1982) is supporting this effort with financing to improve road access to the Ceja de Selva. Agricultural Sector Performance and Government Policies 34. The agricultural sector in Peru underwent a major decline during the 1970s. In part, this was due to a serious drought from 1978-80, but the sector's poor performance was brought about primarily by negative Government policies. These included: (i) an agricultural pricing policy which did not provide adequate incentives to producers; (ii) imposition of an inefficient State-run marketing system; (iii) failure to effectively organize and manage agrarian reform enterprises; (iv) insufficient credit and the dismantling of the extension and research support services for the sector; (v) a requirement that food crops be grown in place of non-food export crops, primarily cotton, for which Peru enjoys a comparative advantage; (vi) the concentration of public investment in large-scale coastal irrigation projects with very long gestation periods; and (vii) insecurity of land tenure owing to a far-reaching land reform. 35. In 1980, agriculture contributed about 11 percent to Peru's GDP and employed more than 40 percent of the labor force, as compared with 15 and 48 percent, respectively, in 1970. The value of food production in constant prices increased by an average of 0.7 percent per annum during this period. The value of crop production actually declined at an average annual rate of -0.6 percent in the 1970s, while livestock production increased at 3.3 percent, largely because of the rapid growth of the poultry industry. During the same period, population grew at an average of 2.9 percent per annum. As a result, nutritional standards suffered, and the country's dependence on imported foodstuffs increased. 36. The volume of food imports--consisting mainly of wheat, rice and other grains, dairy products and vegetable oils--increased by a total of over 20 percent between the early 1970s and 1980. At the same time, agriculture's contribution to exports--which came mainly from sugar, cotton and coffee--fell dramatically toward the end of this period. By 1980, the volume of major agriculture exports stood at only about 22 percent of the 1970 level. In spite of these trends, Peru continued to maintain a positive though shrinking balance of trade in agriculture through the 1970s. The deficit in 1980-81, however, totaled about US$300 million. - 9 - 37. By the late 1970s, the military Government had recognized the gravity of the problems facing the agricultural sector and the potential long term economic and social impact of its decline. It began, therefore, intro- ducing measures to reverse this trend. Consumer price subsidies on most products were reduced or eliminated, the requirement that food crops be grown was eased, and the rebuilding of agricultural service agencies began. The Belaunde Government has accelerated this effort. It has eliminated remaining consumer subsidies except for a subsidy on rice which is now being phased out. Export taxes have been reduced substantially and are scheduled to be fully phased-out by 1983. An agricultural promotion law was passed in 1980, which: (i) concludes the agrarian reform expropriation process (paras. 39- 42); (ii) permits the mortgaging of agricultural land to facilitate increased commercial credit; (iii) provides selected tax incentives to investment; (iv) permits the private import and export of most agricultural products and inputs; and (v) opens up marketing to private participation (although some restrictions still remain). Finally, the Government has reorganized and strengthened sectoral institutions to improve the provision of services and the execution of projects (paras. 43-46). 38. These actions have had a significant impact on agricultural produc- tion. With the end of the drought, the easing of regulations requiring the growing of food and an increase in producer prices close to international levels, cotton production increased by almost 80 percent between 1978 and 1980. Preliminary figures indicate that in 1981 agricultural output grew by over 12 percent, with production increases of 67 percent in rice, 38 percent in corn and 21 percent in potatoes. Agrarian Reform 39. The most important factor influencing agricultural production in Peru in the 1970s was the agrarian reform enacted in June 1969, which affected all farms larger than the equivalent of 50 ha of irrigated land on the Costa. By February 1980, 11.6 million ha of land in about 16,500 farms had been expropriated by Government under the land reform programs; this represented 48 percent of the total land in agriculture in Peru. An area of 8.9 million ha was distributed to almost 400,000 families; these represented less than a quarter of the rural population. Although about eight percent of expropriated land was adjudicated to individual families, most large estates were distributed intact to various forms of cooperative agrarian reform enterprises (AREs), generally consisting of more than 2,000 ha per unit. This was true of the large coastal sugar and cotton estates, as well as the cattle and sheep ranches in the Sierra. The balance of the expropriated land * (2.7 million ha) remains under State control for possible future adjudica- tion, State forestation programs or other public use. 40. During the 1970s, the military Government concentrated most of the financial and manpower resources made available to agriculture on the agrarian reform. Credit went largely to AREs, and the Government's previous research and extension operation was dismantled to provide manpower to carry out the agrarian reform process. After the AREs were set-up, the little research and extension capacity left was devoted to servicing them. - 10 - 41. While the agrarian reform succeeded in instituting a more equitable distribution of agricultural land in Peru, it was accompanied by low levels of investment owing to the instability of land tenure which the program created. The land reform also caused many of Peru's most technically sophisticated farmers to leave agriculture. These factors--coupled with the negative impact of Government policies summarized in para. 34 and the poor organization, management and lack of cooperative spirit in the new AREs--were a significant cause of declining production. In an effort to correct ARE problems, the Government is requiring improved management as a condition for providing them with assistance and credit. It is also preparing a rehabilitation project for the sugar AREs, with assistance from a US$500,000 Bank Project Preparation Facility (PPF) advance. On AREs in the Sierra, Government efforts and generous financial support have not been successful in inducing most farmers to participate fully in the cooperatives, and they continue to work their individual plots. Some AREs in this region have already disbanded, and more are likely to follow. 42. Even though the agrarian reform improved the lot of its beneficiaries, the approximately 78 percent of the rural population not benefited by the agrarian reform is probably worse-off than before. For landless workers, employment opportunities on the large cooperative farms have become more scarce, and the small farmers have been neglected in the provision of Government support services. The Government is now trying to rectify this situation by strengthening support services for smallholders. The research and extension project recommended in this report is a major element in this strategy. Institutional Framework 43. The Ministry of Agriculture (MA) is generally responsible for formulating the Government's sectoral policies and programs. Under a 1981 reorganization, the task of carrying out of public sector agricultural and rural development programs was made the responsibility of: (i) four administratively autonomous institutes under the MA; (ii) a number of independent project authorities which administer major irrigation projects; (iii) departmental development corporations which are responsible for small-scale local projects; and (iv) special project units located in the Office of the President of the Council of Ministers, which prepare and carry out integrated rural development projects for the Ceja de Selva area. 44. Of the four institutes, the most important are the National Institute for Agricultural and Livestock Research and Extension (INIPA) and the National Institute for Expansion of the Agricultural Frontier (INAF). The others are the forestry and agroindustry institutes. INIPA has responsibility for agricultural research, extension, farm mechanization and rural marketing development (paras. 47-50). INAF plans and carries out national irrigation development and rehabilitation programs, land development in the Selva and Ceja de Selva, and some medium-size irrigation projects. INAF is also responsible for insuring that irrigation projects, even those which it does not directly undertake, are technically well-designed and economically justified. - 11 - 45. Specialized services to the sector are provided by a public marketing company and the Agrarian Bank of Peru (BAP) which is the main source of agricultural credit. The marketing company has a monopoly on marketing rice, cotton and fertilizers and on importing grains and powdered milk. These monopoly operations are now being phased out, although the Government will retain a presence in marketing as a check on private traders. The BAP is a Government-owned institution with branches in all parts of the country. It provides about 85 percent of the institutional credit to the agriculture sector with the balance coming mostly from commercial banks and State development banks. In 1980, BAP's loan portfolio was about US$350 million, but this represented only 80 percent of the 1975 portfolio in real terms and was not sufficient to meet the sector's needs. Between 70 and 80 percent of BAP annual lending is short term production credit, and--in 1980--64 percent of its new loans went to cooperatives, almost 36 percent to farmers with more than 20 ha and less than one percent to small farmers. Since 1980, BAP's lending has been expanding, reflecting the increased Government priority for the sector. It has also begun to give more attention to small farmers. A recent US$30 million IDB loan to finance individual farmer lending will help ensure that this trend continues. 46. The Government is now moving to strengthen the institutional structure described above. Priority is being given to building up INIPA and INAF. Both these entities were converted from pre-existing MA departments into administratively autonomous institutes to improve the efficiency of their operations. They have a core staff and are now in the process of recruiting additional managerial and technical personnel. Their salary scales have been increased to help attract and retain qualified personnel. The proposed research and extension project would include substantial technical assistance for INIPA, and the Government has also sought technical assistance in selected areas from USAID and the IDB. INAF is not as advanced in building up its organization, but it is receiving technical assistance from the IDB and from Bank staff. Research and Extension 47. In 1979, the Government began making efforts to reestablish its research and extension service by creating several new institutions, which in 1981 were combined to form INIPA. INIPA has created 18 regional agricultural and livestock research and extension centers (CIPAs) covering the entire country. The CIPAs administer all extension activities for cooperatives and small farmers (with under 20 ha) in their areas, while larger farmers depend on private technical assistance services. The CIPAs are also responsible for administering the research programs in their areas. Most CIPAs cover one department of Peru but in some cases, where efficient delivery of services permits it, some CIPAs are responsible for more than one department. About 900 extension workers have been transferred from the MA to INIPA, and the latter is now beginning to train these staff with assistance from a US$1.0 million Bank PPF advance approved in February 1982, which is helping to finance the initiation of activities under the proposed project. INIPA expects to have sufficient trained staff in place to form the nucleus of an improved extension service by mid-1982. The project recommended in this report would include assistance to strengthen INIPA, and a major investment program to provide facilities, vehicles and supporting services would be carried out under the proposed project for the CIPAs covering the northern Departments of Peru in order to support expanded extension activities (para. 55). - 12 - 48. The "training and visit" (T and V) extension technique would be utilized by INIPA. This consists of a system of regularly programmed fortnightly visits by extension agents to selected "contact" farmers who would be the main link with about ten neighboring farmers with similar resources. With a carefully scheduled program of five-six visits per day, the agent could, with good farmer cooperation, assist about 400 individuals on a continuous basis. Extension workers would also make occasional visits to deal with specific farmer problems and spend one day a week in in-service training with specialists in various subject matters. With the assistance of consultants financed under the Bank's PPF advance, INIPA is now developing a farm system analysis capacity that will enable it to make its research and extension programs more relevant to actual farm problems and resources and, thus, promote the utilization of research results by farmers. Under this approach, agents would be taught how to take into account all factors bearing on the adoption of improved practices (e.g., access to credit, farmer attitude to risk, competition with other crops). 49. In addition to its extension activities, 17 research stations and 27 substations located throughout the country and 600 professional research staff have been transferred to INIPA by the MA. The programs now underway at these stations (mainly devoted to cereals, potatoes, soybean, cotton, pasture improvement, animal breeding and soil and water management) would continue. There is a need, however, to improve the quality of research and establish new research stations so as to cover all of Peru's main agro-ecological zones and commodities. Also, additional graduate specialists are needed at all experimental stations, and there are shortages of vehicles and equipment as well as library and scientific information sources. The proposed project would begin to address these needs. 50. Through its extension and research activities, INIPA will be responsible for distributing improved seed and breeding livestock. INIPA would also promote the increased use of fertilizers and plant protection materials, both of which are generally available. Finally, INIPA has been given responsibility for providing farm machinery services to small farmers and promoting the development of rural marketing systems. Its activities in these areas, however, have not yet been defined. The proposed project would include studies to determine whether there is an appropriate role for INIPA in these activities and, if so, what its role should be. Sectoral Investment Strategy 51. The Government's sectoral investment strategy as reflected in its 1981-1985 public investment program is (i) to continue development and rehabilitation of irrigated coastal areas where the potential for increases in production is great and there is a large sunk investment in irrigation infrastructure; (ii) to begin to develop the potentially rich Ceja de Selva; and (iii) to assist the rural poor, particularly in the Sierra, through rural development projects. The Government is also committed to building up its agricultural credit and research and extension programs to provide better support to the agriculture sector. - 13 - Previous Bank Operations 52. In order to help spur Peru's agricultural development, the Bank has made 12 loans to Peru totalling US$178.4 million. Five of them, in the 1954-1973 period and totalling US$55.0 million, were for agricultural credit and were channelled through BAP (105-PE, 162-PE, 257-PE, 415-PE and 933-PE). In general, BAP's performance has been good. The Performance Audit Report (Sec M81-465 of June 2, 1981) for the fifth project (Ln 933-PE of 1973) concluded that the project's rate of return exceeded that estimated in the appraisal report (30 percent vs 26 percent). It noted, however, that the Bank failed to use the loan as an effective instrument in credit policy issue discussions (e.g., interest rate levels) with the Government. Processing of a sixth loan has been held in abeyance while efforts have continued to reach a mutually satisfactory agreement on interest rates. Also, the fifth project suffered from the deterioration of the research and extension services in the 1970s. The proposed research and extension project represents the first real effort to rebuild these services. 53. Two loans (67-PE of 1952 and 98-PE of 1954), totalling US$3 million, were for farm machinery imports. Another two (Loans 114-PE 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. The Performance Audit Report (Sec M78-43 of January 18, 1978) for the San Lorenzo project financed by Ln 418-PE concluded that the project achieved its basic goals of increasing agricultural production and the incomes of rural poor. The audit noted, however, the need for provision of better maintenance of works, of a strong project unit, and agricultural support programs for irrigation projects. 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 and US$56 million, respectively). Finally, in 1980 the Bank approved its first rural development loan, a US$15 million operation for the Puno zone in the Sierra. The status of Bank-financed agricultural projects currently in execution is discussed in Annex II. PART IV - THE PROJECT 54. This project was identified in March 1981 and was prepared by INIPA with assistance from a Bank-financed consultant. Appraisal took place in October 1981. The appraisal mission's report, entitled "Staff Appraisal Report - Peru Agricultural Research and Extension Project" (No. 3789-PE dated April 12, 1982), is being distributed separately. Annex III contains a Supplementary Project Data Sheet. Negotiations were held in Washington from April 5-6, 1982. The Peruvian Delegation was headed by Mr. Alexander Grobman, Head of INIPA. Project Objectives 55. The objective of the project is to rebuild Peru's agricultural research and extension services so as to help increase the productivity and improve living conditions of Peru's farmers. This would be accomplished through a program to provide support to INIPA at the national level and to strengthen the research and extension system in the five northern CIPAs of Peru which service the departments of Piura, Tumbes, Lambayeque, Cajamarca, - 14 - La Libertad and Ancash. These CIPAs were selected by INIPA for support under the project because: (i) in a contiguous area they cover the three main Peruvian agro-ecological zones; and (ii) they represent one of Peru's most important agricultural areas, with 40 percent of the country's cultivated land (1.4 million ha) and over 45 percent of the value of its agricultural and livestock production. Techniques and practices proven effective in this area should be replicable throughout Peru. The population of this northern area is five million. There are 445,000 farm families of which 320,000 have individual properties and 125,000 belong to AREs. The average individual farm size is 2.5 ha, while AREs average five ha per family. About 70 percent of the farm families live in the Sierra, 28 percent in the Costa and two percent in the Selva--mostly in the Ceja de Selva. The main crops are cotton, rice, sugar cane, corn, potatoes, wheat and beans. Most of the country's cotton and sugar come from this area, and livestock and poultry production are also important. Project Description 56. The Project would consist of: A. Strengthening INIPA's Research Program: 1. Nationwide, by providing: (a) ten internationally recruited scientists for three years each to reinforce on-going research programs for major commodities and specific scientific disciplines, to introduce a farm system analysis capacity, to enhance research organization, and to upgrade expertise of research staff; (b) 19 staff-months of internationally recruited consultant services for specific research studies which pertain to commodities produced in the project area; and (c) studies by approved Peruvian institutions contracted by INIPA for specific research projects. 2. For the five CIPAs, by (a) constructing facilities for seven new and 11 existing research stations; and (b) providing about 75 vehicles, machinery, equipment and incremental salaries and operating costs for the expanded research program; and (c),providing local and overseas training of research staff and library services. B. Strengthening INIPA's Extension Program: 1. Nationwide, by providing: (a) 30 staff-years of internationally recruited consultants to introduce the T and V system in the extension program; and (b) training of extension staff in programmed extension activities with emphasis on the T and V system, and in technical subjects. 2. For the five CIPAs, by (a) constructing their headquarters buildings and about 80 other office/dwelling facilities for the extension services; (b) providing about 650 vehicles, equipment and incremental staff salaries and the operating expenses for the expanded extension program; (c) funding training and library services; and (d) developing an agricultural credit promotion/ assistance program following a study to be organized by an interna- tionally recruited credit specialist in cooperation with BAP at the national level. - 15 - C. Strengthening INIPA's National Level Administration, Planning and Support Services by: 1. Reinforcing its planning department with additional staff and equipment and adding Monitoring and Evaluation, Engineering Planning Service and Project Management Units, including vehicles, equipment, training, incremental salaries and operating costs and about 33 staff-months consulting services for these units; 2. Constructing a documentation and training center for INIPA and setting up a computing and statistical service. This component includes equipment, training, incremental salaries and operating expenses and 18 staff-months of consulting services for these activities; and 3. Providing: (a) 60 staff-months of consulting services for rural agricultural marketing and machinery service studies and for preparation of a follow-up research and extension project, and (b) 40 staff-months of internationally recruited consulting services to help prepare through INAF the engineering and technical studies for a third irrigation rehabilitation project for possible Bank financing. 57. Research Program. This component would represent 36 percent of total project cost. The ten research scientists to be recruited would, together with their local counterparts, help develop or improve programs for the following: rice, corn, wheat, pulses, potatoes, cotton, pasture and livestock, soil and water management, plant protection and farm system analysis. Most of these ten scientists would be recruited through the three Consultative Group on International Agricultural Research (CGIAR) centers in Latin America. Each CGIAR center would provide technical support for these scientists and would thus assist INIPA in the development of work programs in each commodity/discipline. These scientists would be appointed by April 30, 1983 (Section 3.03 (b) of the draft Loan Agreement). The selection, qualifications and terms and conditions of employment of these scientists, as well as of the other consultants and experts provided under the project would be in line with Bank guidelines (Section 3.03 (a) of the draft Loan Agreement). The national research program would be supported by up to 19 staff-months of internationally recruited consultants' services and up to US$250,000 per annum in contracts with local research institutions (primarily universities) to study specific problems. The institutions selected to provide such services and their contracts would require the approval of the Bank (Section 3.06 (a) of the draft Loan Agreement). 58. With the construction of seven new research stations in the five project CIPAs, the total number of stations in the northern region would be increased to 20. The research scientists to be recruited through the CGIAR centers would, among their duties, help design the future research programs of the project CIPAs. These programs would, in turn, provide the basis for a master plan to identify the future development requirements for CIPA research facilities. INIPA would, by August 31, 1983, prepare such a master plan (Section 3.08 of the draft Loan Agreement). Also, so as to prevent INIPA from spreading the CIPAs' manpower and financial resources too thin, no stations additional to those currently established in the five CIPAs and to be constructed under the project would be built unless a justification satisfactory to the Borrower and the Bank had been presented (Section 3.07 of the draft Loan Agreement). - 16 - 59. The professional and technical research staffs of the five project CIPAs have been increased from about 110 to about 260, which is sufficient for purposes of the project. Emphasis would be given under the project to upgrading staff quality, particularly for--but not limited to--the project CIPAs, through in-service training and graduate education. Assurances were obtained during negotiations that the Government would provide the Bank by December 31, 1982 with a policy statement, satisfactory to the Bank, on a system of granting salary increments to INIPA staff. This policy would reflect the intentions to provide incentives for effective performance to achieve INIPA's goals and to attract and retain high-calibre staff. INIPA's annual program of scholarships of one academic year or longer would be subject to Bank approval (Section 3.06 (c) of the draft Loan Agreement). * Initially, training courses in farm system analysis would concentrate on the Sierra, which has been most neglected by Government programs in the past. 60. Extension Program. This component would represent about 40 percent of total project cost. In preparation for the initiation of the project, the number of extension workers and other professional and technical staff in the five project CIPAs have been increased from about 350 to about 590, and addi- tional staff would be added in the future. Staff training in T and V metho- dology, part of which is being financed by the US$1.0 million PPF advance (para 47), has been initiated prior to negotiations. This methodology would be used to provide extension services to farmers with from 1-20 ha. Through this system, about 350 extension agents in the project CIPAs would directly service 16,000-17,000 principal contact farmers and about 115,000 additional farmers. Farmers with less than one ha would receive technical support from mass media programs and contact with other farmers. Cooperatives would be serviced by 15-20 university trained extension officers assigned exclusively to this role. Farmers with over 20 ha would largely rely on technical advice provided by private consultants. Of the 650 vehicles to be procured under the project, about 400 would be motorcycles to be acquired during the first three-four years of the project so that each extension agent would have transport. The remaining vehicles would be used by the administrative, tech- nical, monitoring and evaluation and credit staff of the CIPAs. 61. Because the existing credit delivery system for farmers with under 20 ha is weak, each CIPA, nationwide, would have an agricultural credit specialist at headquarters and credit officers in each zone of the CIPA. An internationally recruited credit coordinator would be contracted for three years to train personnel and organize the credit assistance program. This expert would also design and coordinate a study, to be carried out in cooperation with BAP, of credit usage, delivery systems and the promotion of credit for small-holders. By December 31, 1982, INIPA would appoint a credit coordinator with qualifications and under terms and conditions satisfactory to the Bank (Section 3.03 (b) (iv) of the draft Loan Agreement). Within five months from the date of appointment of the credit coordinator, the credit study would be initiated and a cooperation agreement would be signed with BAP providing for its participation in the study and in the coordination with INIPA of the credit program for each of the project CIPAs (Sections 3.01 (c) and 3.03 (b) (iv) of the draft Loan Agreement). 62. INIPA's Administration, Planning and Support Services. This compo- nent would represent about 24 percent of total project costs. INIPA's Planning Department is responsible for programming, coordinating and monitor- ing INIPA's activities. It is being reinforced with the addition of an agri- cultural economist, systems analyst, and accountant. Two architects would be - 17 - added to the Engineering Planning Services Unit, which would monitor the consultants contracted to design and supervise civil works construction. In addition, a Monitoring and Evaluation Unit with supporting field staff at each of Peru's 18 CIPAs is now being set up within the Planning Department to carry out impact studies to determine the effectiveness of INIPA's research and extension activities. This unit would be assisted by internationally recruited consultants who would design and supervise an effective monitoring system. Engineering Planning and Monitoring and Evaluation Units were created prior to negotiations; they will be operated in accordance with terms of reference satisfactory to the Bank. The staffing of the Engineering Unit in a manner satisfactory to the Bank would be a condition of loan effective- ness (Section 6.01 (d) of the draft Loan Agreement). The Monitoring and Evaluation Unit would be staffed in a manner satisfactory to the Bank by December 31, 1982 (Section 3.02 (b) (ii) of the draft Loan Agreement). 63. For purposes of the project, a Project Management Unit has been established in the Planning Department. This Unit would be responsible for planning and coordinating the execution of the Bank-financed project. Appointment of a Project Manager with qualifications and under terms and conditions satisfactory to the Bank would be a condition of loan effective- ness (Section 6.01 (c) of the draft Loan Agreement). 64. Under the project, computing and statistical services operations would be established to support the research program and to handle INIPA's accounting. Also, a Documentation and Training Center would be constructed close to Lima, which would serve as INIPA's central library, be used for short courses for professional staff and prepare mass media extension mate- rial. 65. Four staff-years of consultancies would be provided to determine the most appropriate role (if any) for INIPA in providing agricultural machinery services to small farmers and developing a marketing system for agricultural produce in rural areas. In addition, one staff-year of tech- nical assistance would be provided to prepare a follow up research and exten- sion project. This work would cost about US$100,000. Finally, the project would include about 40 staff-months of internationally recruited consultants and topographical mapping for the preparation of a third irrigation rehabil- itation project for possible Bank financing. About US$1.6 million of the total cost of US$3.7 million would be financed under the proposed loan; preparation would be carried out by the Special Project for Coastal Irrigation Rehabilitation, a dependency of INAF, which is executing the First Irrigation Rehabilitation project (Ln 1403-PE of 1977). The execution of an * agreement between the Government and INAF, satisfactory to the Bank, provid- ing for the transfer of loan proceeds as well as counterpart funds, free of charges and repayment obligations, for the carrying out of this activity would be a condition of loan disbursement (Section 3.01 (b) and paragraph 4 of Schedule 1 to the draft Loan Agreement). Project Execution 66. The project (except for the INAF study) would be implemented by INIPA over a five year period (1982-87). A condition of loan effectiveness would be the execution of an agreement between INIPA and the Government providing that INIPA would carry out the project and the Government would make available to INIPA, free of charges and repayment obligations, the corresponding proceeds of the loan and the counterpart funds required for the project (Sections 3.01 (b) and 6.01 (b) of the draft Jloan Agreement). INIPA's Project Management Unit, which would have primary responsibility for supervising the execution of the project, would be assisted by a consultant with experience in Bank operations to help in project start-up. This consul- tant would be financed by the PPF advance referred to in para. 47. The Peie advance is also financing design of civil works to insure prompt initiation of the project. 67. The Directors of the five project CIPAs would be responsible for the administration of extension and research operations in their areas. INIPA's Executive Directors for Research and Extension would have responsi- bility for the design and technical aspects of these activities and would liaise with the CIPA Directors in the execution of these programs. 68. INIPA's Department of Technical Communications would be responsible for administering the in-service and external training programs, as well as the Documentation Center. All contracts with institutions for in-service training courses financed under the proposed loan would be subject to Bank approval. There would be an annual review of these contracts by the Bank and INIPA and they would be renewed annually if the Bank and INIPA so agreed (Section 3.06 (b) of the draft Loan Agreement). Project Costs and Financing 69. Total project cost is estimated at US$83.3 million (including US$3.3 million in local taxes), of which US$37.6 million, or 45 percent represents foreign costs. This cost estimate includes the project costs being financed by the Bank's US$1.0 million PPF advance (para. 47). Physical contingencies have been estimated at 15 percent for civil works, and five percent for vehicles, equipment and incremental costs. Base costs are in June 1981 values, and price contingencies have been calculated on the basis of projected annual international price increases of 9.0 percent in 1981/82; 8.0 percent in 1982/83; 7.5 percent in 1983/85; 7.0 percent in 1985/86; and 6.0 percent in 1986/87. The proposed Bank loan of US$40.6 million would cover 50 percent of project costs net of taxes (including all the foreign exchange expenditures and US$2.4 million of local costs) and the capitalized front-end fee of US$600,000. The Government would finance the US$43.3 million balance of project costs. The Bank loan would also refinance the US$1.0 million PPF advance. Local cost financing is justified for this operation in light of the tight fiscal situation the Government faces over the next few years, the substantial role the Bank would play under this project in the important task of reestablishing Peru's research and extension system and the fact that 90 percent of the beneficiaries of the project would be small farmers with under 20 ha. 70. Total financing required for the project is US$83.9 million, including a US$0.6 million capitalized front-end fee. Procurement and Disbursement 71. The proposed project includes about US$8.4 million in civil works. Because of their relatively small size, none of the civil works contracts is - 19 - likely to be of interest to foreign contractors. Therefore, locally advertised competitive bidding (LCB) procedures acceptable to the Bank would be utilized, although foreign bidders could compete. 72. Contracts for the vehicles to be procured under the project would be let in accordance with international competitive bidding (ICB) following Bank guidelines. The cost of this equipment is expected to total about US$3 million. Furniture and supplies are estimated to cost about US$1.3 million, but these are locally produced and would not be attractive to foreign bidders. Orders would be grouped where feasible. Packages of over US$100,000 would be subject to LCB (although foreigners would be permitted to bid). Those below US$50,000--up to a maximum aggregate of US$250,000--would be acquired through prudent shopping procedures in accordance with Government regulations, which are acceptable to the Bank. 73. Scientific and technical equipment and agricultural machinery estimated to cost US$6.0 million, would be grouped in packages of over US$100,000 to the extent possible. ICB would be used for packages over US$100,000, which in the aggregate are expected to total over US$4 million million. Packages between US$50,000 and US$100,000 would be acquired in accordance with LCB, and purchases of under US$50,000 would be by prudent shopping up to a maximum aggregate of US$150,000. However, as it would be desirable that scientific and technical equipment be compatible with INIPA's existing facilities for maintenance and servicing purposes, the Bank would consider requests, on an individual item basis, for purchase through direct negotiation of specified types of equipment up to a maximum aggregate of US$600,000. Both domestic and regional preferences would apply to interna- tional bidding for vehicles, scientific and technical equipment and agricul- tural machinery. Local suppliers and those from Cartagena agreement member countries (or any other regional trade agreement acceptable to the Bank of which Peru is or may become a member) would be accorded a preference repre- senting the difference between the prevailing duty actually applicable and the duty applicable to goods imported from non-member countries, or 15 per- cent on the c.i.f. price, whichever is lower. The regional preference would not be applied, however, if a domestic manufacturer was determined to be the lower bidder after application of the domestic preference. 74. A total of about 77 staff-years of internationally recruited con- sultants' and experts' services would be required under the project. Consul- tants providing architectural and engineering services, whose cost has been estimated as a percentage of civil works rather than on a staff-month basis, are available locally, and thus would not be internationally recruited. The * cost per staff-month of internationally recruited consultants and experts (including fees, overhead, travel and subsistence) ranges from about US$8,500 to $9,500. The cost of the T and V consultants, which have already been contracted, is US$7,300 per staff month. The cost of the 40 staff-months of consultants' services for the preparation of the third irrigation rehabilita- tion project, which involves different technical expertise, is estimated to range from US$9,500 - 11,500. 75. Disbursements under the loan would extend over about six years. Disbursements for eligible goods and services would be made against: (i) 100 percent of foreign expenditures for goods procured abroad, and 80 percent for vehicles, machinery and scientific and technical equipment procured domestic- ally; (ii) 100 percent of expenditures for consultants and expert services; - 20 - (iii) 100 percent of foreign and 30 percent of local expenditures for train- ing, research contracts and library services; (iv) 30 percent of total expenditures for civil works and furnishings; (v) an average of 30 percent of total expenditures for incremental salaries and expenditures, which is converted to a fixed annual amount for each incremental staff in the case of research, and to a decreasing percentage for extension and support services, with each reimbursement being based on a statement to be certified by the head of INIPA; and (vi) amounts due on the PPF and the front-end fee. Project Benefits 76. The calculation of the project's economic rate of return is based A on conservative assumptions as to the adoption rate of technological packages and the incremental production yields that would be derived from the applica- tion of this technology. Taking into account total project cost and the cost of incremental inputs, the economic rate of return is estimated at 20.5 percent. Sensitivity analysis indicates that the rate of return would still be 13 percent (about the opportunity cost of capital in Peru) with a 21 percent reduction in benefits and a 20 percent increase in INIPA costs. In addition, the project is expected to have significant foreign exchange bene- fits. After ten years, in constant 1981 US dollars, it is expected to produce an annual net benefit of US$13.5 million as a result of import sub- stitution and US$13 million in foreign exchange earnings. 77. In addition to the financial and economic benefits, there are sub- stantial unquantified benefits from this project. It would help create a research and extension system that would benefit the whole Peruvian agricul- ture sector. This system would be replicable throughout the country and would improve the chances for success of all future agricultural and rural development projects; it would also serve farmers who do not participate in organized projects. Ninety percent of the beneficiaries of the programs of the five project CIPAs to be supported under this operation would be poor small farmers who have had little or no access to extension services during the past decade. The T and V extension system that would be adopted nation- wide under the project would make it possible to provide technical support to these farmers to help increase their productivity and improve their income and welfare. 78. The project faces no special risks, but the effectiveness of the research and extension system to be created would depend greatly on the Government's commitment to INIPA's program. The priority being given by the Government to rebuilding the research and extension service is evidenced by its creation of INIPA and the strong financial support it is providing, including the recent substantial increase in staff salaries. Also, the impact of this project would depend on Government policy regarding prices, marketing, input supply, etc. These policies have been improved and are now generally acceptable. The Bank will continue to utilize its economic and sector policy dialogue with the country to help ensure that they remain so. - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 79. The draft Loan Agreement between the Republic of Peru, the Banco de la Nacion (which, under Peruvian law, must be a party to all agreements providing for external loans to the Central Government) and the Bank and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 80. The main features of the draft Loan Agreement are referred to in the text and listed in Section III of Annex III. Special conditions of effectiveness would be: (i) the appointment of a project manager; (ii) the staffing of INIPA's Engineering Planning Service; and (iii) the execution of an agreement between the Republic of Peru and INIPA providing that INIPA would carry out the project and the Government would make available to INIPA, free of charges and repayment obligations, the corresponding proceeds of the loan and the counterpart fund required for it. A condition of disbursement for the preparation of a third irrigation rehabilitation project would be execution of an agreement between INAF and the Government providing that INAF would carry out this component. 81. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 82. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments April 28, 1982 Washington, D.C. - 22 - ANNEX I Page 1 of 5 TABLE 3A PERU - SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGiTED AVEEAGES LAJN 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 6 CARIBBEAN EUROPE GNP PER CAPITA (US$) 230.0 410.0 730.0 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF GOAL EQUIVALENT) 436.3 691.8 736.9 1324.1 2368.4 PUPULATION ANl VITAL STATISTICS TOPULATIUN, MID-YEAR (THOUSANDS) 10181.0 13461.0 17149.0 URbAN POPULATION (PERCENT OF TOTAL) 46.3 57.4 66.5 64.2 53.2 POPULATION PKOJECTIONS POPULATION IS YEAR 200U (MILLIONS) 28.5 . . . 51ATIONARY POPULATION (MILLIONS) 55.0 YEAR STATIONARY POPULATION IS REACHEU 2085 POPULAT 1ON DENS lTY PEE SQ. KM. 7.9 10.5 13.3 34.3 80.6 PEK SQ. KM. AGKICULTURAL LAND 33.0 44.0 54.6 94.5 133.9 POPLLATION AGE STRUCTURE (PERCENT) U-14 YKS. 43.6 44.3 42.8 40.7 30.1 15-44 YRS. 52.0 51.8 53.6 55.3 61.5 65 YES. AND AbOVE 4.4 3.9 3.6 4.0 8.3 POPULATION GROWTH RATE (PERCENT) TuTAL 2.4 2.8 2.7 2.4 1.5 URBAN 5.1 5.0 4.3 3.7 3.1 CGUDE BIRTH hATE (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 ACCEPIOES, AENUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) .. .. FOUD AlD NUTRITIGN INDEX OF POUl PRODUCTION PEh CAPITA (1969-71=100) 96.0 102.0 86.0 108.3 119.8 PER CAPIIA SUPPLY OF CALORIES (PERCENT OF REQUIRBIIENTS) 95.0 99.0 97.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 62.0 61.0 59.0 65.8 92.5 OPF WHCH ANIMAL AND PULSE 27.U 25.0 24.0 34.0 39.7 HOILD (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 liHOSiAND) .. 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 URbAN 30.2 58.0 60.0 79.7 RURAL 0.8 8.0 25.0 43.9 ACCESS TO EXCRETA DIlSPOSAL (PERCENT UF PoPULATIUN) TOlAL .. 36.0 34.0 59.9 URBAN .. 52.0 51.0 75.7 RURAL .. 16.0 .. 30.4 POPULAIION 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 URBAN .. 524.8 430.1 558.0 191.8 RURAL .. 3055.3 5747.6 ADMISSIONS PER HOSPITAL BEE .. 19.0 23.0 .. 18.2 HOUSlNG AVERAGE SIZE OF HOUSEHOLD TOTAL 4.9 4.8/f URBAN 4.8 4.9/f RURAL 4.9 4.6/f AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.3 1.9/f URBAN 2.0 I.7l/f RURAL 2.7 2.4/f ACCESS TU ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 26.0 32.1/f URBAN 50.7 54.3/f .. . REhAL 4.2 2.7/f -23 - ANNEX I TABLE 3A Page 2 of 5 PERU - SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVERA9ES - MOST RECENT ESTIMATE) a MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 lb ESTIMATE /b LATIN AMERICA S 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. (1 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 CONSU MPTION PASSENCER 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 RATE (PERCENT) TOTAL 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 39.0/g HIGHEST 20 PERCENT OF HOUSEHOLDS 64.47j 61.0/f LOWEST 20 PERCENT OF HOUSEHOLDS 2.5/8 1.9/f LOWEST 40 PERCENT OF HOUSEHOLDS B.07, 7.07f POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 235.0 RURAL .. .. 180.0 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 293.0 513.9 RURAL .. .. 200.0 362.2 385.1 r 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-e.ighted 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 Pstirated. at 17,625,000. May 1981 -24- ~~~~~~ANNEX I U_NMN I C__ BTC_2~ Pa g e3 o f 5 N.it.:A'lh.,h lh~ - dr,Jr.- I --- g 'all D0FIILI- -CF t-11 y 1-001100h1fFb at frloitis lhata -f--nt gaoo..t.. t h ora.. as -h o-siroogtdoit.o et o a ,dtotad he.o-toa aaoctofthooaoaso-aotodt,f -ofldiat- to- I.ooocgo-oto gaoaogata faoIat,.ooe.ooab aofa -dao I- 'd a otoatos o caooiltt-og- tagaa ftnotoidios:-taat. -toc Thsss--ao-os-rtnloo-foi' apt hffa' eldjatI tata aga -tooya-d.ta ....a..op T-oaiT-ofltloa- aCm-ftogi- aooot -dt -rlt-r .-obo-, a oolid.odbthb-aaeap-i- a-oblt ,f alt.-ao o-Iaa.d by ... r'otso asloo ,faId l:atlot aa (i9117, -ol) 10,ad -ediralocaa no onaataiatfo bopyfi Itto PIFOOt CotFCll0ntOi (Ft .00 tOO 00000. oaaott of o..aaat talatoegy total a foal oorroaaa obot tosrot ala oo boa loot ~~~7, -1ottpa..00I1-,i aafhtgttte.Fftlo.r,toett19oaotoby7a-,ooola19o9 Iaoeeaelt otaoalSpt-ialto-d h aootpa,r ifooosory .dt-atoa I oia OPO0FCAI0N M11 0120 SidT1STlCf Fo12 totj At-r oft.naf) t 0f 1.1 1) 9601 ISM, aic 1909 ff10111 daba A-.fofo oaog o oa2- OSi abt t olloifoto bosbl v .se. tgao ofod. hono tooto f It og-b- -otto .to OfflI aeo ra otn of obto.ttootaa oh-bl.t/ooooti,Iaf of.oooe ogoo 1 o b olddf snt tot .afb, 0.1, ltd -9ff d-o.t fth oetolo - -toatalol P-t--0 yoofttolAyojlt Coato ootoot.ooaaa ot-olf bto oeaaaanoafoito...ot oei .o.d...too lo-1 vtoibyaga-le aod Itbatela -altodatia oo.t&olo-,ao-Foot-ey. fall0aotolo,too tt ----aooa -d Pooaliotaooaotattataabefoalolafeolbee eoaaaaaotto.a.rpICs a-i. aod fanl taeano-aafofgol Ffaa.F000 CtlaobOo.....OOa-bfac .t'yt " Itt.o .....tIe-at a-d fatofltoy -nads foa -o oclo 00000111 Adfoo-d E-aIflaaa Roalo fl--fnat oaaioItsotlt popot-t-nt-- Iot potabena ala,sooI..to aeaotfsooala -lanaata-,atIeendfonoo oybtthca laeooolooc deatbo.t. a.oaonb.gaaa..ca ..o.atfltgaabotaayaoo I acotoaf.. fta....o tiaoafoosact eoolo octcotcpoodoalotaea obsneoy gtara tonar,'I bocadft-.edoodlilfa-at 1oogaha 0yoooocyad.oa.lot;fo ofntah pottfasfsa 1r bealiooyooatn foasootoaoabtntesfadoot- oofao etetIdfi oo ontobot f o tteld bt costt fab 0ti00 aca100p ilsae eo oc..a.I 0ioo ab I.t. otabeyeatlff,aol-oeooce nfdatloneoftloofiiot 0~~~11 01h 01 iaodooooi-oo Ialeen fao-a- loldoed o.ioea d h-a baa,ili, 1ff d f11dd a fofdeeboolfoaco,toaaopgaa t-Ioaaatepd Panl aa . a.oefalec fn oooo1ooe oaotoeco1ln sly00aItcaac fsaIdcoIstaaoa oal. ft. y..loc l-1Fit data Pae-aaktna-- - teoodo.oa arooo0-fo atdetaeno-loIt r-ylafo Ala 0 tcatt9feo7 I-O ea ll y-dof 1979lg-aa -l-po- on oaf -oono -yentl df fodd0 caa-oftabtao Oaaacaf.aotaaoclfff saclto nanfl oloantgal feldyeaaooo ncoapandndlerya fatioo,-lbO,Obti,oadltlldoto.S" a-Ad.folal-1- -d-IIaeoood.-l .....a-C .f n aals _ltneaac_toe pcpaoel n; fIbi, ff10, and 119 Odla. aflea1-1cay csbio-fao.~If -zh.. th poplatba;ilb, 110.en 20 la . coa osas n sesal obln pa9aoo--dofgopooton;-o bas ot al.l..11 solOf0 ya11 adq- atatog - sbdig t 190, -u ad fI--., ooootoatsbl sad fstag Fao.ibolocc-oools-0alfons19-gtofosaod0osao O ssfsa197 Inaaoetlafe-F se7daftbodos of.I.Dt b,c-oooo sfe oa ssts foafo oal lntfeocl scaaal pabiitoi- pe "baanr alto, efdaotsadhtttaot foa:ylaocog aeslattotofocaadoael?acso70tdanaadtaaoa979adtaydaatscegraa,,ooFoaaoa 1le 9t bl.botg g 1- d- aaa heb aS- loIn--ocacol jda-css saae lnllb ceaesedaebeof-foa b tcg o... ...t.e poaroploaa ao.ooafetf0ol.gaal ceeaceppa',dfae a aaofo h~ ~ ~ ~~~A dd h ...~~~~~~~~~pbfoataOsna pcoatldt cao 1fo gplsoa- cos I aosfa rog o poaIo I s'dly 160arsasanloa fod hneoask IalsafFttOaldo fll -oaoartefl-f-l-di,, i,-190ad 970nf . yeopo 9tol laoaaa lelcss Oot ana-as abneet Pe a ascl f_ eoio(o e of_ll sgfaaaf -il ploatos as ,sdfcsasd.fs0ldba a d 10-db -- osifs- ba-de-t, et 00000 effoaeat f n- fod soflls oc hals I 000100psI eota otecla platasal f al osl. tfloelon icocito oaetle T, oal sea dioaoibooioo of paytleolot, aol alloategId 500 n oss1 o sioltlf,i 0.-elsa -o 1-O Cspattag f 0 boIfo, 90 otosebold lanol; 1901-OF, 1910, ota 1911 dod. 1910..d f,d d I sad. 19.9d a" Ita. 1r -1i..di--I a--Iao of dfgoas If' alo i onoet yea-65 1970ao l d oo7s of - anjo1lLobd 1901, 1970, .sod 1979fats mess ace 1 bae-cI- oootyto al ptolo 011111 of btoFif aass bottd beaaial yooslo. Flsesaod- aflsttaggs-ioa-p-daaefa.abs oyolelf.....loagIadoaed aloof fobalisals ad pulsesia als o layd 191-5-e,l of 10 as F-1 Dp--R F.1791dl lgsgooOl-t ysaa,ooobllose toblssgegotoy;oeoastdrslplocooa- 5leecooooacltea lI yooeea ,noeosa ifya-c.l......oo-ottyeoSen oboId ictnfOt TARI(P 1-101) hi aolaylBetfeef-ocgtos ffaso leonlfg n otsa salo ssfo sysootasseseso oen e so 00000;1901. 191 aol 199 daca. ad slotod be llooposeod 11ff ooaadoealI1dnattodla IIsa llosio oefsobadl)-bna h-1loba ofr afaat -eds one osr fsellOsll eoeyfln aa f0pe-oio dl o oa loo.todas _iIteeoaasbidtoeal-toah-011,Ob- IIota-a- boaeooe-aooos IsIa fa 9no0oalolcoff97atoes osecsota d r fa .Yea.odosaa,srns a oaooelo aa oataoo "oIo lana -Is on-eod of oolag ip po..o.f.a cosfedsblgYftboaalebe os of d 20sboa Ielf055 stae goottenleosfooks-ocy aeI enlTacon r-nooe1y ess.aoablsaooesaaoolfamolytbaatbsttaassattsoassobscsofsbebooa.ttfd sadatOaal-?secsaoofpoytlsoooO(ttebaosaddaa6a-)s1979d"sOsh-bo do1 aol -ido 10 spat h a 0sypoloae potodb-a t sttgOl pIle lbs oolfsooloe sad disposal, eb to s9sa7 DO.sf-d-yat bioaoscaea fonot o ollOeDoso sa at-arob eoe-on yssa0 lt s fpa ons oId a tt- 00000101los dal sd- Ieror -os pea lea I..atlta .1Ray 109 Plotlsolc pe Obylol d ,- Ioaofadtts yaom fpsotlgpyt otoYtolfadfosedoaloho aaatoas dy -hsl Peoateoab tolgOeon-Pplto t dt 196sd 6by ta9nbee - afoss t da salaadso- sgedassaP oss, eaoioat "ees sadaats fa r p > e ° .< ¢ a . ff ¢ F m d > . o n W . a  2 w s n n _ n o ¢  D N v U  < C m _ e o n s tG ° o o s r > > _ > e o r z o _ U = v /n 5 n o _ e M | ] c X ffi; i g s ° ° O p % >| q Y g s O a m n X  b r O t 4 Z 1 4 s r O ¢ + ) M ms n o v W M ° X 3 4 n X <  o M n ¢ w  e 4 D = n n C g t > > o hs ¢ t  X t  F < Q > > O o < r e . ° q L < * x o . W o u . jW . i jC, q j u o o o % > < < jS CA s {_ [ _ I ; &D ; S O i ' { | > ^ | z + z I TO I  I  > ; > ;£ >; _I S |W; 19 > 1N v s G O @ _ 4 * |£ LJ 1S. O = I S G _ U o @ < s 1 O O wi o o S wi -o a b i i abo i - i -si i i c B s X s_ o = X ,o, ]o i _ o s 1- n | _ _ _ b liv U is lo - v = cj = -_ > > > o, D o _ _ w _ _ sx _ S M > o | @ w w _ ( | i_ U o > b l iw | ° @ s i i w S i j>- r i |i -E 1 S | < @ iJ ;> _ o o D < a j _, o j @ Cj l o im _ _ i i 1 _ | _ _ t w | i F s _> t X > O m _ > _ > E g _ w ci o l i o i S _ s s > b _ | _ w W > w | o; | c o o _ s w n c > b a _ i s = - - - 19 w - ° |@ 9 | > - |@iCi ¢ b 9 @ ° w-b @ > w-9 i il P |b Z o_inSw X IiJ Zo _ i Dwo __wis w 4 yog 8i -i>>r < w 1Xt lilin w o > l q oi b bw bs_;. | v w>.o ° No ,.az; > jXg-Log -1 > ; iD a a " ! E X _ - - - c F ti r i° - b X ° i = i ° ° it ' - 4 -{ '-1 < @=<6$ irr 0as ¢s !- i li>-- Iilo|> s ,<; ooYWi mt .i r o; q S . _ o s o S 8 |> i v |g lo g W  M t 4 >] > O i w > is g 7 > W vr i j S . i '  p g X ii g S X { c ci Xb j _ O F i j E t o-so M b 5 i i i O  T Ir, _ |71S|< >: e t Sn Y w w Yo w > w tb 2 -|9 _ yo; y _ _ oc o I i o;< - i g  1- b O>-r: ,n;4 o is _ ' | o b s _ s- J i : _ _ _ _ in X 7 S bd  | Z O | o1 =  ° N s u w im _ W s o Z e e yr L | o L _ _ L ^ o 1 : E > _ _ w O w i _ - * i . J 1 D r E L _ o i _ _ ' o i o B W S s Io S B w w U | w °L 3 ¢ l t b 1> im _ | e ; g _ > @ N; = i ';L avr o ' O {B ;o wQ o b ¢b_> v o i4 I; ° Y |E z .X_ N Ww 1X ;,w-°>_,> > _ b o L i X > is i i |EI;l l o i _ _ t _ _ _ o o IBl;lti - -~~~~~~~~~~~~~~~~~~~~~ - 27 - ANNEX II Page 1 of 6 THE STATUS OF BANK GROUP OPERATIONS IN PERU A. STATEMENT OF BANK LOANS (as of March 31, 1982) ---US$ million --- ( Amount Loan (less cancellations) Number Year Borrower Purpose Bank Undisbursed 27 loans fully disbursed 409.2 949 1973 Republic of Peru Education 24.0 1.9 1196 1976 Republic of Peru Transport 76.5 22.0 1215 1976 Republic of Peru Power 35.6 4.9 1281 1976 CENTROMIN Mining 39.7 4.7 1283 1976 Banco Vivienda Urban Dev. 21.6 9.6 1358 1977 COFIDE Industry 35.0 3.9 1403 1977 Republic of Peru Agriculture 25.0 21.3 S-il 1978 Republic of Peru Preinvestment 8.8 2.5 1771 1980 Republic of Peru Irrigation 56.0 51.1 1806 1980 PETROPERU Petroleum Prod. 32.5 27.0 1812 1980 Republic of Peru Rural Dev. 15.0 14.4 1888 1980 Republic of Peru Preinvestment 7.5 5.1 S-19 1980 SIDERPERU Technical Asst. 5.0 4.7 1963 1981 CORPAC Aviation 58.0 57.6 1968 1981 COFIDE Industry 60.0 60.0 2018 1981 ELECTROPERU Power 25.0 25.0 2064 1981 Central Reserve Bank Industry 26.0 26.0 2091 1982 Republic of Peru Transport 93.0 93.0 2117 1982 PETROPERU Industry 5.3 5.3 Total 1,058.7 of which has been repaid 183.5 r Total now outstanding 875.2 Amount sold 18.3 of which has been repaid 18.3 - Total now held by Bank 875.2 Total undisbursed 440.0 - 28 - ANNEX II Page 2 of 6 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982) Type of Year Obligor Business Loan Equity Total 1960 Industrias Reunidas, S.A. Home Appliances 0.2 - 0.2 1960 Luren S.A. and Ladrillos Calcareos, S.A. Bricks 0.3 - 0.3 1960 Durisol del Peru, S.A. Building Materials 0.3 - 0.3 1960; 1962 Fertilizantes Sinteticos, S.A. Fertilizers 4.1 - 4.1 1962; 1968 Cemento Andino, S.A. Cement 2.3 0.2 2.5 1964; 1967 Cia. de Cemento Pacasmayo Cement 1.1 0.5 1.6 1975 Southern Peru Copper Corp. Mining 15.0 - 15.0 1978 Cia. de Minas Buenaventura Mining 2.0 0.5 2.5 1980 Cia. Minera San Ignacio de Morococha, S.A. Mining 2.7 0.5 3.2 1981 Sogewiese Leasing 3.0 0.1 3.1 1981 Consorcio Energetico de Power Huancavelica Transmission 4.5 - 4.5 Total gross commitments 35.5 1.8 37.3 less cancellations, terminations, repayments and sales 18.0 0.4 18.4 Total held by IFC 17.5 1.4 18.9 Total undisbursed incl. participants' portion 8.2 - 8.2 - 29 - ANNEX II Page 3 of 6 C. STATUS OF PROJECTS IN EXECUTION 1/ (As of March 31, 1982) Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973; Effective Date: March 5, 1974; Closing Date: June 30, 1982. The project has experienced serious difficulties and is now about 40 months behind schedule owing to start-up problems including weaknesses in the project unit and cumbersome bureaucratic procedures. In order to resolve these problems, the project has been modified to reduce its scope, increase the Bank disbursement percentage, create a revolving fund and improve administrative procedures (see President's Memorandum R79-59 of March 27, 1979). As a result, the pace of project execution has improved substantially over the past year, and disbursements now stand at about US$22.1 million. Loan 1196-PE: Lima-Amazon Transport Corridor Project; US$76.5 million Loan of May 27, 1976; Effective Date: August 18, 1976; Closing Date: December 31, 1982. Construction of the project's river ports component is almost completed, although with some cost increases because of start-up difficulties. There were serious delays in contracting for civil works under the road component because of slow procedures and limited Government implementation capacity. These problems have been largely overcome and construction is now underway on all project components. The project has been modified so as to reallocate funds for the purchase of road maintenance equipment and eliminate improvement of those road sections which cannot be completed within a reasonable time (see President's Memorandum R79-88 of April 27, 1979). Loan 1215-PE: Fifth Power Project; US$36.0 million Loan of September 20, 1976; Effective Date: November 18, 1976; Closing Date: December 31, 1982. The slowdown of demand in ELECTROLIMA's market in the wake of economic difficulties as well as procurement problems, have delayed the project's power distribution component and completion is expected about a year behind schedule. Serious delays were also experienced in getting the technical assistance program r of the loan underway; however, all consultants have now been retained, and with strong support from the current staff in the Ministry of Energy and Mines the program is now well advanced. Because of the delays, the Closing Date has been ( extended to end-1982. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 30 - ANNEX II Page 4 of 6 Loan 1281-PE: CENTROMIN Mining Project; US$40.0 million Loan of December 6, 1976; Effective Date: May 24, 1977; Closing Date: December 31, 1982. Initiation of the copper mining component was delayed by about two years because of the lack of local counterpart funds owing to the recession of the late 1970s. CENTROMIN is now proceeding with the project with support from additional Government counterpart funds, as well as a supplementary IDB loan and commercial bank borrowing to cover inflationary cost increases. Engineering, procurement and mine development activities on this part of the project are well-advanced. The mine-water treatment plant has now been completed. Loan 1283-PE: Urban Sites and Services Development Project; US$21.6 million Loan of October 12, 1976; Effective Date: January 10, 1977; Closing Date: December 31, 1982. Administrative difficulties, particularly the need to reconcile Peruvian procedures with Bank guidelines for procurement, delayed the project by about one year. All components are now moving ahead well and disbursements stand at US$12.0 million. Because of past delays, however, the Closing Date has been extended to end-1982. Loan 1358-PE: Industrial Credit Project; US$35.0 million Loan of January 28, 1977; Effective Date: March 30, 1977; Closing Date: June 30, 1983. Peru's economic recession led to a contraction of investment and to lower than anticipated demand for the loan in the late 1970s. In view of this, the Borrower -- the National Development Bank (COFIDE) -- agreed to finance projects identified by commercial banks and other financial institutions, which would also guarantee these loans and provide some loan servicing. With this action and improving economic conditions over the past two years, demand for the credit line has increased, and it is now almost fully committed. Loan 1403-PE: Irrigation Rehabilitation Project; US$25.0 million Loan of May 20, 1977; Effective Date: August 2, 1977; Closing Date: June 30, 1983. Because of the weakness of the project unit, there was a long delay in completing the designs for civil works in the six valleys where irrigation systems are to be improved. The unit has been substantially strengthened over the past few years, the design phase is now complete and construction has started. The project, however, is now several years behind schedule. Loan S-il-PE: Water Supply and Power Engineering Project; US$8.8 million Loan of December 22, 1978; Effective Date: June 27, 1979; Closing Date: December 31, 1982. The main components of this project consisted of the feasibility study for the Mantaro water transfer scheme and a master plan for Lima's water system. The Mantaro study has been completed, and all other components are being implemented satisfactorily. - 31 - ANNEX II Page 5 of 6 Loan 1771-PE: Lower Piura Irrigation Rehabilitation Project; US$56 million Loan of February 4, 1980; Effective Date: May 28, 1980; Closing Date: December 31, 1985. Project execution is gaining momentum. The implementation of most of the Bank-financed components of the project has begun or is in the process of being started. Loan 1806-PE: Petroleum Rehabilitation Project; US$32.5 million Loan of April 28, 1980; Effective Date: September 30, 1980; Closing Date: January 31, 1983. The project got underway more slowly than expected because of the weak implementation capacity of PETROPERU. All project components, however, have now begun and execution should improve in the coming months. Loan 1812-PE: Puno Rural Development; US$15 million Loan of April 28, 1980; Effective Date: July 9, 1981; Closing Date: June 30, 1985. Although there was a delay in making this loan effective, project activities are now underway. Consultants for the extension program have been hired and irrigation system designs are being prepared. Loan 1888-PE: Bayovar Engineering and Technical Assistance Project; US$7.5 million Loan of August 21, 1980; Effective Date: December 22, 1980; Closing Date: June 30, 1983. Consultants have been contracted and the final feasibility report for the phosphate fertilizer project is being reviewed. Loan S-19-PE: SIDERPERU Technical Assistance Project; US$5.0 million Loan of December 15, 1980; Effective Date: April 16, 1981; Closing Date: June 30, 1985. A consultant's report evaluating SIDERPERU's expansion plans has been reviewed. A plan of action to deal with the findings of this report is being discussed with SIDERPERU.. Loan 1963-PE: Aviation Development Project; US$58.0 million Loan of August 19, 1981; Effective Date: January 21, 1982; Closing Date: December 31, 1986. Procurement activities for equipment have begun. Loan 1968-PE: Second Industrial Credit Project; US$60.0 million Loan of August 19, 1981; Effective Date: February 25, 1982; Closin Date: June 30, 1985. About US$10 million of this loan has thus far been committed. - 32 - ANNEX II Page 6 of 6 Loan 2018-PE: Power Engineering Project; US$25 million Loan of August 19, 1981; Effective Date: February 25, 1982; Closing Date: June 30, 1985. Final design of a number of projects included in this loan, including the Yuncan hydroelectric project, are now underway. Loan 2064-PE: Small-Scale Enterprise Project; US$26 million of Effective Date: ; Closing Date: December 31, 1985. This loan was approved by the Board on December 8, 1981. It is expected to be signed shortly. Loan 2091-PE: Eighth Highway Project; US$93 million Loan of Effective Date: ; Closing Date: June 30, 1986. This loan was approved by the Board on February 16, 1982 and is expected to be signed in the near future. Prequalification of consultants and constructors is being done. Loan 2117-PE: Oil Refinery Engineering Project; US$5.3 million Loan of Effective Date: ; Closing Date: June 30, 1985. This loan was approved by the Board on March 25, 1982. It will be signed shortly. Selection of consultants is now being done. J - 33 - ANNEX III Page 1 of 2 PERU AGRICULTURAL RESEARCH AND EXTENSION PROJECT SUPPLEMENTARY PROJECT DATA SHEET SECTION I: TIMETABLE OF KEY EVENTS (a) Time taken by country to prepare the project: 6 months (b) Project prepared by: INIPA with Bank assistance (c) First presentation to the Bank: March 1981 (d) Identification of the project: March 1981 (e) Departure of appraisal mission: October 1981 (f) Planned date of effectiveness: September 1982 SECTION II: SPECIAL BANK IMPLEMENTATION ACTIONS None SECTION III: SPECIAL CONDITIONS It has been agreed that: (a) As conditions of loan effectivess, a project manager, whose qualifications and terms and conditions of employment would be satisfactory to the Bank, would be appointed, the Engineering Planning Services Unit would be staffed in a manner satisfactory to the Bank and the Goyernment and INIPA would sign an agreement providing that the Government would make available, free of charges and repayment obligations, the corresponding proceeds of the loan and the counterpart funds required for the project (paras. 62, 63 and 66); (b) the ten project research scientists would be appointed by April 30, 1983 and the credit coordinator would be appointed by December 31, 1982 (paras. 57 and 61); (c) no research stations, additional to those now existing and to be constructed under the project in the five northern CIPAs, would be built unless justified to the satisfaction of the Bank, and--by August 31, 1983--INIPA would prepare a master plan for the future expansion of research stations in the five northern CIPAs (para. 58); - 34 - ANNEX III Page 2 of 2 (d) within five months of the appointment of the credit coordinator, a study of farm credit usage and delivery would be initiated and a cooperation agreement would be signed with the BAP providing for its participation in the study and in the coordination with INIPA of the credit program in each of the project CIPAs (para. 61); (e) all overseas scholarships and contracts for research studies and in-service training would be acceptable to the Bank; training contracts would be subject to an annual Bank/INIPA review; and the Bank would approve all institutions contracted to do research work and the terms and conditions of such contracts (paras. 57, 59 and 68); (f) the Monitoring and Evaluation Unit would be staffed in a manner satisfactory to the Bank by December 31, 1982 (para. 62); and (g) as a condition of disbursement for expenditures related to the preparation of the third irrigation rehabilitation project, the Government and INAF would enter into contractual arrangements satisfactory to the Bank (para. 65). J PERU AGRICULTURAL RESEARCH AND EXTENSION PROJECT IBRD-16012R MARCH 1982 .)\CS S~~~~~~~~~~~~~~~~~~~~~~~~~~~O CEDROS *Es ° Existing research stations 76mMBIs 5 0iiesDevelopment with the project on /AUsiNBES t - -Extension zone boundories e existing research stations i: 4z -(s ~~ CIPA boundaries > New research stations Internotional boundary Ecological zones - ""~~~~~~~~~' ~~~Coast 4 I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Sierra U//At] 7 C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~HIRA 'Forest p U <' R . A {fv'< > P I U R A * Cities '> U R A \......JS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ANINCOCIPA boundaries *Piura f K *Piura qG,HUANCABAMBA _ International boundary Ns PI/ UN RA OMONTEGRANDE \.?> {"+t ' JAENO 0BAGUA ; \ 7S"~~~ 't~^'t i 9 \:: () 7'1~ OLMOS, /IMOTUPF-O/Mo03 - r; *,' H A tS ChtOrA ; \ oA R C~~~~~~~~~~~~~~~~~~CH I CL A YO tHICLAYO~CHOTA --CH I C L.6A Y-Oc CAIM,RCA ~VISTA A CHOTA NiAMgA rIt/h; A J A MA. 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MILES O 0 40 0o 60 1oe 120 ; ; rhl pape&f4pxpdhythwwvddwoAtsttffiasSwlhArA*cilEdnra ; Qi ) ?< )> .tntREQUI,ARE UIPA jen en. .One sfhr=rweef en. .nen i enun e S ene.n eO sThe 0nnnnetnnne flnenednn.lsh 2 e on f)2 : : 0 . ;; bnoneni.ene or eOns nnde*h Sey neo unin en en, n.n enir Menl Bert end ; ONAs: eTniocree. h.. n enennn.rne| noranie,nO nnne .1 ft~~~~~~~~~~~~~~~~~ fi-f~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~i cZ n