CREDIT PROJECT PERU. June 20, 1973

Transcription

1 Public Disclosure Authorized FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Public Disclosure Authorized Public Disclosure Authorized APPRAISAL OF AGRICULTURAL CREDIT PROJECT PERU Report No. 55a-PE Public Disclosure Authorized June 20, 1973 Agriculture Projects Department Latin America and the Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or coinpleteness of the report.

2 CURRENCY EQUIVALENTS US$1 = SI S/. i = us$ S/. 1,000 = US$25.80 sl. 1,o0o,ooo = us$25,8oo WEIGHTS AND MEASURES Metric System ABBREVIATIONS BFA - Banco de Fomento Agropecuario del Pera Central Bank - Banco Central de Reserva del Pera BFA FISCAL YEAR January 1 to December 31

3 PF?U APPRAISAL OF T1-Pj AGRICULTURAL CREDIT PPOJECT Table of Contents Page No. SITDMARY ANT) CONCLTSTONS INTRODITCTION... 1 Il. BACYCR0OTJN... 1 A. General.1 B. Land Peform.3 C. Agricultural Credit. 5 III. THF PPROJECT.6 A. Defiinition.6 B. Detalled reatures.8 C. Cost Estintates and Financing. n D. Procure-ent and DisburseT'ent 12 IV. BANCO DE FOMENTO AGROPECUARIO DEL PERU (BFA). 13 V. MAPKETTNG AND SUB-BORROWqEPS' BENEFITS 19 VT. BENEFITS XNT JUSTIFICATIN.21 VTI. AGREEMENTS REACIED AND RECOMMENDATION 22 This appraisal re-port is based on the findlnp,s of a mission,.hich visited Peru in SenteTnher/October 1972 and was composed of Messrs. K. UJ. Berg, D. B. Argyle, 0. Urbina (Bank), and P. A. Crofts and B. C. Bilbo (Consttltants).

4 Table of Contents (Cont'd) ANNEXES 1. Agricultural Background 2. Land Reform and Cooperatives 3. The Livestock to be Financed litnder the Project a) Dairv b) Meat c) Animal Health 4. Annual Crop Production 5. Marketing of Products to be Financed Under the Project 6. Mechanization, Irrigation and Land Reclamation to be Financed Under the Project 7. Perennial Crops to be Financed Under the Project 8. Agro-industry to be Financed Under the Project 9. Disbursement Estinate 10. Banco de Fomento Agropecuario del Peru 11. Project Cash Flow 12. Condensed Balance Sheets (Actual and Projected) 13. Profit and Loss Accounts (Actual and Projected) 14. Producer Incomes and Financial Rate of Return of Investments Table 1 - Table 2 - Yield, Cost and Price Assumptions Investment Models and Financial Rate of Return 15. Economic Rate of Return Table 1 -- Economic Rate of Return to the Enterprises MAPS

5 PERU AGRICIUTURAL CRMDIT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises an Agricultural Credit Project for which a Bank loan of USS25 million equivalent is proposed. The loan would support a three-year lending program of the Banco de Fomento Agropecuario del Peru (BFA) for medium- and long-term ínvestments in agriculture, encompassing livestock and agro-industry to be made by small farmera, including cooperatives, and medíum size farmers. BFA, which ia government-owned, would be the borrower with Government bearing the exchange risk. ii. The Bank has made four previous loans to BFA: 105-PE in 1954, 162-PE in 1957 and 257-PE in 1960 (each for US$5 million); and 415-PE in 1965 for US$15 míllion. All four have been fulty disbursed and the first three have been fully repaid. The Bank has made four other loans fór agricultural development in Peru: US$1.3 million in PY 1953 (67-PE) and US$1.7 million in FY 1954 (98-PE) for agricultural machinery; and two loans for irrigation: US$18 million in FY 1955 (114-PE) and US$6.5 millien net of cancellation in FY 1965 (418-PE). All but the last have been fully disbursed. iii. Peru's agricultural sector produced 14% of the country's GOP in 1970, a relative decline from ita ahare of 20% in During the same period, the proportion of the labor force employed in agriculture declined from 53% to 48%. During the last two decades, agricultural production grew by less than 2% annually as compared to 5% of the country' a ecenomy growth and 3% of population grawth. The relative stagnation in agricultural production has reduced Peru's favorable agricultural balance of payments. Excluding fishmeal, agricultural exports exceeded imports by US$100 millíon in 1963 but by 1971 this surplus had been reduced te US$16 míllion. Sugar, cotton and coffee dominate agricultural exports, while wheat, meat and dairy products are the main agricultural preducts imperted. e iv. The main problems encountered are: (i) the demographic Dressure on land actually cultivated which, at about 0.38 ha per rural person and 0.18 ha per ínhabitant, is the highest in Latin America; (ii) the fact, that the average production per worker in agriculture is less than one-fifth the average output per worker in other sectors; (lii) regional disparities, particularly the subsistence farming un the Sierra as compared to high productívity in irrigated coastal valleys; (iv) the high cost of land development, whether for irrigation (Coast) or for settlement (Selva); (v) under-and unemployment in the rural sector; the mal-distrlbution of land before the land reform law of 1969 was introduced; (vi) presaure to increase food imports because the domestic demand for foodstuff ís increaslng faster than supply, followed by a deterloration in the agricultural balance of trade: and (vii) the uncertainty following iinmediately after the agrarian reform law of 1969 was announced.

6 - ii - v. Although land reform has been an objective since the early 1960's it is only since 1969 that Govermment has introduced measures that change ownership of land fundamentally. Before 1969, about 84% of land was concentrated in only 1.3% of holdings. Reforms are now underway, however, to transfer large portions of agricultural land to cooperative ownership but about three-fourths is still in the hands of individual farmers, mostly of small and medium size. Despite considerable changes in the agrícultural structure, output has remained stable during the last three years and Government ís trying to reduce imports by encouraging investments in the agricultural sector. The proposed Project would assist this policy. vi. The National Development Plan places particular emphasis on agrlcultural development, particularly: (i) the implementation of the land reform law of 1969; (íi) encouraging cooperatives and settlement of a maxímum number of families on the land and the promotion of worker participation in management so as to achieve higher o01tput, higher rural living standards and a more equitable distribution of rural incomes; (iii) the promotion of specific categories of products, with emphasis on import substitution wherever practicable; and (iv) the reduction in the level of unemployment in the rural sector from 31% in 1970 to 23% in ' vii. BFA is virtually the only institutional source for lending to the agricultural sector, being responsible for about 80% of such lending. It, hovever, has been very short of medium and long-term lending funds. In fact, during the first half of 1972, 96% of its lending was on short term. Under the Project, BFA would finance medium- and long-tere tments in inves addition to those supported by a US$12 million IDB loan for 70 newly formed E cooperatives. BFA also handles Government trust funds, mainly for small farmers and cooperatives, but the risk in these operations is borne by the Government, with the Ministry of Agriculture carrying out -he loan appraisal. viii. Under the Project, BFA would make about 2,500 loans to smiall farmers, including cooperatives, and medium-size farmers for investnents in livestock farming, on-farm development for mixed farming, perennial crops and agro-industrial development. Total Project cost would amount to US$41.7 million equivalent. Sub-borrowers would contribute 20% and Government would provide BFA with another 20% in the form of a capital contribution. The proposed loan, equivalent to 60% of Project cost, would cover the balance, including the estimated foreign exchange component (46%) and some local currency (14%). ix. Lending funds would be earmarked to serve both cooperatives and individual farmers in equal portions. The effective interest rate charged to cooperatives would be 9% per annum during the first 15 months of Project execution and 10% thereafter, or another rate agreed upon by BFA and the Bank, and to individual farmers 13%. Loan terma would range fromi five to 15 years. x. Procurement would be through normal comnercial channels, since the range of items to be financed under the Project is very diversely spread

7 - iii - over a four-year investment period and not suitable for bulk procurement. A number of foreign firms are represented, assuring keen coi.petition, and supplles are adequate on the local market and prices competitive. xi. The financial rates of return are estimated to range from 19 to 39%. The overall economic rate of return is estimated at about 26%. During negotiations appropriate assistances were ohtained, providing a suitable basis for a Bank loan of US$25 míllíon for a term of 18 years, including a five-year grace períod.

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9 PERU AGRICULTURAL CREDTT PROJECT I. INTRODUCTION 1.01 Two Bank preparation missions, consisting of Messrs. P. Courbois and J. Peberdy, and Messrs. P. Courbois and G. Luhman, visited Peru in May 1971 and in March 1972 to help complete preparation of an Agricultural Credit Project for investments by individual farmers and cooperatives in livestock development, minor irrigation and on-farm development, mechanization, orchards and processing facilities. The Project report was finally prepared by the Banco de Fomerto Agropecuario del Peru (BFA), which would be the borrower, with Governmen.t as the guarantor. This report was the basis for appraisal following the loan application submitted by the Ministry of Economy and Finance in August A loan of US$25 million equivalent is recommended Despite recent slow development of the agricultural sector, growth prospects are good. Governmrent is encouraging investients in agriculture through technical and financial assistance and, lately, through an improved price policy but BFA, virtually the only institutional source for medium- and long-term loans to agriculture, has been short of lending funds for these terns. The proposed Project has been designed to help correct this deficiency The Bank has made four previous loans to BFA: 105-PE in 1954, 162-PE in 1957 and 257-PE in 1960 (each for US$5 million), and 415-PE in 1965 for US$15 million. All four loans have been fully disbursed and the first three have been fully repaid. The Bank has made four other loans for agricultural development in Peru: USt1.3 million in FY 1953 (67-PE) and US$1.7 million in FY 1954 (98-PFE) for agricultural machinery; and two loans for irrigation: US$18 million in FY 1955 (114-PE) and US$6.5 million net of cancellation in FY 1965 (418-PE). All but the latter have been fully disbursed This report is based on the findings of an appraisal mission to Pertu in September/October 1972 consisting of Vessrs. K. W. Berg, D. B. Argyle, 0. Urbina (Bank), and R. A. Crofts and B. C. Bilbo (Consultants). II. BACKGROUND A. General Area and Population 2.01 Peru has an area of some 1.3 million km2 (Maps) and a population of about 14.5 million. Of the total land area, only about 2% or 2.5 mnillion ha

10 -2- is under cultivation (including fallow lands). Another estimated 21% or 27 míllaon ha is declared as natural pasture but large parts of this area are being used only in a very extensíve manner. About three-quarters of the country is occupied by mountains (up to 6,770 m), desert and undeveloped jungle. In the coastal zone, where most of Peru's intensive agriculture is situated, production depends ccmpletely on irrigation. There are 52 valleys in which some 650,000 ha (5% of total coastal area) are irrigated to produce mainly cotton, sugarcane, maize and rice. However, only about 30% of this land always receives adequate irrlgation water; a further 40% receives sufficient water in an average year, while the remainíng 30% receives adequate irrigation only in years of abundant rainfall. Of the total livestock produiction, over 60% is accounted for in the Sierra, achieved mostly under extensive conditions on unímproved natural pastures, and over 30% comeé from intensive operations of dairy and fattening units on the coast. Good prosnects for increasing livestock production exist in the Selva, but high clearance, settlement and marketing costs, the latter caused bv difficult communications, are obstacles to its development. Agriculture in the Economy 2.02 About half of the country's population lives in rural areas and saoe 30% of the total economically active population is either unemployed or underemployed. The contribution of agriculture (excluding fisheries) to the GDP declined from 20% in 1960 to about 14% Ixn While Peru's population during the last two decades has been growíng annually by about 3%, the e country's economic growth has averaged 5% as compared to only 1% to 2% in the agriculture sector. Food imports have, therefore, been increasing, reaching US$144 million in In the same year agricultural exports, excluding fishmeal, amounted to USS160 míllaon. The latter have, on average, remained on the same level during the period Crops occupying more than 100,000 ha are maize, potatoes, barley, cotton, rice, coffee and wheat. Another irportant crop is sugarcane. The chree main agricultural export products are sugar, cotton and coffee, while the major agricultural irports are wheat, meat and dairy products. Trends in agricultural production, hovever, indicate that the gap between food production and internal denand is widening. It has been estimated that the average annual rate of increase in the demand for food over the next several years will be about This would likely result in incremental food imports of about US$15 to 20 million annually, with consequential effects on the balance of payments. Government development plans, therefore, aim at a selective increase in production to maintain a positive agricultural balance of payments under a supervised investment progran, backed by credit made available through the BFA. To achieve these targets, Government intends to increase productivity at the farm level through a fundamental change in land tenure which will also bring about an improvement in income distribution. These changes are expected to encourage new investments. The proposed Project supports these objectives (for more details, see Annex 1).

11 -3- B. Land Reform 2.04 The agricultural sector in Peru is undergoing a substantial change. In 1961, 84% of the land was concentrated in only 1.3% of the total number of holdings. To rectify this, two agrarian reform laws were passed, one in 1964, which was solely a land distribution measure, and the other in The former was implemented in only four provinces in the Sierra region -- Cuzco, Puno, Pasco and Junin -- and resulted in the expropriation of 1.5 million ha of 795 inefficiently managed large estates (latifundios), together with some 270,000 head of livestock. Land was then reallocated to about 20,000 family holdings. Although no attempt was made to implement the maximum retainable limits laid down by the law for different categories of land in the coastal region, some medium-sized farmers took steps to bring their holdings within these limits (for a more detailed analysis, see Annex 2) The new agrarian reform law introduced in June 1969 is a much more comprehensive measure and only since its implementation have rapid changes come about. Definitions of maximum land holdings, valuation and compensation payments for properties expropriated under the new law are much more striet than under the law of Implementation has been progressively extended so that it now covers virtually all the coastal and Sierra regions and a separate law for the Selva is expected to be promulgated shortly. In addition to the expropriation of latifundios and land consolidation of very small holdings (minifundios), legal justification for expropriation is given by abandonment or inefficient management and the existence of anti-social or feudatory land use systems or of unlawful labor conditions The maximum owmer-operated land holdings permitted are: (a) Coastal Region Arable Farms: 150 ha irrigated or 300 ha non-irrigated; (b) Coastal Livestock Farms: 1,500 ha natural pasture; (c) Sierra Region Arable Farms: 15 to 55 ha irrigated according to district or 30 to 110 ha non-irrigated according to distriet; and (d) Sierra Region Livestock Farms:. area necessary to support 5,000 head of sheep at shearing time.

12 -4- In all categoríes, these líints may be substantially increased (provided the publlc interest allows) where wages paid are at least 10% higher than the legal minirnum rates and profit is shared with workers. On the other hand, the limits are reduced or cancelled when labor regulations have not been observed. Compensation for expropriated property ls paid partly in cash (livestock and machinery) and in bon<s As of August 31, 1972, about 4.3 million ha had been expropriated cornprising 2,200 units; otut of this, 2.L million ha had been distributed to some 102,000 families. The amount of land exdropriated represents about one-third of that declared 'expropriable` under present plans (total 12.7 million ha) The following table shows a brealcdown of land (including agricultural and non-agricultural) declared exnropriable and progress as of August 31, 1972: Expropriated Expropriable August 31, 1972 ('00n ha) (1) ('00n ha) (%) Irrigated 79h Non--irrigated 1, Pastures 6, , Other 3, TOTAL 12, Present plans call for expropriating a total of 9.8 million ha hy the end of 1075, consisting of about 9,500 farm units (in 1961, there were about 840,000 farrns in Peru, covering a total of 17.7 mnillion ha). This compares with a total of about 30 million ha of cultivated and nasture land in Peru Most of the land distributed under the land reforn has been allocated to cooperatives of various kinds. Ahout 2.0 million ha lis in the hands of 274 production cooneratl.ves, comnunal cooperatives and agricultural societies of social interest (Annex 2). Another 0.3 million ha has been distributed to some 25,000 individual farmers. It is estinated that Government will form over the ne::t ttlree years about 50 new productíon cooneratives annually in which each rmer'her's "share" of land will be about 10 ha. In addition, there are 227 cooperatives vhich were in existence before 1969 and which are nostly service cooperatives. Many service cooperatives were formed hefore 1969 being comnosed nostly of medil'm-size farmers. There were several service cooperatives that lacked leadership and proper organization. They have disappeared over the years. Those which have survived are worklng satisfactorily. Newly formed cooperatives receive considerable Government assistance particularly in management and accountina training, and while operational results are lirnited because of their recent formation, there are encouraging signs in regard to producti.vity.

13 These new cooperative organizations, although intended to be selfgoverning, operate under a comprehensive administrative structure that controls their planning and operations to promote achievement of production targets laid down in the National Development Plan. The aim is to settle the maximum number of families on expropriated land in viable units that will improve agricultutral productivity and so permit increases in rural living standards. So far, Governrent has taken a pragmatic approach in executing land reform, being guided by the desire to achieve social justice, while at the same time maintaining or improvin- production. Consequently, production has not declined and, in some cases it has increased. On the other hand, the speed of land reform is also slowing down because of that. Cooperatives play already an important role in Peru's agricultural sector and this is increasing. In order to provide them with sufficient and adequately trained staff, GovernTnent has been setting up schools to train management staff for the cooperative sector (para 2.09), but there is still a danger of a shortage of qualified personnel as the land reform progresses. Government is aware of this problem and gives high priority to proper training. At present it receives technical assistance fron bilateral sources, UINDP and under a US$12 million ITB-loan signed in June These training prograns are considered satisfactory. e C. Agricultural Credit 2.11 The Banco Central de Reserva del Peru (Central Bank) has the major responsibilitv for controlling credit and for providing general direction of the banking svstem, while the Superintendencia de Bancos (Superintendency of Banks) is responsible for ensuring that the banking system and individual banks comply with regulations. There are a total of 21 commercial banks which are mainly concerned with commerce and general lending. In addition, the Banco de la Nacion (Bank of the Nation) acts as banker for the Government and five specialized governmient-owned banks assist in the development of agriculture, industry, mining and housing. The Banco de Fomento Agropecuario del Peru (BFA) (Chapter IV) specifically serves in agricultural and forestry developnent. It is well represented througbout Peru and provides over 80% of institutional agricultural credit, whiich totals about S/. 8,000 million (USS207 million) loans outstanding; the remaining amount comes from the commercial banks. Agricllítural credit represents about 20% of total institutional credit -- a percentage which has been fairly constant over the past five years. Despite the growth in agricultural loans from SI. 5,000 to SI. 8,000 million (US$ million) over this period, however, there is still a shortage of lending funds -- particularly long-term. In recent years, BFA's predominance in the agricultuire field has increased and it is probable that this trend will continue as manv former clients of the commercial banks have heen expropriated and the cooperatives replacing them will deal with BFA, which can provide loans at preferential interest rates. In 1971, one-third of BFA's new loans were made to cooperatives and this percentage is expected to increase.

14 BPA provides nearly all the medium- and long-term lending to agriculture in Peru and the bulk of the short-term lending but its ability to make long-term loans has been greatly reduced over the last four to five years because of lack of suitable resources. The commercial banks have provided mainly short-term loans for larger production units and agro-industries. BFA's lending includes Governnent funds (mainly from external sources) held by BFA as trust funds. In addition, BFA received in June 1972 a US$12 million loan from IDB to finance investments in about 70 newly formed cooperatives. Companies engaged in sale of machínery and other major inputs provide some additional credit Rates of interest on loans from commercial banks are normally 14%. BFA's interest rates are low and range from 7% for loans below S/. 50,000 (USS1,300) to 13% for loans above SI. 300,000 (US$8,000), based on the principle of assisting small farmers and encouraging the production of certain food crops. Interest rates to cooperatives are usually 7% to 9% and are derived by divíding the total amount of the loan by the number of members in the cooperative and then using this figure to establish the relative interest rate normally charged for individual farmers. The Central Bank's discount rate for commercial bank loans is 9-1/2%; however, agro-industrial projects receives preferential discount rates of 5% and 7%. However, BFA's preferential discount rate is only 2% and Central Bank funds are an important part of its short-term resources. Interest rate ceiling on fixed deposits is 11% while savings deposits normally receive 7%. Deposits with housing societies normally pay 10%. III. THE PROJECT A. Definition 3.01 The Project would be part of BFA's lending program, over a threeyear cormmitment period. It would help finance investments in livestock, on-farm develodment including mínor irrigation, drainage and storage, mechanization, orchards and related processing facilities on loan terns between five and 15 years. Investments would be made mainly by small farmers including those grouped in cooperatives and the balance by medium-size farmers. The Project would finance throughout the country: (i) the development of livestock farming, i.e., beef and dairy cattle, sheep and alpacas (43% of total Project investment); (íi) on-farm development for annual crop production including alfalfa (25%); (iíi) perennial crops (12%); and (iv) agroindustrial development including pigs and poultry (20%). BFA would be the borrower and would administer the Project. Total Project cost is estimated at SI. 1,614 million (US$41.7 million) and the Bank's contribution would be US$25 million, or 60%, covering the US$19 million estimated foreign exchange cost (46%) and US$6 million local currency (14%), which is justified on country grounds, while Government and beneficieries would each contribute US$8. j million (20%) equivalent. The contribution of the latter is considered reasonable.

15 The following table shows the major investments expected to be made over the three-year cormitment period: Typical Size Number of Loans Total Total Investment Total of Sub-prolect Made in Year Loans Area per Invest- (ha) (ha) Sub-project ment --- in S/. ' Dairy ,500 22, ,500 Beef/Sheep Llamas/ Alpacas ,000 1, ,400 PigsI Poultry , ,060 Annual crop and alfalfa production ,500 8, ,250 Perennial Crops , ,400 * Agro-industry and Other Investments Not Included Above , ,40t Total ,194 2, ,614,010 e 3.03 About 2,500 small- and medium-size farrners and cooperatives wjould participate in the Project. A large portion of Project investments would be made in the coastal region xwhere Peru's mnost intensive agriculture is situated, but consi derable investments, partictilarly for beef cattle production, would also be spiiported in the Selva and Sierra. The nuimber of loans under the particular investnent categories mentioned above could var' considerably depending whether large sub-loans were made to cooperatives for such investments or not. It is expected that most sub-loans for pigs, poultry and agroindustrial investments would be made to cooperatives. Also, some sub-loans to cooperatives would be made for dairy and beef production. On the other hand, both cooperatives and individual farmers would make investments for annual crop production including alfalfa, which includes mainly on-farm irrigation, draina-e and mechanization. Sub-loans for perennial crops are expected to be nade principally to individual farmers. Of the total project funds, 50% would be earmarked for lndividual farmers and 50%' for cooperatives. The estimated number of loans is based on the separate consideration of each

16 investment category, but in practice investments would likely be in a combination of several integrated items. The separation into five illustrative types of investments has been made to test the financial return of each major production activity on its own merits The composition and size of the proposed Project are based on: (i) kind and size of sub-loans financed by BFA In the past; (ii) BFA's expected staff capacity to process and supervise sub-loans; and (iii) the estinated credit demand by both individual farmers and cooperatives for investments not expected to be financed under Government's trust funds, for which BFA carríes no risk, or under an IDB loan which finances 70 large cooperatives. B. Detailed Features Pasture Establishment and Improvenent for Milk Production 3.05 Existing dairy farmera, mostly small farmers (about 15 ha) and some cooperatives would get long-term loans for expanding and improving their operations. It is difficult to estimate the size of cooperatives for this kind of investment, but the largest amount of loans are expected to go to srmall farmers, particularly in the Sierra. In total, about 11,000 ha of new pasture would be established, following ploughing of land previously tised extensively as natural pasture. Another 11,500 ha would be improved wíthout ploughing by seeding, cleaning and fertilization. This would involve about 1,200 sub-loans, including some large loans to cooperatives. Investments would cover: pasture development (21% of investment); breeding stock (46%); machinery (7%); buildings (15%); and fences and water supply (11%). The dairy herd would be based on Holstein and Brown Swiss cattle, which have heen raised in Peru, yielding about 3,700 kg annually by year 4 after the investment. Average investment per sub-borrower is estimated to be about US$4,000 equivalent (Annex 3). Pasture EstablishTnent and ImProvement for Beef Production 3.06 Under this category, the expansíon of beef production through pasture establishment and improvement would be financed.!edium-size farmers (about 110 ha and 220 head of cattle) would clear about 50 ha of jungle or other unused land and plant new pasture and also improve about 6(0 ha of existing pasture. As in the case of dairy projects, some cooperatives would also participate. Investments would take place mainly in the Sierra (highlands) and Selva (jungle) and would involve, in total, about 300 to 400 sub-loans and some 44,000 ha of pasture. Investoents would cover: pasture developrient (23% of investment), breeding stock (32%), machinery (28%), buildings (7%), and fences and water supply (10%). In addition, the Project would also finance some similar investments for sheep, llama and alpaca operations which, however, are expected to be on a much more extensive basis. Average investrnent per sub-borrower is estimated to be about US$30,000 equivalent. e

17 -9- Pig Production 3.07 The Project would also finance investments for pig production, to be undertaken mostly by large sugar cooperatives. About 10 large subloans would be made for buildings (37% of investment), breeding stock (23%), feed (20%), labor and veterinary costs (10%) and machinery (10%). In total, this would provide facilities for a herd of some 3,200 breeding sows and about 40,000 fattening stock. In addition, the Project would finance some similar investments for poultry. Investment cost per unit is estimated to be about US$330,000 equivalent. Annual Crop Production and Alfalfa 3.08 Sub-loans would be made for developing about 22,500 ha through on-farm irrigation, drainage, land levelling and mechanization. About 300 to 400 small- and medium-size farmers and some 20 cooperatives are expected to develop land which haye not been used intensively because of drainage and irrigation problemrs, and shortage of mechanization equipment. Most of the investments would be made in the northern coastal area where irrigation and subsequent drainage are essential to assure good yields. Crops to be grown are mainly cotton, sorghum, maize and potatoes. Investments would include: machinery (67% of investtnent), land levelling (18%), drainage construction (7%) and minor irrigation (8%). Investment costs are estimated to be equivalent to about US$6,000 for small farmers, US$20,000 for medium-size farmers and up to US$200,000 for cooperatives (Annexes 4 to 6). Perennial Crops 3.09 Mostly small- and medium-size farmers would make investments in perennial crops, which would include mainly: mango, banana, pineapple, avocado, citrus, olive, grape and asparagus. Under the Project sub-borrowers would each establish perennial crops on about 10 ha which has previously been used for annual crops. Sub-project costs would cover: planting (30% of investment), labor (39%), machinery and equipment (9%), land preparation (10%) and fertilizer and pesticides (12%). It is expected that 6n0 such loans would be made covering a total of 6,000 ha. Average investment costs are estimated to amount to about US$8,000 equivalent per sub-borrower (Annex 7). Agro-industrial Investments 3.10 Because of increasing production from commercial farming, there is a need for investnents in processing facilities for agricultural products. It is expected that sub-projects would be prepared for lemon oíl and olive oil extraction plants, milk pasteurization plants, feed mills, sausagemaking plants and cold and grain stores. No models have been developed for agro-industrial investments because the variations in types make meaningful presentation difficult. Since BFA has a very limited experience in financing such investments, all sub-loans under this category, including any other agricultural investments not mentioned above, would be submitted to

18 Bank for prior approval regardless of size (para 4.14 and Annex 8). Investment costs per individual sub-borrower would vary considerably, averaging about TUS$160,000 equivalent. C. Cost Estimates and Financing Cost Estimates 3.11 Total Project cost is estimated at SI. 1,614 million (1TS$41.7 million), of v hich 46Y, or SI. 735 million (US.<19.0 million), would be foreign exchange. Cost estimates and foreie,n exchange requirenents, based on the estimated denand for long-term investments, are: Foreign Exchange Lending Categories Local Foreign Total Local Foreign Total l (S--. M) - - (US 1. Livestock other than Pigs and Poultry Annual Crop and Alfalfa production Perennial Crops Agro-industry, Pigs and Poultryv and Other Investments Not Included Above Total Project Cost: Cost estimates include a 10% allowance for cost increases. The following investment iten-s would be involved: Livestock Annual Agro- Other than pigs Crops and Perennial Industry Total and poultry Alfalfa Crops Pigs.Poultrv (in SI. Million) Land Preparation and Planting Buildings Machinery and Equipment Irrigation and Drainage Facllties Livestock and Planting materinl 273 _ Total: ,614

19 Excluded from Project financing would be cooperatives receiving loans under the IDB project and, unless the Bank agrees otherwise, any investment for sugar production by cooperatives. Financing for the latter has not been requested by BFA because sugar cooperatives have suffícient reserves for self-financing and would need BFA leans only for their diversification plans. Alse excluded from financing would be sugar refining. During negotiations assurances were obtained en these mat:ters. Financing 3.13 Of the total Project cost (S/. 1,614 million or US$41.7 million), 20% would be financed by sub-borrowers, which includes the contribution of family labor (S/. 323 million); BFA would contribute 20% from its own resources (S/. 323 million) which it would receive from Government in the form of a capital contribution to BFA. An initial SI. 100 million would be paid into the Project account. In addition SI. 123 and 100 million would be paid within 12 and 24 months of loan effectiveness. During negotiations, assurances were obtained on these matters. The former would be a condition of effectiveness. The Bank loan would cover the balance, or 60% (S/. 968 million or Us$25.0 million), which would be US$6 million more than the estimated foreign exchange component (46%). This is justified on country grounds. The financing plans for individual components of the Project are summarized in the following table: Sub- BFA/ Total Project Lending Categories Borrowers Governnent Bank Cost (in SI. Million) Lívestock other than Pigs and Poultry Annual Crops production and Alfalfa Perennial Crops Agro-industry, Pigs and Poultry and Other Investments not Included Above Total: ,614 % of Total: BFA would be the borrower and Government would bear the foreign exchange risk. Assurance were obtained on this matter. The Bank loan would be at the standard interest rate and repayable over a períod of 18 years, including five years of grace. SWith sub-loans being made over a three--year period, the last repayment to BFA would be mnade 18 years after the start of the Project. The Project cash flow projections indicate that repayment of the Bank loan, as indicated above, would be appropriate (Annex 11).

20 D. Procurernent and Disbursement Procurement 3.15 The items to be financed for the approximately 2,000 to 3,000 subborrowers throughout Peru over the four-year investment period, are varied and would not be suitable for bulk procurermenthrough international competitive bidding. In most cases, land development and construction of farm buildings would be undertaken by the sub-borrowers themselves or by small local contractors. Goods required for such constructions, including planting material, livestock,, machinery and equipment would be obtained through existing commercial channels, which are satisfactory. International suppliers of the imported items are adequately represented in Peru, competition is keen and services are reasonable In recent years, Government has imposed import ceilings, which are adjusted quarterly in the light of demand and available funds. This condition has had little effect on tractor and machinery dealers, but, with the expected rise in demand for such goods, there might be some shortage from time to time for both tractors and machinery, including spare parts. Tractors and implements are exempted from custom duties and supply is satisfactory. Government, in early 1971, invited tenders for a tractor assembly plant, and the award has finally been made in late This would be the first tractor manufacturing plant within the Andean Group of which Peru is a member. However, it is estímated that production of such a plant would not get underway before 36 months after the award was made. Therefore, assurances were obtained from Government that it would ensure that the supply of tractors and spare parts therefor would be adequate and of reasonable prices for the investments under the Project. Disbursement 3.17 With BFA's conmitments extending over three years, its disbursements would be spread over about four years and Bank disbursement is expected to cover four and a half years. The Bank disbursements would be made for 75% of amounts disbursed by BFA for individual loans against a certificate of expenditure. The documentation for such expenditures would not be submitted to the Bank for review, but would be retained by BFA and made avaílable for inspection by the Bank during the course of supervision missions. Individual loans would represent up to 80% of the new investment financed. The Bank would disburse up to an amount specified for each category. In a-dtt-ion, 50% of the Bank loan amount would be earmarked for individual farmers and 50% for production cooperatives and service cooperatives. This takes into account the grow- _ng importance of cooperatives presently occupying 25% of agricultural lands and benefitting from a US$12 miulion IDB loan (para. 6.01). Bank disbursements would thus be the equivalent of: SI. 416 million for livestock other than pigs and poultry; S/. 242 million for investment in annual crop and alfalfa production; SI. 116 million for perennial crops; and SI. 194 million for agroindustrial investnents, pigs and poultry and others not included above. A

21 schedule of estimated Bank disbursetment given in Annex 9. In the event the expenditures under any category provided for should decrease, the amount of the loan allocated to such category and no longer required could, at the request of the horrower, be reallocated to another category. IV. BANCO DE FOHENTO AGMOPECUTARTO DEL PERU (BFA) General 4.01 The Banco de Formento Agropecuario del Peru (BFA) is a Government owned agricultural credit and developnent institution which was established in 1952 as a successor of the Banco Agrícola del Peru established in It provides over 80% of institutional credit to the agricultural sector. Additionally, BTA has a marketing monopoly on natural rubber and jute and is also the trustee for Agrarian Reforn Bonds on which it incurs no risk. A new basic law governing the BFA was enacted in 1968 but since then its status and operations have been affected by the Agrarian Reform Law, which includes directives on thc broad credit policies to be followed by RFA. Emphasis is to be given to cooperative organizations and they are to receive priority for credit in a situation where funds are limited. A new BWA law under preparation is expected to incorporate these modifications. BFA is responsible to the Ministry of Economy and Finance and hv law coordinates íts credit policies with the Ministry of Agriculture and the Comnittee of Governrment Credit Policy. (BFA is described in greater detail in Annex 10.) Resources 4.02 The resources of BPA have more than doubled over the last five years and amounted to S/. 8,786 millaon (TTS$226 níllion) at December 31, Paid-up capital (authorized capital us S/. 10,000 million (US$258 million)) comprised S/. 1,663 million (USW43 nillion), an increase of 120% over the last four years, and reserves were SI. 124 million. Other major resources included: Central Bank advances of SI. 1,295 million (US$33.5 million) provided at concessionary discount rate of 2%; current deposits, S/. 1,115 million (T1SS29 million), which are mainly excess funds of the cotmercial banks; provisions SI. 1,081 million (US127.9 million); and an IBRD loan, S/. 477 million (TJSS12.3 mitllion) Use of Resources; Lending Operations. BFA's outstanding loans fron its own funds (excluding trust funds) increased sharnly from just over S/. 3,000 mtlllion (UJS$112 million) 1/ in 1966 to S/. 6,son Tillion (US$168 million) in 1971 (Annex 10, Table 1). However, when viewed against inflation and hig,h overdues, BFA's annual lending volume in real terms has increased at e 1/ Calculated at exchange rate at time of consideration.

22 only a moderate rate. New long- and medium-term loans granted during 1966 were S/. 250 million (ITS$9.3 million) and irtcreased to only SI. 300 million (US 7.6f million) in 1971, actually a decrease in real terms, reflecting BFA's íack of long-term resources since IBRD loan funds were fully drawn in During the first six months of 1972, BFA wias able to make only 4% of its new loans on medium- and long-term, while 96% was on short term. New shortterm loans, however, rose fromi S/. 1,780 million (USS66.4 million) in 1966 to SI. 5,000 million (US$129 minlion) in 1971 and BFA is able to meet most requests for such borrowings. Increased access to Central Bank funds has been a major factor in this Besides the lending operations from its own resources, BFA administers the credit aspects of Government trust funds for the agricultural sector. For this, BFA receives in most cases a fee of 6% for these services. These funds are extended on agreed rates to stirulate activities under special Government policies. Outstandíng loans from trust funds for whích BFA is only a fiscal agent (the Government appraises and approves loans and covers the risk) rose from SI. 307 million (US$11.5 million) in September 1966 to SI. 1,332 million (US$34.3 million) at December 31, Of this amount, SI. 857 million (US$22.1 million) was for long-term and S/. 475 million (US$12.3 miliíon) for short-term. BFA also acts as the channel for payment of Agrarian Reform Bonds which takes limited time but helps BFA in the collection of some old debts (para. 2.06) Non-Banking Operations. BFA's non-banking activities mainly concern a monopoly on the purchase of wild rubber and import of natural rubber. Other activities include purchase of jute. Over the past several years, however, BFA has made little profit or loss on these operations. Total volume of purchase was about SI. 200 million (UJS85.2 million) in 1971, resulting in a deficit of S/. 3 militon (US$80,000). In earlier years, there was a similar volume producing either a small surplus or deficit. One of BFA's interests, the Fundo Iberia, a large rubber plantation and agency in a remote part of the Selva, has been highly unprofitable for many years. In 1971 losses were about SI million (US$450,000), a figure similar to those recorded for prevíous years. BFA has for a number of years been trying to get ríd of the Fundo Iberia. At present, a bill is awaiting cabinet consideration for its removal from BFA to Governnent. During negotiatíons assurances were obtained from Government that it would take over the Fundo Iberia and reimburse BFA for the losses it sustains until this has talcen place. Financial Situation 4.06 BFA has been making only snall surpluses for a number of years (Annexes 12 to 13). While BFA lends at fairly low interest rates, its cost of resources is also very law, 1.2% of all resources, thus allowing a spread of about 7% on its loan portfo7!o, which is high by most standards. M4ost of thls spread is taken up in operating costs, TYhich equal about 5% of the loan portfolio, and allowances for provisíons, mainly bad debts, equal to about 2% of the loan portfolio. Income is adversely affected by arrears of interest, e.g., in 1971 S/. 98 million (USS2.5 million), or 1Si%' of interest due was not e

23 collected. In future years BFA, with an increased loan portfolio and improved efficiency is expected to make modest surpluses. Annexes 11 to 13 illustrate the expected results from the proposed loan and other sources BFA has a satisfactory liquidíty position -- current assets (i.e., lees than 12 months) excludíng provisíons for bad debts and trust funds were about SI. 4,100 millon (US$115 míllíon) as compared to corresponding líabílities of about S/. 3,300 million (US$93 million). Its debt equity ratio of 2.4:1 is fairly low and reflects BFA's limitation on borrowing except when funds are avaílable at very low interest rates. With low on-lending rates (para 2.13) for much of its lending, fairly high overheads and large provisions agaínst bad debts, BFA had to keep its financíal costs down to prevent losses Recovery of loans by BFA has been a problem for miany years. Overdues in the mid 1960's were about 30%; they declined to about 20% in 1967 and subsequently increased to about the present level (27% at June 30, 1972), which has been faírly constant for the past three years. Reasons for this increase include- the effects of Agrarian Reform which has resulted in many larger farmers and sharefarmers leaving farming, sometimnes without full payment of debts; firmer BFA policies with regard to recordíng of debts; non write-off of old debts; natural disasters; Government requíring BFA to defer payment in certain areas because of natural disasters; and BFA branch managers giving short-term loans for long-term purposes to overcome shortage of longterm funds. BFA's provision for bad debts is about 40% of overdues and 11% of the total portfolio. These are considered to be a realistic estimate of uncollectibles Three years ago BFA established a special Overdues Department, reporting to senior management, to improve collections and nany large and medium overdues are now tnder its control. VJhíle these constitute only 1,200 (5%) of the 29,000 loans overdue at SeDtember 30, 1972, they include about 45% of the total mnount overdue and about 50% of the amount overdue by more than nine months. The Overdues Departnent has been giving priority to the larger overdues to have a maxiítim fmpact and is progressively reviewing loans and either taking legal action, agreeing to a rearrangenent (debt still remaains as overdue) or recommending a write-off. Although friproving, the present rate of progress is slow and nepds to be accelerated. I T nder the recently approved InB loan to BFA for on-lending to cooperatives, RFA agreed to reduce overdues to 147 by June This halving of the present level of overdues will require a major effort by BFA and an increased emphasi.s on loan collection and wríte-off. This ls likely to apply particularly to the 24,000 overdues of small loans which are under the control of branches. With the conditions imposed by the IDB loan, there ls limited scope for other requirements. However, during negotiations an assurance was obtained that BFA by December 1974, would have fully reviewed all loans overdue as at DeceTnber 31, 1971 (a total of 16,On0 amounting to SI. 950 million (T T SA25 million)) and after reviewing the results with the Bank elther write them off, rearrange on a satisfactory basis or put under legal action. This would ensure that a revíew of the many old overdues had been or would be corpleted.

24 - les - Organization and Management 4.10 BFA's highest authority is its Board, which consists of four no"'inces of the Ministry of Finance and fouir nominees of the Ministry of Agriculture. An Executive Conmittee comoosed of the President of BFA,. two directors and the General Manager handles all matters entrusted to it by the Board. The Chairman of the Board is the President, who is a full-time employee of the BFA; he has a key role in matters of general policy. The General Manager is responsible for the general operations of BFA and is appointed by the Board. He is assisted by a Central Manager (Senior Credit Manager) and department managers in charge of: two Credit Departments, each responsible for credit operations for approximately half the country; Finance, handling external transactions, deposits and commercial activities (e.g. rubber); Planning and Economic Studies, responsible for planning, and preparation of requests for external aid; and Technical Development. A number of sub-managers responsible for Debt Collection, Trust Funds and Internal Audit report directly to senior management. BFA has wide coverage in Peru, with 14 seni-auitonomous branches controlling a further 42 agencies, which have functions similar to those of the branches, and 46 inspections which receive and prepare loan applications for consideration by agencies and branches. They are well equipped to handle the increased lending volume due to the project and their authority to approve loans would be raised (para 4.14) Under a previous Bank loan, BFA some seven years ago underwent a reorganization with the assistance of a French consulting finm. It mainly strengthened the accounts and separated the banking activities from the nonbanking activities, but the problems BFA has been encountering since 1968 are rising staff costs while avaílable mediun- and long-term lending funds have been inadequate. This situation led to a reduction of branch authority for medium- and long-term loans and gradual centralization to the Lima head office. lanagement is aware of the problem and with additional funds now available from Government and under those that would be supplied by the proposed Bank loan, steady improvements can be expected. Present staff totals 2,186, including 247 professional agricultural specialists. Staff numbers have expanded quite sharply in recent years, but despite a substantial expansion in portfolio, there has been little improvement in efficiency. The central office staff numbers 468, which is considered high and a reflection of the undue amount of paper work. Líaison between the head office and branches needs to be ímproved as there is little personal contact. Key credit personnel from the head office need to visit branches more often and branch managers and senior branch staff need more contact with the Departnent of Planning and Economic Studies and more exposure to field work would benefit both groups. Assurances u7ere obtained at negotiations that BFA would arrange for more frequent visits between head office Credit Department staff and branch staff and that the Department of Planning and Economic Studies Twould be more closely consulted on sub-loan approval. In addition, BFA would prepare and discuss with the Bank by not later than June 30, 1974 an overall and branch,by-branch review of its operational and administrative costs and a plan of how to improve its efficiency, particularly an outline to reduce such costs as a percentage of the loan portfolio. After the review, a plan, satisfactory to the Bank, should be put into effect. During negotiations assurances were obtained on this matter.

25 Lending Policies and Procedures 4.12 At present any BFA loan can cover only one category (e.g. cropping requirenent or livestock or machinery) and is either short, medium or longterm. Therefore, many borrowers need several individual loans, each separately recorded and filed. Under BFA's proposed new law, this duplication of files and work would be largely elimirnated. Short-term loans (up to two years but most often seasonal loans for annual cropping expenses) of up to S/. 1,200,000 (IJS$31,000) can be approved at branch level but medium- and longterm loans can be approved at branch level only to a maximum of S/I. 150,000 (US$3,900). All other applications are appraised and referred to the head office for approval. Because of the general shortage of long-term funds, BFA has not encouraged long-term lending. This limit would be raised under the Project (see para 4.14) BFA's field appraisal methods are generally satisfactory for shortterm loans, but those for long-term loans, while thorough, often fail to require consideration of the farm as a whole and repayment periods are therefore frequently inadequate. Also the time of appraisal is often long and has discouraged potential borrowers. Under the Project, technical and financial evaluation and assessment of long-term investment effectiveness would be strengthened. This would be accomplished by engaging a qualified and experienced credit specialist in long term development lending to coordinate the various BrA departments and give general guidance to management on appraisal procedures. Assurances were obtained at negotiation that BFA would in consultation with the Bank appoint a qualified and experienced credit specialist. That such a specialist had been assigned or appointed would be a condition of effectiveness BFA staff would assist applicants in the preparation of detailed plans including farm plans, income and expenditure estimates and cash flows and would appraise all sub-projects in terms of incremental returns. Subloans up to S/. 1.2 million (US$31,000) would be approved at branch level and all others would be referred to the head office; all loans in excess of US$100,000 and all agro-industrial loans and loans for pig and poultry production (para 3.12), regardless of size, would require prior approval of the Bank. Sugar producing cooperatives would only be elegible for investments in agro-industries, except sugar production and refining, and for pig and poultry production. BFA vould make loans to cooperatives only if it was satisfied with the management and only in cases where those cooperatives do not have good prospects of securing capital from other sources, including from their own surpluses, to finance the proposed investment. BFA would lend up to 80% of total new Investment cost and technical staff would neriodically visit borrowers to ensure that ftnds were being used for the intended purposes. The above procedures would not be altered without prior approval of the Bank and assurances were obtained on them during neg,otiations Interest Rates: In lieu of using the allocation function of the cost of capital, Covernment has instituted an administrative resources allocation mechanisn under hiich credit is distributed. BFA's effective interest

26 rates charged to borrowers vary from 7% to 13%. The weighted average in 1971 was 10.5% per annum (para 2.13). In spite of these low rates, however, BFA has continued to show a slight surplus hecause of the low average cost of its resources and hence adequate spread and the non-assumnption of risk under trust funds. On the other hand, the financial return of farmers and cooperatives on additional investmnent indicates that a higher rate of interest would be well within the debt service capacity of the beneficiaries provided adequate maturity for loans under the Project were granted. Therefore, in view of the farmers' ability to pay more and BFA's need to meet increasing demand and imptove its own financial position, assurances were obtained from RFA that its effective interest rate to cooperatives under the Project would be no less than 9% for a períod of 15 months following loan signing and 10% thereafter, or at an another rate to be agreed upon by BFA and the Bank, and to individual farmers no less than 13%. However, should the rate of inflation increase in any FY of Peru to a level in excess of 9% per annum, BFA, the Government and the Bank wqould review interest rates charged to suh-borrowers. Assurances were obtained on this matter. E 4.16 Cash flows of typical investmients under the Project indicate that the follotiing repayment periods for loans to sub-borrowers would be appropriate, but in no case would a sub-loan under the Project be nade for a period of less than five years: Grace Period Repayment Period Total in years Dairy Beef Pigs Annual Crop and Alfalfa Production Perennial crops h. Agro-industry During negotiations, assurances were obtained that these periods wyould not be exceeded without the Bank's prior approval. Accounts and Audit 4.17 In general, accounting and auditin" procedures are satisfactory. llowever, the limited classlfication of ageing of overdue loans and the systen of multiple loans for individuals are deficiencies which need to be corrected. The newly appointed external auditors, Alonso, Castro and Associates are an experienced and well established Lima firm. The Superintendent of Banks periodically audits and reviews part of BFA's activities to ensure compliance with banking recuirements and to ensure satisfactory standards of practice. Assurances were obtained at negotiations that BFA would keep separate loan accounts for the proposed Project and that these accounts and its general accounts would continue to he audited by auditors acceptable to the Bank and that the audited accotnts and auditors' report yotuld be sent to the Bank within four rmonths of the end of BFA's fiscal vear.

27 eyv. MKRKETING AND SUB-BORROWERS' BENEFITS Marketing 5.01 Under the Project, production generated from investnents would consist mainly of meat (beef, pork, poultry and mutton), milk, grains (maize and sorghum), cotton and various fruits (avocados, mangos, olives, grapes, pineapple, lemons and bananas). Under the National Development Plan, , priority is given to three main groups of agricultural products: (i) deficit produets or ones which are imported; (ii) regulated products for which prices are for various reasons controlled; and (iii) export products which are traditionally exported. Alnost all the products financed under the Project come under one or another of these groups. Not specially mentioned are fruits for which, however, there is a growing internal demand because of population and income growth, coupled, in certain cases, with good export possibilities, e.g. lemon oil. Following drainage investments, higher cotton yields per ha are expected; on the other hand, perennial crops to be established under the Project will replace some cotton production. Therefore, total cotton production is not expected to rise as a result of Project investnents and this is in line with National Development Plan targets. _ 5.02 At full development, about five years after investment, it is estimated that farmers and cooperatives would produce íncremnental amounts due to Project investments of about: 10,700 tons of beef, pork and poultry (liveweight), 75,000 tons of fruits, 60,000 tons of feed grains and 35,000 tona of potatoes It is Government's policy to support agricultural production by maintaining producer prices at reasonable levels for those crops for which there is a good demand, either internally or externally. However, recent Bank survey reports on Peru have stressed the need for the adoption of more appropriate price and import policies to give a greater incentive impact to the production program set out in the National Development Plan Prior to 1967, policy was directed towards maintaining low prices to urban consumers and duty-free imports (particularly of neat) were relatively freely admitted, often at the cost of weakening production incentives. In 1967, the devaluation of the Peruvian Sol (from S/ to the US$ to SI ) improved the terms of trade for agricultural producers. Since 1969, imports, now entirely under Governnent control, have been restricted and have not been allomed to affect adversely producer prices. The Governnent a now considering adopting a strategy, which would involve a balancing of competing objectives, such as, the desire to atimulate production of certain products, to raise incomes of the rural population, and to keep urban cost of living from rising too rapidly. The Bank intends to continue closely to follow the question of agrícultural policy in Peru and to review with the Government the need to give high priority to production objectives whenever these objectives are not accorded adequate weight Iniplementation of this policy remains, however, uneven. While, in general termis, producer prices are satisfactory and provide sufficient incentives to farmers and cooperatives, as indicated by the financial rates of

28 return on the farm models set out in Annex 14, controlled prices for beef at S/. 35 per kg ungraded at wholesale market are low compared wlth current w,orld príces (S/. 108 equivalent per kg U.K. wholesale market for Argentinian chilled rump boneless and SI. 50 per kg c.i.f. any U.S. port of entry for imported boneless manufacturfng frozen beef). In fact, however, effective prices to both producers and consumers are considerably higher than the control price level. For young animals classed as "extra," the producer gets about SI. 30 per kg liveweíg.t (= SI. 62 per kg deadweight), whereas prime beef cuts are retailed at over S/. 100 per kg. Government has its livestock price policy currently under review, but apart from the problem of having to balance consumner and producer interest, there are unusual complications in the present situation in Peru. On the one hand, because beef imports on Government accotnt are sold at the controlled price, a heavy and increasing subsidy to the consumer is involved in these transactions; on the other hand, as the controlled price is used as the basis for the assessment of livestock compensation payments under the land reform, any increase ln its level would automatícally raise compensation costs which have to be paid in cash. In addítion, Government keeps beef prices under control to prevent inflationary prices at times of short supply, and it has introduced 15 beef meatless days per month. e 5.05 For miost other commodities, Peruvian prices are roughly in line with world market prices. In the case of rice, however, artificially high -?rices are paid to producers. The price for paddy delivered rice mill ls S/. 5,000 per ton, which gíves an equivalent f.o.b. price for milled rice of approximately SI. 9,000 or US$232 per ton. Comparable f.o.b. world mtnrket prices (August, 1972) wjere US$141.7 per ton for Thai rice (5% broken) and TIS$79.3 per ton for Burmese rice (42% broken), showing that the Peruvian price is two to three times hiíher than world market price levels. However, these world marked prices have, lately, also risen considerably; i.e. Thai rice up to UJS$192 per ton. The high local. nrice, nevertheless, has led to a 65% increase in paddy output during the last decade, enabling Peru to achieve self-sufficíency in rice in 197n, largely at the expense of a reduction in cotton plantings and production The existíng agricultural marketin- system should he able to handle, wdithiott d<ificulty, the increased production -enerated by the Project, tyhich at most will anount to 27 of nresent agricultiral output. Moreover, existing narketint deficiencies are knov7n and considerable puhlic expenditure (T,S~22.6 mi1lion) is projected for markcting infrastructure improvements under the National Develonment Plan 1Q This will be complemented by private investment under the Project in on-farn storage and in processing. Sub)-borrowxers' Benefits 5.07 On the basis of investment costs, vield and price assumptions, five illustrative investment nodels (Anne- 14) have been workced out to analyze the financial benefits expected fror d4fferent iters to be financed tuder the proposea Project. The financial rates of return t.tould be 24% for dairy farming, 10% for beef farring,, 35% for pig enterprises, 39% for mixed farnin- and 27% for perennial crop production. This is considered to be

29 very satisfactory, assuring incentives to prospective investors under the Project. To test the sensitivity of financial returns against varying costs, alternative assumptions haye also been used which show the following rates in comparison to the `best estimate": if annual cost would be 10% higher than estimated and all other incomes =nd costs do not change, the financial rates of return would drop as follows- dairy farming from 24% to 19%, beef farming from 19% to 17%, pig enterprises from 35% to 31%, mixed farming from 39% to 27% and perennial crops from 26% to 17%. A slightly greater reduction, but etill acceptable rates of return, would be obtained if sales, dropped by 10%, because of price or yield reductions, while all other assumptions remained. Thus, it can be concluded that returna should provide sufficient incentives to producers to make the intended investments. VI. BENEFITS AND JUSTIFICATION 6.01 The Bank loan would enable BFA to provide medium- and long-term credit facilities to small farmers (including cooperatives) and to medium-size farmers to enable them to make long delayed investments and expand their operations, specífically in cattle, pig, poultry and agro-industrial activities. Such investments have, in the recent past, not been made because of a climate of uncertainty following the agrarian reform law of 1969, and because of an acute shortage óf funde in BFA, the major source of long-term agricultural credit in Peru. The demand for such credit is now increasing, however, from -_- both individual farmere and cooperatives. The demand for loans to finance investments undertaken by cooperatives is expected to grow rapidly. This sector occupies presently about one-fourth of Peru's agricultural land, but this portion le growing. Cooperatives already receive preferential treatment under BFA's lending policy using ita on resources and Government trust funds for financing their investment plans. In addition, an US$12 million IDB loan ls financing such investments. Taking the above into account, 50% of the proposed loan has been allocated for the cooperative sector. Individual farmers, who farm presently three-fourths of Peru's agricultural land, would recelve the remaining 50% of the proposed loan. Their investment neadb haye been neglected in the past. This has been due to uncertainty inmediately after the land reform and BFA's preference for cooperatives. The demand of these individual farmere, however, in considerable, because long delayed ínvest ente are now urgently required and those farmers not affected by land reform measures are regaining confidence. The Project would assist Government efforts to provide investment credit to these types of agricultural producers, which would finally result in raising their living standards The more efficíent land use and a better income distríbution through agrarian reform has become the established polícy of the Government * of Peru. The recent experience indicates that the rate of implementation so far has had no detrimental effects on production and in certain crops production has increased. Appraisal indicates that the new system as presently set up can raise agricultural production. Attentíon should be drawn to the fact that so far satisfactory results haye been achieved because of

30 a pragimatic and reasonable rate of implementation adjusted with available resources. However, in such a far reaching and sensitive program, the medium and long-term effects are inevitably difficult to foresee and the possibility must be recognized that an accelerated redistribution of productive resources and/or a less flexible approach to production, supply and narketing patterns could cause serious disruptiona in output. Nevertheless, the performance of the Government to date and their stated policies for the future supports the confidence that the present reasonable approach will be maintained. e 6.03 Agricultural growth has lagged significantly behind the overall economic growth of the econony and it also has been less than population growth. Investments of the kind to be financed under the Project would help raise agricultural productivity in selected priority products in accordance with the targets of the National Development Plan The resultíng increased production would help ímprove Peru's balance of payment position, mainly by import substitution (meat, milk products and grains). Annual net foreign exchange savings and, to some extent, earnings attributable to the Project would reach about US$11 míllíon equivalent annually, after taking into account the cost of imported inputs (estimated about US$4 míllion) at the Project's full developrient. Annual debt servíce would amount to about US$3.0 million. Additional, but non-quantifiable, benefits would also result from ínstitutional improvements of BFA, improvement in the employment situation and the demonstration effect on non-project farmers and cooperatives The economic rate of return has been calculated on the basis of predicted world market prices for 1975, plus an allowance for transportation cost for the major agricultural products expected to be produced under the Project, with the exception of pork, milk and potatoes. The latter are regarded as `non-tradeable" commodities for which current Peruvian prices have been used. The Project's overall rate of return to the economy i8 estirmated at 26% (Annex 15). VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During loan negotiations, agreement was reached on the following principal points: (a) the Government would provide BFA with a capital contribution of SI. 323 million on an agreed time schedule and bear the exchange risk (paras 3.13 and 3.14); (b) BFA would review its overdue loan portfolio, endeavour to reduce its administrative coats and appoint a credit specialist (paras 4.09, 4.11 and 4.13);

31 (c) BFA would exclude from financíng under the Project such production cooperatives which have good prospects of securing capital. from other sources, including from their own surplus, to finance their proposed investments (para 4.14); and (d) BFA would finance up to 80% of investnent costs and charge an effective interest rate of 13% to individual farmers and an initial 9% to cooperatives, which would be raised to 10%, or another rate to be agreed upon by RFA and the Bank, after 15 months (para 4.14 and 4.15) Conditions of effectiveness of the loan would be (i) that Government has paid a capital contribution of SI. 100 million to BFA's project account; and (ii) BFA has appointed a credit specialist (paras 3.13 and 4.13) The proposed Project constitutes a suitable basis for a Bank loan to BFA of US$25 million for a term of 18 years, including a five-year grace period. June 20, 1973

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33 ANNEX 1 Page 1 PERU AGRICULTURAL CREDIT PROJECr Agrícultural Background General 1. Bordered on the north by Ecuador and Colombia, on the east by Brazil and Bolivia and to the south by Chile, Peru lies between the equator and latitude ' S. with a coastline of some 3,000 km on the Pacific Ocean. Of the total land area of million ha, cultivated land accounts for only 2.2 million ha (1.7%), natural pastures cover 27.1 million ha (21.1%) and the balance (77.2%) is either land of nc agricultural use, forest or undeveloped land (see para. 3). The total population is estimated at 15 million. 2. To bring out the range of geographical conditions existing in Peru, it is necessary to break down the aggregate figures shown above, and, for this purpose, it is customary to divide the country into the following three zones: (a) Coastal Zone This area, between the Pacífic Ocean and the 2,300 m contour contains 10.6% of the country, and because of minimal rainfall, its agriculture is completely dependent on irrigation. In 52 valleys containing for the most part fertile soils, some 650,000 ha of irrigated land (5% of total coastal zone) produce the bulk of the sugar, cotton, maize, rice and fruit. The valleys are separated by stretches of sand dunes and hílls, affording meager natural pasture. (b) The Sierra e Comprising over 30% of the total area of Peru, the Sierra zone embraces the Andean mountain region where, in valleys below 3,500 m, sumer rainfall of 300 to 900 mm permits the cultivation of temperate crops (potatoes, wheat, maize and barley) on relatively fertile land totalling 1,500,000 ha about a quarter of which is irrigated by small-scale irrigation systems. This cultivated land represents only 3% of the total area of the zone, but an additional 24 million ha (61%) are natural pastures, making the Sierra the principal livestock area in Peru. In the Sierra the majority of the population is living under low standard subsistence economy conditions.

34 ANNEX 1 Page 2 (c) The Selva Made up of the eastern slopes of the Andes below 2,000 m and Peru's share of the Amazonian jungle, the Selva is largely undeveloped. Although it accounts for 58.8% of the total area of Peru, the present area of cultivated land is estimated at less than 500,000 ha. In addition to its isolation, it has disadvantages of relatively poor soils and a humid tropical climate with high rainfall. 3. Land distribution by zone and agricultural use is summarized in the following table: Cultivated Area Total Other Non- Cultivated Natural Including Zone Total Area Irrigated irrigated Area Pastures Forests ('000 ha) % ('000 ha) ('000 ha) ('000 ha" ('000 ha) ('000 ha) Coast 13, ,675 10,317 Sierra 39, ,179 24,015 14,127 Selva 75, ,747 Total: ,241 2,189 27,120 99,191 /1 Percentage of Total Area: /1 Includes an estimated 672,000 ha classed as "cultivable but not used." Source: Ministerio de Agricultura, Oficina de Estadistica. Agriculture in the Economy 4. Between 1960 and 1970, agriculture's share of GNP fell from 20.3% to 14%, the proportion of the labor force employed in agriculture declined from 52.8% to 48.4%. During the last two decades, while Peru's population has increased at about 3% per annum and its annual economic growth rate has been 5%; the growth rate of the agricultural sector, however, has been less than 2% per year. 5. The relative stagnation in agricultural production indicated by these trends at Table 1 to this Annex has reduced Peru's favorable agricultural balance of payments. Excluding fishmeal, agricultural exports exceeded imports by US$100 million in 1963 but by 1971 this surplus had been reduced to.

35 ANNEX 1 Page 3 US$16 million. Sugar, cotton and coffee dominate agricultural exports, valued at US$159.2 and constituted 18% of total exports in By the same date, agricultural importa (of which wheat, meat and dairy products together account for 60% of the total) had risen in value to US$143.6 million, or 19% of total importa. Agricultural Production - 6. Crops. The area and production of Peru's main crops in 1970/71 is estimated to be as follows: * Percentage Main of total Producing Crop Area Cultivated Area Production Zone ('000 ha) ('000 m ton) Maize Sierra and Coast Potatoes ,950 Sierra and Coast Fruit n.a. Coast and Selva Seed Cotton Coast Wheat Sierra Coffee Selva Vegetables / Coast Rice (paddy) Coast Sugarcane Coast Others n.a. Total: 2, /1 Estimates. Source: Ministry of Agriculture Statistics. 7. During the last decade, the main trends in the production of the major crops have been reductions in barley and wheat (11% and 15% respectively) with a compensatory rise in maize production (30%); and a 65% expansion in paddy production (in response to artificially high producer prices) which has led to self-sufficiency in rice at the expense of a drop of about 36% in both area and production of cotton (Table 1 to this Annex and Annex 4).

36 ANNEX 1 Page 4 l 8. Livestock. The livestock production figures in Table 1 show that, apart from poultry meat and eggs, where output doubled, annual rates of production increase for other livestock items in the decade were low. Overall, by value, the increase was 2.9% Der annum, less than the rate of population growth (estimated at 3.1%). However, the comparable statistics for 1970 and 1971 show increases of nearly 10% per annum for beef production, probably reflecting increased slaughteríngs as an indirect result of the land rciorm rather than any real improvement in production. During the same period ( ), there were considerable imports of líve animals intended to assist in the re-building of the national herd (Annex 3). 9. Irrigation. Under a new law 1/, private water rights have been abolished, and water is regarded as the property of the state, to be allocated for use according to social needs. Each farm unit created or recognized under the land reform is to receive water according to an approved cropping pattern, while water charges are to be inereased to reflect more accurately the real costs of providing irrigation water. The change to this new system has just started. 10. The National Development Plan continues to make provision for new large-scale projects, which combined would add about 150,000 ha of new irrigated land with improved water supplies on a further 100,000 ha. The high cost of some of these schemes, lack of capital and skilled manpower, and the additional burdens thrown on the Irrigation Department by the new water law, make the achievement of these targets unlikely and underline the fact that the greatest short-term increases are likely to come from an improvement in water use in existing irriration areas. Provision for such small-scale works as planned in 1970 accounts for only 20% of projected expenditures on irrigation totalling S/. 6,095 million (US$160 million) or 52% of total public expenditure on agriculture from 1971 to Inputs. Fertilizer use expanded by over 50% between 1966 and 1970, with imported urea largely replacing guano as the nitrogen component. Price ratios (about 3:1 between crop and nitrogen) are favorable. Current usage represents 25% of the optimum and is largely concentrated on irrigated land in the coast, particularly for sugar and cotton crops. The risk element involved with uncertain rainfall is the major deterrent to the spread of fertilizer use in the Sierra. 12. The use of other cash inputs is also largely restricted to the more advanced coastal areas. The number of tractors in operation grew by about 50% over the last 10 years, while imported pesticides are used chiefly on the cotton crop. 13. The use of improved seeds increased only slightly from 1960 to 1967, rising from 22.6% to 25.4%. Progress in the use of such seeds is greatest in sugarcane, cotton and maize production, but research efforts are being intensified in all priority crops. 11 Decreto Ley No of July 24, e

37 e Agricultural Services ANNEX 1 Page In 1969, a reorganization of public services concentrated responsibility for the formulation and execution of policy within the agricultural sector in the Ministry of Agriculture 1/, and a number of previously semiautonomous agencies were incorporated within the Ministry's framework. Under a Director Superior, six main executive general directorates deal with Water and Irrigation, Forestry, Agricultural Production, Agrarian Reform (including Land Settlement), Research and Marketing. Of the advisory branches to the Ministry, the Agricultural Sector Planning Office (Oficina Sectorial de Planificacion Agraria - OPSA), with direct links to the National Planning Institute (Instituto Nacional de Planificacion), is the most important. 15. Peru is divided into 12 agrarian zones and in each of these is a replica of the national level organization. Under the Agriculture Director for the zone, there are directorates for each of the six executive branches of the Ministry together with a zonal planning office. Each zone is subdivided into sectora, corresponding to natural regions, and these, in turn, are subdivided into sub-sectors to facilitate the planning of integrated settlement projects (Projectos Integrales de Asentamiento Rural - PIAR). Responsibility for both planning and implementation of agricultural development, within the general framework of approved national plans, is vested in the agrarian zone director and the zonal agricultural staff. This decentralization gives the necessary executive flexibility to vary policy implementation according to local priorities, as in the case of land reform. 16. Of most direct concern to the project are the General Directorates of Agricultural Production and of Land Reform. The former has a total staff of about 4,000, of whom 50% are professional and technical personnel and 6% are at Lima. Their responsibilities include extension, training, and supervision of inputs, while specíal branches deal with livestock and cooperatives. The Directorate General of Land Reform and Settlement (DGRA y AR), primarily responsible for the implementation of the land reform law, has a staff of 2,000, 50% of whom are professional and technical and 30% are working at headquarters. In general, the staff of these key departments are both committed and competent but, as explained in Annex 2, are facing increasingly complicated problems as the land reform progresses. Basic Problems of Agriculture in Peru 17. The basic problems facing agriculture in Peru include: (a) the demographic pressure on land actually cultivated which, at about 0.38 ha per rural person and 0.18 ha per inhabitant, ia the highest ín Latin America; 1/ Decreto Ley of March 25, 1969.

38 ANNEX 1 Page 6 (b) the fact, that the average production per worker in agriculture is less than one-fifth the average output per worker in all other sectors; (c) regional disparities, in particular, the low output and poor living standards of most of the rural population of the Sierra who are still in a virtually subsistence economy; (d) the high cost of land development, whether by irrigation on the coast or settlement in the Selva; (e) pressure to increase food imports because the domestic demand for foodstuffs is increasing faster than supply, followed by a deterioration in the agricultural balance of trade; and (f) under- and unemployment in the rural sector, estimated at about 30% in 1970, and leading to considerable migration, particularly from the Sierra to the cities, notably Lima, aggravating already difficult socio-economic conditions. 18. To this formidable list, it would have been necessary to add prior to 1969, the acute mal-distribution of land, involving the existence of both minifundio and latifundio holdings and of many feudal and sharecropping types of land tenure, which together constituted major obstacles to the irmprovement of the level of rural income. National Development Plan 19. In the agricultural sector, the National Development Plan has as its main objects: (a) implementation of the land reform law of / to create a new agrarian structure made up of various kinds of cooperative organizations formed either to (i) to continue the operation of existing large units (e.g. sugar plantation complexes on the coast and extensive ranches in the Sierra) or (ii) operate as a new production unit on lands where smaller holdings (or parts of them) have been expropriated, where minifundio holdings have been integrated or new settlement schemes have been established, plus the remaining medium- and small-scale individual farmers who conform to the terms of the land reform law in respect of size of holding, efficiency of operations and compliance with social and labor legislation; 1/ Por details, see Annex 2.

39 e ANNEX 1 Page 7 (b) through the new cooperative units, to combine efficient working and economies of scale with the settlement of the maximum numbers of families on the land and the promotion of worker participation in management so as to achieve higher output, higher rural living standards and a more equitable distribution of rural incomes; (c) through the planned and controlled use of land, under the new agrarian structure, and water, under the equally farreaching new water law (para 9 above) to concentrate production promotion on specific categories of products, with emphasis on import substitution wherever practicable; and (d) the reduction in the level of unemployment in the rural sector from 31% in 1970 to 23% in The plan target 13 an overall annual growth rate of 4.2% over the period This ranges from less than 1% annually for sugarcane to more than 20% annually for eggs and poultry meat. Pork and milk are expected to grow at 8% per annum, with beef and mutton increasing at the annual average rate. Cotton and coffee, which together with sugar, constitute the main export crops are expected to grow at about 2% and the major food staples of maize, rice and potatoes at about the annual average rate. Since the population growth is estimated at 3.1% per annum, achievement of the projected annual growth rate of 4.2% would restore the agricultural balance of payments surplus to its 1970 level of US$31 million. 21. To achieve these production targets, reliance is placed on: (a) detailed planning and control at all levels; (b) provision of maximum technical assistance, particularly to the new cooperative units emerging from the land reform; (c) concentration of these promotional activities in integrated schemes in priority areas 1/ (Areas de Accion Directa), which are planned to expand from 133,000 ha in 1971 to 298,000 ha in 1975; (d) increased output per man and per hectare; there is considerable potential for yield increases in certain crops, notably barley, maize and wheat, as shown by the following table where average yields in Peru are compared with those in other Latin American countries (average world yields are also given). 1I This is in conformity with reconmendations made in recent Bank survey reporta.

40 ANNEX 1 Page 8 Yields in 1967 (mt/ha) Highest Yield Latin Producer Crop Peru America World Yield Country Rice (paddy) Australia Potato Netherlands Barley Netherlands Corn Netherlands Wheat Netherlands Cotton (llnt) Israel Sugarcane Hawai Source: FAO. Production Yearbook, Fertilizer and improved seed use is only about 26% of optimum although utilization is proportionately higher on more technically advanced farms in the coastal region. Increases in livestock production depend more on management and pasture improvement; (e) controlled supply of inputs, such as water, fertilizer, improved seed, and credit in conformity with production priorities, again with preference given to the new cooperative organizations; and (f) improvement of marketing facilities; 22. The cost of providing supporting government services on the scale called for under the plan is high, as is shown by the fact that expenditures on the administration of land reform (excluding compensation payments to previous owners), extension and promotion, and on marketing for the period are projected at S/. 3,481 million (US$90 míllion), which is 30% of total public expenditure in the agricultural sector during the period..

41 ANNEX 1 Page 9 Recent Performance and Future Prospects 23. Production figures for 1970 and 1971 given in Table 1 to this Annex represent an annual increase by value of the order of 1%, which is less than planned targets. It must, however, be remembered that these two years have been particularly unfavorable for agriculture. Unusually heavy summer raíns affected crops especially in the northern coastal area where flooding and landslides caused heavy losses, and unseasonal frosts in the Sierra adversely affected the potato crop there. 24. Precise evaluation of recent performance is made more difficult by the fact that figures for the base year (1970) used in plan projections appear to be lower than actual production for that year as published by the statistics office of the Ministry of Agriculture. This applies particularly in the case of livestock, where special condítions existed (para 8 above and Annex 3). Revised demand/supply projections for all sectors of agriculture are now being forrmulated as part of the compilation of the biennial budget These new forecasts, based on actual experience and built up from data compiled by the zone offices, are likely to be more realistic and show some reduction in previous target levels. In particular, recognition of the need for more grain imports to support livestock expansion is leading to the conclusion that there may well be a further fall in the agricultural balance of payvtents to US$7.6 million in However, the fact that significant production increases were registered in 1970 and 1971, at a time when sweeping changes were being implemented under the land reform and under generally unfavorable climatic conditions, augurs well for the future productivity of the new agrarian structure. While, in the longer run, the role of agriculture in Peru's future economic growth may be a diminishing one, further increases in agricultural output and productivity are essential in the short term to meet as much as possible of the country's growing food demands so as to avoid any undue increase in agricultural imports that would jeopardize the balance of payments position. 26. More detaíled reviews of future prospects, with particular reference to comnodities to be produced under the proposed Project are given in Annexes 3 and 4. Price policy and marketing implications are outlined in Annex 5..

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43 ANSlX 1 Table 1 P E R U AGRICULTURAL CREDIT PROJECT Production of Masor Croos asd Ltvestock Products (000 Metrfc Tons) CROPS Rice (Paddy) B-rley Maize Wheat Sugarcane 7,701 7, ,463 7,950 7,800 6,700 7,591 8,309 Seed Cohton Coffee Pototo.- 1,398 1,531 1,568 1,499 1,820 1, ,929 1,968 LIVESTOCK PRODUCTS Pcoltry ó Beef Pock Uutton , Other Mle!t' , Eggs Mílk Source: Bank Report No. WH-206a. e 1/ Includes offa.. Principal Agciulctural.. noorts ('000 Metrie Toas)! Wheat arley Rice (MIlled) PuIses Dry Uilk Po-deri' Evaporated Mtlk Butter Live C.ttiei/ OeOf Uutton B.8 Poultry Kdible Oil cad F.tc e source Ti.kbe. P-odutt11/ PuIp and Paper Thie-e and Perkins Report tc the Bank. 11 Except f-ve lr caltie (íl '000 head 3 3 ) and ttmber products (in '000. ). 2/ PF.der eqoivaleoc of rehcon:titutd whol. eill. 3/ Oil equivalents. loveo,ber 15, 1972

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45 ANNEX 2 Page 1 PERU AGRICULTURAL CREDIT PROJECT Land Reform and Cooperatives Introduction 1. The results of the agricultural census of 1961 highlighted the tremendous disparity in the size and number of land holdings then existing in Peru. At one end of the scale, only 1.3% of the farms exceeded 100 ha in size, yet their total area covered 84% of the land farmed; at the other end, over 69% of holdings were of less than 3 ha, and accounted for less than 4% of the total farmed area. Peru had thus a land tenure structure embracing both latifundio and minifundio (Table 1). 2. The first agrarian reform law (Decreto Lay No of May 31, 1964) was solely a land redistribution measure. Implemented only in four provinces e (Cuzco, Puno, Pasco and Junin) in the Sierra region, it resulted in the expropriation of 1.5 million ha made up of 795 inefficiently managed latifundio, together with 270,000 head of livestock, and their reallocation to 19,820 family holdings. Although no attempt was made to implement the maximum retainable limits laid down by the law for different categories of land in the coastal region, some medium-sized farmers took steps to bring their holdings within these limits. The Agrarian Reform of The new agrarian reform, introduced under Decreto Ley No of June 24, 1969, is a much more comprehensive measure than the 1964 law. Firstly, its definitions of maximum land holdings, of valuation bases and of compensation payments, are stricter (Table 2). Secondly, its implementation has been progressively extended so that it now covers virtually all the coastal and Sierra regions. (A separate law governing the Selva region is expected to be promulgated shortly.) Thirdly, and most fundamental, the new law goes beyond land redistribution and aims at securing the emergence of viable new production units, intended to be instruments capable of achieving the production targets set under the Development Plan (Annex 1). 4. Reflecting this comprehensive approach, the provisions of Decreto Ley No apply not only to lands expropriated under the law, but also to idle and abandoned lands, land under public ownership and areas reclaimed and improved for agricultural productions under State-financed irrigation

46 ANNEX 2 Page 2 and drainage schemes. In addition to concentration of land ownership ("latifundio") and fragmentation of holdings ("minifundio"), legal justifícation for expropriation of land is created by the abandonment or inefficient management of lands, and by the existence of anti-social or feudatory land use systems or of unjust or unlawful labor conditions. 5. The maximum permitted owner-operated land holdings are: (a) Coastal Region Arable Farms 150 ha of cultivated irrigated lands or 300 ha of non-irrigated land. Livestock Units 1,500 ha of natural pasiture. (b) Sierra Arable Farms varying from 15 to 55 ha of cultivated irrigated lands according to district, or varying from 30 to 110 ha of cultivated non-irrigated lands according to district. Livestock Units the area necessary to support 5,000 head of sheep at shearing time. 6. In all categories, these limits may be substantially increased (provided the public interest allows) where specified technical conditions have been met, including the payment of wages at least 10% higher than legal minimum rates, compliance with social legislation requirements and the operation of profit sharing schemes. Equally, the limits may be reduced or cancelled when labor regulations have not been observed. 7. Agro-industrial complexes (such as sugar plantations and mills) are to be taken over as units under conditions to ensure the continuity of management and operations. The law makes special provision for the concentration of small holdings (minifundio) into viable family units and for the regulation of leasehold agreements and of agro-industrial contracts, involving the supply of agricultural raw material to processing industries. 8. While compensation for land and fixed assets expropriated is based on previous tax declarations and assessments, livestock and permanent plantations are assessed on a current market price basis. In compensation for expropridted property, the former owner is entitled to receive payment in cash and bonds on the following bases.

47 ANNEX 2 Page 3 (a) efficient owner operated farms -- up to S/. 100,000 in cash and the balance in Class "A" bonds bearing interest at 6% per annum and repayable over 20 years; (b) inefficient owner operated units and rented lands -- up to SI. 50,000 in cash and the balance in Class "B" bonds bearing ínterest at 5% per annum and repayable over 25 years; (e) indirectly cultivated or idle lands -- up to S/. 25,000 in cash and the balance in Class "C" bonda bearing interest at 4% and repayable over 30 years; (d) livestock compensation ls paid ln cash; and (e) capital equipment compensation is paid ín cash up to a limit of S/. 1,000,000, and the balance ín bonds of the appropriate Class. 9. Under Decreto Ley No , the authorized limit for the issue of all classes of Agrarian Debt Bonds ls SI. 15,000 million. The bonds are nonnegotiable, carry the guarantee of the State and, together with their lnterest, are exempt from taxes. Payment of annual amortizations and interest is made ín cash up to a limit (currently about SI. 25,000) varying with the cost of living index and the balance in shares (valued at market prices) ín industrial enterprises which are to be supplied by the Banco Industrial del Peru. Agrarian Debt Bonds of all classes are to be accepted at their nominal value when accompanied by an equal cash payment for investment for a minimum period of 10 years in a duly qualified industrial enterprise. 10. The Banco de Fomento Agropecuario del Peru (BFA), as the trustee for Agrarian Debt Bonds, acts as agent for interest and amortízation payments as well as for the collection of payments to be made by beneficiaries of the land reform in settlement of the agreed purchase price. Methods of Implementation 11. Main responsibility and powers for the execution of the land redistribution provisions of the law are vested in the Direccion General de Reforma Agraria y Asentamiento Rural (DGRA y AR) under the Ministry of Agriculture. 12. As part of the Governnment's decentralízation policy, Peru has been divided into 12 agrarian zones (cee Map), intended to correspond as far as possible with geographical regions, although other consideratíons (notably conmunications) have had to be taken into account. In consequence, although Zones I to VII cover the coastal regíon, they also include some of the Sierra and even, in the case of Zone II, a portion of the Selva. Zones X, XI and XII constitute the bulk of the Sierra and Zones XIII and IX most of the Selva.

48 ANNEX 2 Page In each agrarian zone, all branches of the Ministry of Agriculture, including the Agrarian Reform branch, come under the control of the director of the zone, who is responsible for the planning and execution of the agrícultural development of the zone in accordance with the targets and guidelines set out in the National Development Plan. The speed and scope of land reform actions is thus coordinated with the general development of the zone. 14. Land reform actions involve the following main four processes: (a) Declaration of an 'Agrarian Reform Zone". When zonal plans have been finalized for the restructuring and resettlement of an area (which may be the whole agrarian zone or a specified part of it), taking all factors into account, a Supreme Decree is pronulgated declaring the area to be an "Agrarian Reform Zone." (b) Expropriation. Once an Agrarian Reform Zone has been so declared, detailed expropriation plans are published and affected owners have an opportunity to submit observations on the proposals. After these have been considered, the Zonal branch of the DGRA y AR announces its decision in a resolution, which has subsequently to be confirmed by Supreme Decree. Streamlined procedures for land acquisition compel awners to supply maps, titles and other papers on demand. Appeals are limited to compensation issues and are not permitted to delay expropriation procedures. e (c) Interim Arrangements. Between their expropriation and transfer to new owners, holdings may be and usually are managed by Administrative Committees. These are of two kinds: (1) Special Committees. These consist of Government officials and representatives of the workers, have all the necessary legal powers to carry on the operation of the holding, are expected to assist in the process of determining the appropriate form of organization for the new unit and can operate for up to a maximum period of two years. (ií) Provisional Committees. These are formed where it ls considered necessary to make a provisional land transfer. Such committees are made up of not more than five or less than three workers, have the same powers as special committees and may not operate for more than two years and lead up to a definitive transfer to the type of cooperative organization eventually chosen for the unit.

49 ANNNEX 2 Page 5 (d) Transfer of Ownership. Expropriated land may be transferred by the DGRA y AR to various forms of cooperative and Sociedades Agricolas de Interes Social (SAIS) and to qualified individuals or family farm units, under integrated rural settlement projects (PIAR). Beneficiaries contract to purchase the new holdings at an economic price payable in 20 annual instalments with up to five years of grace. 15. Beneficiaries under the land reform are given preference in the provision of technical assistance from the various departments of the Ministry of Agriculture and of credit supplied through the State banking system. At the same time, this assistance is provided within the context of and to attain the production targets laid down in regional development plans. Private arrangements to redistribute land holdings are encouraged, provided they are carried out with the approval of the DGRA y AR. 16. To deal expeditiously with all disputes arising from the implementation of the land reform, a special branch of the judiciary has been established, consisting of a land judge in each agrarian zone and an agrarial tribunal, acting as a final court of appeal. Cooperative Organizations 17. Of the 361 cooperatives registered up to the end of 1969, some 227 are still in existence. All of these represent voluntary associations under standard-type cooperative legislation (e.g. Ley General No of 1964) formed mainly for such purposes as bulk buying of inputs, processing, storage and marketing. Some of these cooperatives (notably rice milling cooperatives) have been successful, but the overall "casualty rate` (37%) has been high, although land reform has adversely affected many of these cooperatives. Many had disappeared before 1969 because they were ill-defined from the beginning, had no leadership and their members were initially only thinking of taking advantage of the then comperative law which provided some subsidies. 18. Under land reform legislation (principally Decreto Ley No and Decreto Supremo AP of November 4, 1969), new kinds of cooperative organizations were set up for the dual purpose of restructuring agrarian society and implementating agricultural development plans. Although the basic rules applying to these new organizations are essentially cooperative in character (their standard organizational structure is as shown at Table 3), their autonomy is strictly limited. Not only are they subject to the overriding control of the zonal authorities in production planning and control, but in the first stage of their existence, under the supervision of Government advisers, the directing bodies have been appointed rather than elected and the employment of technical managers has been controlled. In addition, the distribution of annual net profits has to conform to the following conditions: (a) not less than 10% to the Reserve Fund; (b) not less than 5% to the Education Fund;

50 ANNEX 2 Page 6 (c) not less than 10% to the Social Provision Fund; (d) not less than 15% to the Investment Fund; (e) not less than 5% to the Cooperative Development Fund; Note: allocations under (a) - (e) may not exceed 70% of the net annual profits. (f) interest payment not exceeding 2% per annum on members' contributions; and (g) the resultant balance is distributed amongst members according to time worked or use made of the services of the cooperative; not less than 25% will be compulsorily capitalized and added to the members' share holding and the balance paid in cash. 19. The following are the types of cooperative organization set up under the land reform legislation: (a) Production Cooperatives (Cooperativas Agrarias de Produccion). These are associations for exploitation of the land in common, where the land and all other related property (livestock, installations, equipment and plant) belongs to the cooperative and there are no individual rights of ownership. This type of cooperative has been formed to take over the sugar plantation complexes and other large estates expropriated in the coastal region. In addition to the agricultural workers of such estates, industrial workers and management staff are eligible for membership. e (b) Minifundio Land Consolidation Cooperatives (Cooperativas Agrarias de Integracion Parcelaria) In areas where minifundio problems exist, these are formed with the object of establishing viable production units. Members transfer to the cooperative either property rights in all or part of their land or the right of usage over it as their contribution to the cooperative funds, under terms authorized by the DGRA y AR. Thereafter the exploitation of the whole area is on a common basis, with priority for working on the cooperative land given to those who have given up all their land. (c) Service Cooperatives (Cooperativas Agrarias de Servicios). The object of these cooperatives is to supply services to their members, particularly in such fields as input supply (fertiíizers, machinery equipment, credit, irrigation, and the like), marketing, storage and processing. M-embership of service cooperatives is limited to owners of holdings of land not l

51 e ANNEX 2 Page 7 exceeding three times the size of the family unit (i.e. 45 ha in the coast and 90 ha in the Sierra) and not employlng more than six permanent workers. (d) Communal Cooperatives (Cooperativas Comunales). There are intended to be the eventual socio-economic structure for the peasant communities in the Sierra. They will take over the existing community lands and those added to them under the agrarian reform and provide organizations for their exploitation in comon and for the provision of common services. (e) Sociedades Agricolas de Interes Social (SAIS). Under the agrarian reform legislation, the DGRA y AR may, whenever necessary, authorize the establishment of these looser forms of pre-cooperative; this concept has, in fact, been applied where large extensive ranches have been expropriated in the Sierra. Cooperative membership of each SAIS is made up of the communities surrounding the production unit, together with the cooperative of the production unit (usually the expropriated hacienda). (f) Central Cooperatives (Centrales de Cooperativas). All the organizations described in sub-paras (a) through (e) above _may form second-degree or central cooperatives in order to procure supplies, market and process products, conduct credit transactions aud organize other common services for their affiliated bodies. The most important of these Central Cooperatives is the Central de Cooperativas Agrarias de Produccion Azucareras (CECOAAP), which effectively controls the operational and planning policy of the 12 expropriated sugar estates in the coastal region. e 20. As already stressed, all the new cooperative organizations are required to work within the framework of the production development plans and must do so to qualify for preference in the supply of inputs, such as water under the new water laws, and credit from the State banking system. In addition, from the administrative and financial point of view, they are subject to the controls imposed by cooperative legislatíon. Previously, these controls were exercised by the National Office for Cooperative Development (Oficina Nacional de Desarollo Cooperativo - ONDECOOP), an autonomous agency under the Prime Mlinister's office, by the National Center for Cooperative Training (Centro Nacional de Capacitacion Cooperativa - CENACOOP); and by the Cooperative Auditors (Auditores de Cooperativas - AUDICOOP). In 1971, when the Sistema Nacional de Apoyo a la Mobilizacion Social (SINAMOS) was created as a special arm of the administration to promote public participation in the development process, these organizations were transferred to its control, and under Decreto Ley of April 4, 1972, their functions were integrated in the new SINAMOS organization. Administrative and accounting control of cooperatives now vests with the Direccion General de Apoyo Externo of ONAMOS

52 ANNEX 2 Page 8 (the central office of SINAMOS), which is being strengthened to cope with its increasing responsibilities and is receiving outside technical assistance under the recent IDB loan. Progress in Land Reform 21. As of August 31, 1972,.the following position had been reached in implementing the land reform measures: Expropriations Percentage of Target as stated in National Plan Number of holdings expropriated 2, % Land (in ha) 4,228, % Compensation (in S/. Million) 7, % Allocations to new owners Land (in ha) 2,356, % Number of families involved 102, % The compensation figure given above (SI. 7,405 million = US$191 million) relates to land and installations only and was paid 5% in cash, 35% in "A" bonds, 46% in "B" bonds and 14% in "C" bonds (para 8 above). In addition, SI. 1,115 million (US$29 million) had been paid in cash for more than 1.5 million livestock expropriated. Estimates of the total cost of completing the land reform vary greatly and the figure of SI. 18,050 million (US$466 million) is probably on the low side. To it, in any case, has to be added livestock compensation costs (estimated at S/. 4,600 million (US$119 million) and administration costs, projected for the period at S/. 1,992 million (US$51 million). 22. In terms of land, therefore, one-third of the "expropriable" area has been taken over. However, within this average for the country as a whole, there are considerable regional variations (Table 4). For example, in the Sierra (Agrarian Zones X, XI, and XII) an area totalling 2,970,000 ha has been expropriated, but half of this (1,470,000 ha) had already been taken over under the earlier agrarian reform. The higher than average percentages for the value of expropriated property in Zones II and III (Chiclayo and Trujillo) is due to the fact that the larger sugar plantation complexes were in this area. In Zone VI (Arequipa), only 1.7% of the units have been expropriated because the main problem is one of mínifundio, and the concentra-

53 ANNEX 2 Page 9 tion of holdings, some as small as 0.3 ha, presents enormous social and administrative difficulties. On the other hand, in Zone I (Piura) nearly 58% of "expropriable" holdings have already been taken over since, because of the pressure of population and shortage of cultivable land, the Zonal policy is to settle as many families as possible in new cooperative units. 23. As regards allocations to new owners, from the detailed breakdawn given in the following table, it will be seen that only 5.6% of the total land affected under agrarian reform measures was transferred to individual ownership, and the balance to the various forms of cooperative organizations already described. The 11 SAIS (Sociedades Agricolas de Interes Social) and the 12 sugar cooperatives together account for more than 50% of the land transferred under agrarian reform. In the case of land settlement schemes, the former policy accounts for the preponderance of individual onership; in new schemes since 1969, however, cooperative organizations are being formed. SUMMARY OF LAND TRANSFERS UP TO AUGUST 31, 1972 A R E A Type of Number of ha Percentage ha per Beneficiary Number Families ('000) of Total Family A. Land Reform Transfers Individual 16,399 16, Cooperatives , Communities 61 15, SAIS 11 11, Total: 16,605 90,819 2, B. Land Settlement Individual 8,967 8, Cooperatives 68 2, Total: 9,035 11, Combined Totals: 25, ,325 2,356 Source: DGRA y AR e

54 ANNEX 2 Page 10 The figures in the last column headed "ha per family" show that, in the case of production cooperatives, the size of an individual member's share in the total cooperative land holding is less than 20 ha. When allowance is made for the fact that the proportion of cultivated land to the total is about 12% (para 33 below), it is clear that a policy of maximrnum settlement has been followed, and these cooperatives can rightly be regarded as groupings of small farmers. 24. As of August 31, 1972, expropriations exceeded allocations by 1,872,000 ha. Of this, some 700,000 ha represent unused land that will continue in Governnent ownership; the balance (1,172,000 ha) was under the temporary administration of Special Committees and Provisional Committees (para 14 (c)), and represents, in effect, what is in the "administrative pipeline." This naturally varies according to the relative speed of the expropriation and transfer processes. By October 12, 1972, this "pipeline` amounted to 1,097,799 ha, made up as follows: (i) 29 Special Committees administering 346 holdings covering 514,053 ha; and (íi) 155 Provisional Committees, covering 13,352 families on 583,746 ha. 25. What has been, by any standards, a major restructuring of Peruvian agriculture, with the largest units and one-third of the land in the coastal and Sierra regions already affected, has been carried through without any apparent adverse effect on production in 1970 and 1971, even when due allowance is made for other factors (such as climate and world prices) (Annex 1). 26. In this respect, the results of the 12 sugar cooperatives operating under the control of the Central de Cooperativas Agrarias de Produccion Azucareras del Peru (CECOAAP) are most striking. In 1971, the 8.3 miillion tons sugarcane milled was a record; the area cultivated (83,575 ha) had risen to pre levels; and sugar production (913,274 tons) was 18.9% above the average for the five years Yields at tons of cane per ha per year and mill extraction rates at 92.82% were the highest for the past five years. Here, too, production was undoubtedly favored by good climatie conditions, but the all-round improvement is a tribute to the smoothness of the take-over of the sugar estates immediately after the passing of the land reform law (24 June 1969) and to the technical management provided, both on the estates and at CECOAAP. 27. Thanks to these successful operations, the sugar cooperatives are building up their financial resources. The coordination of their operations by CECOAAP enables them to reduce to a minimum their dependence on external sources for short-term loans. Again under centralized planning and supervision by CECOAAP, the sugar cooperatives are investing in much-needed plant replacement (some suppliers credit has been obtained for this purpose) and have a livestock diversification plan, involving 30 individual projects in w

55 ANNEX 2 Page , at an estimated total cost of SI. 284 million (US$7.3 million), for which they intend to contribute 20% from their awn resources and borrow the balance from the BFA under the proposed project. At present, the more prosperous cooperatives are providing financial assistance to the "poorer` units -- thus givíng tangible expression to the theme of mutual aid that is underlined in the National Development Plan. It should, hawever, be stressed that, outside the sugar cooperatives, no comparable form of central or second-tier organization as yet exists. Future Trends 28. Land Reform. In the light of experience, there has already been some scaling down of the targets for future land reform operations. Against the 25,886 units covering nearly 12 million ha expected to be expropriated by December 31, 1975, according to the National Development Plan , revised projections (as of October 18, 1972) set lower targets of 9,552 units covering 9,830,000 ha (Annexes 2 to 5). In units, the main reductions are in Agrarian Zones VI (Arequipa) and VII (Taena) at the southern end of the coastal region, while there are also notable falls in area targets in Zones IV (Lima) and VII (Taena). 2. The following table sets out the actual and latest projections of land expropriations, according to information supplied by the DORA y AR: LAND REFORM ACTUAL AND PROJECTED RATES OF LAND EXPROPRIATION Period Farm Units ha ('000> / , / , ,355 /3 1,093 / ,500 /3 1,160 / ,884 /3 1,456 / ,303 /3 2,446 /3 Total: ,830 e /1 Operations under earlier Agrarian Reform (Decreto Ley 15037). /2 Covers period from June 24, 1969 (date of passing of present Agrarian Reform Law - Decreto Ley 17716) to Decenber 31, /3 Projections.

56 ANNEX 2 Page 12 U Against the projections of 1,355 units and 1,093,000 ha to be expropriated in calendar year 1972, during the first eight months (January to August), expropriations covered only 659 units and 553,000 ha, which casts some doubt on the validity of the revised projections. 30. It would appear that the agrarian reform process is necessarily entering a new phase. During the initial períod, action was concentrated on a small number of large units and the success achieved so far owes much to the facc that "going concerns" were taken over and their technical management maintained (as in the case of the sugar plantations and other large estates in the coastal region and the large cattle and sheep ranches in the Sierra). This is borne out by the fact that the average size of the units expropriated up to August 31, 1972, was 6,500 ha. Even on the basis of the revised targets, the average size of the unit to be expropriated between September 1, 1972 and December 31, 1975, is 750 ha. Taking the average distribution for the country as a whole, such a holding can be expected to be made up of: Irrigated-cultivated land 45 Non-irrigated cultivated land 75 Natural pastures 405 Other 225 ha Total: 750 Even af ter allowance is made for the effect of minifundio on this average, it seems clear that the land reform process is nearing a stage where it will be dealing principally with large numbers of medium-size farmers. In such cases, not only are the expropriation procedures more numerous (and more difficult when partial expropriation is involved), but there is also a formidable administrative task in forming a new cooperative for what is essentially a new unit and area of production, as well as in ensuring that it has the right management and technical assistance. 31. At the other end of the scale, where minifundio is the main problem as, for example, in Arequipa, progress in the integration of small holdings is necessarily slow. It depends not merely on the redistribution of such holdings but also on the provision of alternative employment (either in land settlement schemes or in other sectors than agriculture) for those for whom no work can be provided in the new integrated production unit. 32. In a recent statement, the Minister of Agriculture stressed that 99% of the expropriations have been from farmers larger than 150 ha and that already 4,000 ha of land in the 10 to 150-ha unit range have been declared "unaffected" by the land reform as against 17,252 ha expropriated from the e

57 ANNEX 2 Page 13 same range of holdings. There are indications that, by the end of 1972, land reform in the coastal region will be regarded as completed. On the other hand, there are demands for the process to be speeded up particularly where there is pressure for the settlement of more familles on the land. H,wever, in addition to the growing administrative complicatíons already mentiened, there are other factors that may well be taken into account. Indirectly, the agrarian reform has already encouraged a number of voluntary land transfers and it has forced medium-síze farmers to comply with social and labor legislation, notably in the provision of housing and in the operation of profitsharing schemes. In other words, some of the main aíms of the agrarían reforms are being achieved without resort to expropriation and redistribution of land. 33. The following table compares expropriatíons in the various categories of land: EXPROPRIATIONS BY LAND CATEGORY Expropriated as of Category Total Expropríable August 31, 1972 ('000 ha) Percentage ('000 ha) Percentage Irrigated cultivated Non-irrigated cultivated 1, Pastures 6, , Other 3, Total: , Unfortunately, no breakdown by land category is avallable for the projections of expropriations, but it is considered that they will be roughly proportionate to the classification of total expropriable land, as they have been in the past. 34. As of August 31, 1972, 526,000 ha of cultivated land had been expropriated out of a total of 2,189,000 ha, so that 76% still remained in the hands of individual owners. Should the revised projections of expropriations set out in para 29 be achíeved, this proportion will have dropped to about 25% by the end of If in practice land reform progresses at a slower rate, then the proportion remaining in the hands of individual farmers by the end of 1975 may well be between one-third and one-half. e 35. Cooperatives. At the outset, two general points need to be stressed. Tle first is that the cooperative organizations being established under the

58 ANNEX 2 Page 14 agrarian reform are not so much cooperatives as "self-governing units" (empresas autogestionarías). As such, they form an integral part in the highly planned and supervised structure that has been set up to achieve the agricultural produiction targets set out in the National Development Plan. Second, this framework has its ideological origins in the patterns of Inca society 1/. In this lies its appeal to and likely acceptance by all levels in the pyramidical structure, including the workers who form its base of August 31, 1972, out of the total of 202 production cooperatives 2/, 68 were concerned with land settlement and 134 had been formed to take over 868,000 ha under the land reform, giving an average unit size of 6,500 ha. This, of course, reflects what has been described above as the first phase of the land reform, i.e., the period during which large `going concerns" (like the sugar plantations and, more recently, the vineyards in the Ica zone) have been taken over in their entirety and reconstituted as cooperatives, with virtually the same technical management as under their previous owners. 37. With this class of cooperative, the main problem is one of the relationship between the workers and the technicians. In certain cases, there have been considerable difficulties and friction, leading to the resignation of numbers of technicians, including 173 in the sugar cooperatives. But the success, already noted, of these units suggests that such difficulties are being overcome. The workers and their representatives on the various cooperative committees are being "educated" in the need to pay proper salaries to technicians and there are crash programs for the training of both management and supervisory personnel, operated by the National Center for Agrarian Reform Research and Training (Centro Nacional de Capacitacion e Investigacion de Reforma Agraria - CENCIRA) with UNDP assistance, and by the National Center for Cooperative Training (CENACOOP), now part of SINAMOS (para 23). 38. As the land reform enters its second phase, the problems of forming and managing new cooperatives will deepen because members will increasingly include previously independent farmers who may well be less adaptable to outside control than the labor forces of the latifundio. Under the land reform administration, much time and care is taken to ensure that the right kind of cooperative organization is chosen for a given situation and in the choice of its first leaders. Despite the undoubted enthusiasm of the admlnistrative staffs and the emphasis being placed on training and education, it would seem that the present rate of formation of production cooperatives (about 50 per year) cannot be increased, since to do so would risk the lowering of standards of operating efficiency, which would be contrary to Government's policy. This factor constitutes a further constraint on the speed at which future land reform operations can be executed. 1/ William H. Prescott: "The Conquest of Peru", Book I, Chapters 2 and 4. 2/ Excluding 11 SAIS and 61 Comunidades. d

59 ANNEX 2 Page 15 e 39. A limited number (about 20) of new service cooperatives have been formed since the implementation of the agrarian reform. If, however, the future trend is a slowing down in the projected rate of expropriation, then this might well be accompanied by measures encouraging individual farmers to form service cooperatives for the supply of inputs (fertilizer, credit and machinery) and for marketing and processing. Here too, there would be problems of management and supervision, ao past experience in Peru has shown (para 17 and Annexes 5 and 8). 40. Taking all the above factors into account, it is estimated that, by the end of 1975, the number of cooperatives in existence, by catégory, is likely to be as follows: 1. Production Cooperatives (a) formed under Land Reform operations (50 per year for six years) 300 (b) formed under Settlement Schemes before June 1969 S0 after June Total production cooperatives: SAIS Communal Cooperatives Service Cooperatives remaining from these formed before June formed since June Implications for Agricultural Credit Total: Under the old agrarian structure, the large private estates were, in general, able to finance their operations and meet their investirent needs out of their own resources or by borrowing from commercial banks, while the main source of short- and long-term credit for small and medium size farmers was the Banco de Fomento Agropecuario (BFA). As a result of the major changes in the agrarian structure already made by the land reform, however, this pattern has been radically altered. The new cooperatives that have taken over

60 ANNEX 2 Page 16 the large estates are dependent upon the BFA for both short- and long-term credit and, under Government policy, receive preference in the provision of scarce long-term funds. This trend is illustrated by the figures for BFA crop lending given below: BFA Crop Loans Season 1967/ /71 Type of Approved Approved Borrower Amount % Amount (S/. Million) (SI. Million) Large 1, , Nedium Small , Cooperatives - - 1, Total: 2, , Source: BFA 42. Moreover, the implementation of the land reform has meant deferment of most intended investments. In the case of the new cooperatives, their first task was to ensure that current operations were maintained and they are only now beginning to implement new investment programs. For instance, as already mentioned in para 27, the sugar cooperatives have a livestock and processing diversification program for involving investments totalling S/. 284 million (US$7.3 million). In the case of Individual farmers, in order to avoid a prolonged state of uncertainty, the Government intends to decide by end 1972 which properties will be subject to expropriation in the key areas in the coastal region, where, on account of demographic pressures and social tensions, land reform implementation has priority. Those not affected will be given certificates of "inafectacion" and the issue of such certificates has already started. This should lead to a growing demand for medium- and long-term credit, particularly from medium-size farmers wishing to invest in land improvement (irrigation, drainage, levelling, and such), in mechanization and in livestock development. Those whose holdings have been reduced in size are likely to be forced to intensify ín order to maintain their previous income levels, while the rise in effective wage rates, because of the standards set in the cooperatives, is providing an additional incentive to mechanization.

61 ANNEX 2 Page The creditworthiness of the new cooperatives, both production and service, will depend upon the extent to which they have been able to bulild up reserves for investment and have demonstrated their capacity for efficient management. Those production cooperatíves formed out of existing enterprises are more likely to be able to accumulate investment reserves than those formed ab novo, as the sugar cooperatives have already shown. Both types, however, are subject to legal restrictions as to the proportion of any annual surplus that may be allocated for investment (para 18) and both have, after a maximum grace period of five years, to meet annual instalments in payment of the agreed price of their land. 1/ 44. As regards management, again it is the cooperative formed to take over an existing enterprise that has the advantage because of the relative ease of ensuring continuity of technical management. For this reason, it will be necessary to examine closely the farm development plans and to assess the capability of the management at the time of appraisal of all loans to production cooperatives. 1/ As of March 31, 1972, the sugar cooperatives had already paid to the BFA SI. 236 million (US$6 million) in such instalments. e

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63 ANNEX 2 Table 1 *eperu AGRICULTURAL CREDIT PROJECT Estimated Number and Size of Agricultural Holdings 1961 Size of Holdings Numbers Hectares TOTAL: 843,282 17,722,044.3 less than 0.5 ha 157,475 36, ha to less than 1 ha 135,445 92, to less than 2 ha 185, , to less than 3 ha 107, , to lesa than 4 ha 65, , to less than 5 ha 47, , to less than 10 ha 76, , to less than 20 ha 31, , to less than 50 ha 17, , to less than 100 ha 6, , to less than 200 ha 4,* , to less than 500 ha 3,400 1,009, to less than 1,000 ha 1,519 1,022, ,000 to less than 2,500 ha 1,093 1,619, ,500 and over 1,026 10,651,830.7 No declaration 42 SOURCE: "Los Problemas del Credito Agropecuario y el Desarrolo Econcmica" Banco de Fomento Agropecuario del Peru, October December 1, 1972

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65 P E R U AGRICULTURAL CREDIT PROJECT ORGANIZATIONAL CHART Agricultural Cooperatives Body Composition Main Functions 2 1. General Assembly All members of the cooperative. 1. Elect members of Administrative and Supervisory Councils. (Asamblea General) 2. Consider and approve Annual Reports and Accounts. 3. Allocate surpluses (within límits laid down). 4. Approve annual Development Plans and Budgets. 5. Set financial limits to powers delegated to Administrative Council. 6. Form Special Comsittees. 2. Delegate General AssemblY members elected by General Functions 2-5 of General Assembly. Assembly when cooperative membership (Asamsblea General da Delegados) exceaed Administrative Council Not less than 5 members elected by 1. Responsible for day-to-day operations. General Assembly. (Consejo de Administracion) 2. Appoint managers and grant them the necessary powers to carry out their work. 3. Present the Annual Report and Accounts to the General Assembly. 4. Meets at least once per month. 4. Supervisory Council Not less than 3 membere elected by 1. Supervise actions of Administrative Council and Special General Assembly. Committees to ensure that these are within the powers (Consejo de Vigilancia) granted to these bodies. 2. Check the accounts. 3. Examine claims by members against actions by Administrative Council and special Committees. 4. Submit a report on its activities to the annual meeting of the General Assembly. 5. Special Committees Not lees Chan 3 members elected by the 1. Plan the policy for each functional or geographical umit. operacional or geographtical unit for (Camites Especializados) which the committee has been formed. 2. Advise on its execution. 3. Such other duties as may be delegated by the Administrative Council. Their establishment u optional but they are found in all the large cooperativeas. Source: Reglamento de Cooperativas: Decreto Supremo No AP of November 4, 1969.

66 P E R U n AGRICULTURAL CREDIT PROJECT (D Land Reform Progress of Expropriations Subject to Expropriation Expropriated as at August 31, 1972 Units Ha Value Units Ha Value_ 1 Units Area Value ('000) (S/..M) ('000) (S/. M I. Piura , II. Chiclayo 1, , , III. Trujillo 2,100 1,445 2, , IV. Lima 2, , , V. Ica 1, , VI. Arequipa 10, VII. Tacna 2, X. Huancayo 2,542 3,361 1, , XI. Cuzco 1,219 2,441 1, XII. Puno 807 1,587 1, , H ,049 2, , SOURCE: DGRA y AR statistics. 1/ Excludes livestock compensation. * * a

67 P E R U AGRICULTURAL CREDIT PROJECT Land Reform Expropriations - Actual and Projected Actual Projected Position at Agrarian Total Upto 12/31/70 _ 1971/ /75 12/31/75 Zone Units Ha Uníts Ha Uníts Ha Uníts Ha Uníts Ha ( '000) ( '000) ( '000) ( '000) ( '000) I. Piura II. Chiclayo 1, , (349) (72) (1,535) (603) (1,978) (848) III. Trujillo 2,100 1, ,163 (150) (450) (1,765) (627) (2,060) (1,391) IV. Líma 2, (258) (480) (1,986) (432) (2,473) (1,065) V. Ica 1, , , (490) (110) (1,177) (328) (1,700) (497) VI. Arequipa 10, (1,000) (206) (8,937) (321) (10,044) (584) VII. Tacna 2, (974) (6) (1,784) (239) (2,794) (248) X. Huancayo 2,542 3, , ,032 1,107 2,480 (400) (300) (2,019) (1,125) (2,527) (2,648) XI. Cuzco 1,219 2, ,103 1,345 1,723 (140) (350) (912) (1,588) (1,202) (2,345) XII. Puno 807 1, ,039 1,006 1,368 2,226 (316) (742) (302) (182) (779) (1,553) Total: 26,163 ~~~~~~~~~12, , (4, 197) ( ) (6 (6,10) (11,886~) (l1,945) Notes: 1. Projections given ín above table are forecasts of Direccion General de Reforma Agraría y Asentariento Rural as of October 18, Figures in brackets show comparatíve original projections as set out in Plan Nacional de Desarrollo - Vol. II, Plan Agropecuario (Cuadro No. 57 on page 81). ZD X

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69 ANNEX 3 Page 1 PERU AGRICULTURAL CREDIT PROJECT Livestock To Be Financed Under The Project A. Dairy Cat.tle Production 1. In 1970, dairy milk production totalled approxinately 600,000 tons 1/, 31% of which was produced from intensive dairy installations in the coastal and Sierra (highland) regions and 69% from cattle mostly owned by small farmers (prior to the land reform) in the Sierra. The estimated total of cows in milk was 700,000. About one-half of this milk production is used to mnake cheese and butter, particularly in the Sierra where antiquated processing predominates; the other half is consumed as milk, either evaporated, processed or fresh. Much of this milk production is consumed within the subsistence economy that characterizes the Sierra. 2. Dairy units supplying the main population centers in the coastal region utilize high-yielding milk cattle such as Holstein and Brown Swiss with good average yields. Most are stabled continuously, and fed on chopped green maize, sorghum, maize stover, and silage, with molasses, rice bran and cotton seed cake as concentrates; in the southern coastal region, however, dairy cattle are normally tethered and grazed on irrigated alfalfa. Production in the Sierra is based on dual-purpose native breeds, with low yields and short lactation period (180 to 200 days). 3. Production fipures given in Annex 1, Table 1, show' an uneven growth in milk production (10% per annum fromn 1960 to 1964, then stagnation at about the 759,000-ton level between 1966 and 1969, followed by spurts to 830,000 tons and 897,000 tons in 1970 ancl 1971 respectively). This unevenness is probably due to statisticnl vagaries and production is more likely to have grown at a steady rate of about 4% per annum over the past decade. In any event, it was insufficient to meet denand during the period 1965 to 1969, when imports of milk products averaged 20,000 tons and butter imports averaged 9,000 tons. Both import categories were reduced considerably in 1970 and 1971 under stricter Government controls (Table 1). 1/ Excluding sheep milk amounting to some 150,000 tons.

70 ANNEX 3 Page 2 Development Pros pects 4. The National Developrment Plan projected a production increase for milk of the order of 10%, but revised estimates suggest that annual growth rate will be about 2.5 percent. Thus the need for imports seems certain to continue, but the future trend depends much on whether the higher produiction levels of 1970 and 1971 are sustained. 5. In the Sierra (a major producing area), stocking rates are already iigh and the bulk of t'ne cattle Is in the hands of smnall producers hardly emerging from a subsistence economv. To speed Up this process, such farmers are being organized3 in various forms of cooperative and community units (Annex 2), to facilitate extension efforts and the spread of new technology, such as dairy production based on irrigated pastures of ryegrass and white clover, as demonstrated by the work of the FAO/IVITA 1/ project at Huancayo. Because of the inherent difficulties, however, such developments are unlikely to show imiiediate results. 6. In the short term, the best prospects of increasing milk production lie in tlhe expansion of the stall-fed herds in the northern and central coastal areas anci in the dairy cattle grazed on irrigated pastures and in the Andean vallevs of the Sierra. Prices and 1larketing 7. Controls are imposed on milk prices with varying effectiveness. Industrial plants pay on the basis of a controlled price of SI per litre, wvith variations according to quality (butterfat content) and deductions for collection costs. Elsewhere, particularly near urban centers on the coast, the official producer and retail prices for fresh milk are frequently exceeded. Five major milk processing plants, not all working to full capacity, are already in existence; and plans exist for the establishment of nine more plants in new areas of production. Although, there is much room for inprovement in present milk marketing system (Annex 5), it should be able to handle the additional production to be generated by the Project without difficulty. In addition, some of the agro-industrial investment under the project is expected to be used for milk processing (Annex 8). Project Considerations 8. It is expected that, under the Project, investrnents in dairy production would be made in all three regions of Peru, but principally in the Andean valleys where there are major concentrations of milk cattle. Here and in the southern coastal zone, small farmers with no more than 10 animals are likely to be the maln sub-borrowers. Therefore, a model has been developed based on a small farm of 15 ha of pasture, of which 7.5 ha would be renewed completely by sowing grass and clovers and the remaining 7.5 ha would be improved by resowing and fertilizing. Part of the investrnent cost involved in pasture improvement would be for land preparation, plowing, and such and appears under the heading of "machinery." 1/ Instituto Veterinario de Investigaciones Tropicales y de Altura. e

71 ÑNNEX 3 Page 3 9. Other projected investments ínclude fencing to divide the grazing land into small plots to permít pasture rotatíon and a 50% increase in the stocking capaclty (to 1.5 animal units per ha); constructions to facílítate herd handling; the purchase of cows and a pure-bred bull (or, alternatively artificial insemination). With these improvements, coupled with the supplementary use of concentrates and better management, the farm would reach full production of milk and animals in the seventh year, when yields of milk per year and per lactation period should rise to liters. B. Meat Background 10. The demand for meat in Peru has long exceeded national production and imports to fill the gap more than doubled between 1965 and 1969 (6,400 tons of beef and 3,900 tons of mutton in 1965 against 14,000 tons of beef and 8,300 tons of mutton in 1969) 1/. According to the latest projections, the total demand for meat is expected to continue expanding at a rate of about 5.5% per annum. 11. Within these aggregate figures, however, changes in the pattern of consumption have already taken place. As the following table shows, between 1961 and 1970, beef's declining share of total expenditure on animal proteina was compensated for by rises in the proportiona of poultry meat and fish. Pork and mutton registered small increases in quantities consumed but, in term8 of money their shares of total consumption declined. Changes in Main Sources of Animal Protein ( ) % by % by Amount Value Value Amount Value Value (0o ton) (S/. 1o ('000 ton) (S/. M) Poultry Meat , Fish , Pork Beef 76 1, , Miutton Total: , Sources: Ministries of Agriculture and Fisheries and mission estimates. 1/ See Table 1.

72 ANNEX 3 Page 4 Furthermore, Government's policy of limiting beef imports and reducing consumption through tlhe imposition of "meatless" days is likely,to accentuate these trends (Annex 5). It is against this general background therefore, that the prospects for each of the major types of livestock production included in the project are examined. Beef Cattle 12. Production. The production figures given in Table 1 show an uneven upward grawth from 1960 to 1971 at an average annual rate of 1%. But these statistics are based on registered slaughterings and the higher levels of 1970 and 1971 may be partly attributable to the effects of the land reforn. Under the National Development Plan, production increases of the order of 7% per annum were Drojected, but these targets are being revised downwards and the new rate suggested is 4.8%. 13. Of the total national herd, estimated at abotut 3.5 millíon, nearly three-quarters are concentrated in the central and southern Sierra. Current policies impose price ceilings only on meat from animals three years of age and older, thus encouraginc the sale of younger animals at hip,her prices to feed-lot operators in the coastal region. This is more economic than continuing to range-fed old steers in the Sierra and the operation could be further encouraged by strengthening the marketing facilities for the purchase of young animals.- e 14. Beef cattle fattening in feed lot operations on the coast has been stimu]ated by prices above the official control level (Annex 5). Constraints to the expansion of the system, however, are shortage of good quality youncattle and seasona 1 shortages of cottonseed cake but there is scope for expanding the feed base by using molasses and fishmeal, which is being introdtuced by so-me sugar cooperatives. To take advantage of temporary pastures which have appeared near Piura as a result of the abnorrmally heavy rains, sone 40,000 heifers and 16,000 steers are being imported under a Government scheme that is intended to help increase the supply of cattle for fattening. 15. Beef cattle production will undoubtedly provide one of the main bases for the development of the Selva and some schemes are already being starteéd both by Government and private enterprise. 16. Project Considerations. Beef production in Peru is based on a mixed breeding systems in the Sierra and on feed lot production in the coastal region, utilizing all types of cattle, principally native and dairy breeds. Specialized beef cattle types are bred and fattened in the north of the country anrl in the Selva. There is a denand for medíum-and long-term credit to extend and intensifv al.l these operations, particularly production of beef cattle in the Sierra and Selva. 17. A farm operating under conditions similar to tliose found in the Selva has been chosen to serve as an illustrative model, but with minor variations, it would be applicable for other regions. Investrent costs in this e

73 ANNEX 3 Page 5 model include the establishment of new and improvement of existing pastures (utilizing fertilizers and legumes), machinery to maintain them in optimum condition and purchase of good quality breeding stock. The size of the farm is considered to be 110 ha, capable of susstainíng 164 animal units (1.5 AU/ha). At full development, from the eighth year, when annual production would level out at 26 fattened steers from 24 to 40 months old weighing 400 kg; 14 replacement heifers of various ages; and nine culled cows of 400 kg weight. With the proposed investments and improved management it should be easy to reach these targets, giving calf crops of 70%. Sheep 18. Production. Between 1964 and 1971, mutton production grew at only a little over 1% per annum to reach 23,600 tons, whereas imports increased from 5,100 tons to 8,800 tons. Of the estimated total production of 10,000 tons of wool, some 2,500 tons were used in the cottage industry, 2,000 tons in the Peruvian woollen industries, and the balance (5,500 tons) exported. 19. The total number of sheep in Peru is estimated at above 17 million, the bulk of which is grazed extensively on natural pastures especially in the central and southern Sierra. Under the land reform, new forms of cooperative and community organizations have taken over the large sheep haciendas and it i through these new units that it is hoped present production methods will be improved, particularly under Programs of Direct Action (Programas de Accion Directa) in Zones IV, VI, X and XII. Revised production projections for 1973/74 put the annual rates of increase at 4.8% for mutton and 1.6% for wool. 20. Prolect Consideratíons. It is considered that loans for sheep development under the Project will be relatively few, mainly because, in the chief sheep-growing areas (the central and southern Sierra) and elsewhere, the BFA has access to other sources of funds, such as the recent IDB loan, to finance the cooperative organizations involved. Nevertheless, some demand may arise from individual or cooperative enterprises in Zones V, VI and VII to which the IDB loan does not apply. The investments involved are not expected to be large, however, no special sheep farm model has been prepared. zims 21. Production. After a rapid expansion in the 1950's, national production of píg meat grew only at 1% per annum between 1960 and 1970 to a total of 46,500 tons, but it jumped in 1971 to 53,600 tone in response to higher prices following the shortage of red meat. Imports of pig meat are negligible. 22. Operations in the pig industry consist of: (i) commercial intensive units on the coast, utilizing imported strains and supplying Lima and the other main urban centers; (ii) extensive rearing of native breeds in the Sierra mainly for auto-consumption; and (imi) a growing production in the Selva. The present national herd includes nearly 2 million. A 6.6% annual growth rate has been forecast, involving mainly expansion in the commercial sector, but this will call for better conversion ratios and at least maintenance, if not improvement, of current feed/selling price relationships.

74 ANNEX 3 Page Project Consíderations. As far as pigs are concerned, Government policy favors the development of vertically integrated enterprises that include meat processing so as to extend the overall market for fresh pork and raise consumption levels. The farm model in Annex 14 is based on a herd of 315 sows, subdivided into three production lines of 105 sows each, utilizing buildings specially designed and constructed for intensive-type operations. Production would be not less than 4,000 pigs of 100 kg liveweight, some of which would be processed in the sausage factory to be built as the second stage of the sub-project. 24. In view of the scale of operations involved, this type of pig production would likely be undertaken only by cooperative units, with the trust of such loans probably going to sugar cooperatives to support their livestock diversification prograns. The central organization for the sugar cooperatives (CECOAAP) has the necessary technical resources to ensure proper planning and management of proposed pig production units. Poultry 25. Production. Commiercial production of poultry meat and eggs is concentrated near urban centers of the coastal region, which in 1970 accounted for 96.5% and 67.5%, of total production respectively. In rural areas, some poultry ís kept on free range to supply the farmer s own needs. Within the last decade, prodtlction of poultry meat and eggs has doubled reaching 53,600 tons and 30,000 tons respectively in /, and imports have ceased. This expansion took place entirely in the comntercial sector, with intensive production based initially on imported strains and made poultry the fastest growing component of the iivestock sector. The controlled prices for poultry meat compare favorably with other meat prices and as a result, such produce now accounts by value for 25% of total expenditure on animal protein (para 11). 26. National Development Plan projections involve a further doubling of poultry meat and egg production during the period 1971 to 1975, to help counterbalance the slower rate of growth expected in the other livestock sectors. Constraints on further expansion at this rate, however, include: (a) a decline in feed quality in face of price controls on millers' sales, despite maintenance of fixed price for locally produced maize 2/; (b) the need to import maize and other feedstuffs to supplement national production; and (c) marketing deficiencies and the need for more slaughtering and refrigerated storage capacity. 1/ Giving per capital consumption rates of 3.8 kg of poultry meat and 2.0 kg for eggs. 2j Of the 20 compound feed mills in Peru, four produce 85% of total output.

75 ANNEX 3 Page Proíect Considerations. Under the diversification program for the sugar cooperatives, the Central Agency for Supar Production Cooperatives (Central de Cooperativas Agrarias de Produccion Azucarera - (CECOAAP)) is planning to establish some vertically integrated units for the production of both eggs and poultry neat. These units would be sited next to the intensive pig units outlined in para 23 in order to share the samne infrastructure (roads, water and power supply) and would include feed mills, slaughterhouse, and cold storage and rmarketing facilities, as well as the poultrv production units. Such enterprises would probably be considered, at least in Dart, as coning under the category of agro-industrial investment for financing under the Project. 28. Because such projects are onlv identified and not prepared ín detaíl and because their size and character would require that specific loan applications be referred to the Bank for prior approval, no project model has been prepared. Llamas and Alpacas 29. Production. Fron an estimiated national flock of llamas and alpacas, totalling 3 million, somie 1Q,000 tons of meat and 3,500 tons of hi h grade wool is obtained. All the mneat and about 10% of the wool is consumed in the procucing areas, wbich are mainly in the central and soutihern Sierra. Tle rest of the x7ool is exported at a prpmium price because of its special quallties. 30. lunder the National Development Plan, it is hoped that production, which has been stagnant, can be increased at the rate of 2.7% per annurm, principally through the Introductlon of teclhnical improvements on the new production units established under the lánd reform. 31. Pro ect Considerations. Almost all the llamas and alpacas are bred in the altiplano of Agrarian Zones X, XI and XII, and Covernment funds have been allocated for financing the cooperative organizations involved in their production. There may, hot.zever, be a small demand for credit from other types of producers and, for this reason, these animals have been included in the livestock lending categorv. C. Animal Health Ceneral 32. Livestock in Peru are afflicted by foot and mouth disease, swine fever, liver fluke and some other diseases resulting from parasite infection. The incidence rate ís being reduced, however, through regular protective treatment encouraged by the veterinary service. e

76 A.NEX 3 Page In the daíry cattle industry, wide use is made of artfical insemination under services provided by both the Government and the private Livestock Associations, although the latter are currently in the process of reorganization. Research 34. Livestock research, together with the operation of breeding programs and demonstration farms, is carried out by IVITA, as well as by Government research stations and the Agricultural University of La Nolina. Although it covers all three natural regions of the country, the national research program is giving special attention to the animal health problems of the Sierra, where the largest potential for improvement exists. Recently, in view of the likelihood of future livestock expansion in the Selva, research work in the diseases of wild jungle animals that could be transmitted to cattle, sheep and poultry has also been intensified. Under the National Development Plan for , some 33 new agricultural research stations are to be established on a regional basis and will include veterinary divisions wherever livestock production is important. Extension 35. Livestock technical assistance services new form part of the integrated organization of each Agrarian Zone 1/ and are backed up by the speciaiísts at the Ministrv of Agriculture and the research stations. With this strengthened and improved technical assistance, borrowers for livestock investments under the Project should be able to prevent undue disease losses. 1/ See Annex 1.

77 ANWTE X 4 Page 1 PF.RU ACRICULTURAL CREDIT PPOJECT Annual Crop Production General 1. The crops to be discussed herein are not actually financed under the Project but will benefit from investnents in mechanization, drainage, and on-fari improvements as described in Annex 6. Major annual crops most effected by the Project would be corn, cotton, potatoes, sorghum, and other field crops. In the past, irrigated crop land in the coast that developed salinity problems as a result of the high water table was abandoned for other available land close by. Careless use of water aggravated the water table problen and existing drainage facilities were, in most cases, not maintained properly. Improper land leveling also accounted for excess water use and loss. The salinity, high water table, and poor irrigation, plus a low level, both in quantity and quality, of inputs such as seeds, fertilizers, and insecticides, resulted in a poor productivity record. Up qrading 2. Backed up by agrarian reforxn and because it is aware that water is the liniting factor in the expansion of agriculture in the very productive coastal area, Governrnent is taking steps to prevent poor utilization of irrigation water. Farmers that do not increase their production to acceptable levels may lose their water allotments and their farms. With these incentives, plus the need for increased profits, farmers and cooperatives are now prepared to make the needed capital investments to improve efficiency and increase yields. Crop Status 3. Corn. Corn was grown on about 374,000 ha in 1971, with about 46% of the crop being irrigated. The average coastal yield was 3.2 tons per ha, but with the use of hybrid seed and proper inputs, some farmers reported yields of over 6 tons per ha. Corn, as well as other feed grains, are in short supply and Government promotes investments aimed at improving yields. The average price received in the coastal area was S/. 3,500 per ton, which ls above the equivalent world market price of S/. 2,600 per ton. e 4. Sorghum. Sorghumn occupies some 7,500 ha, a re]atively s allu area in Peru. About 76% of the crop is harvested for grain and the rest for

78 ANNEX 4 Page 2 fodder. Sorghunm can be used in double cropping with corn or two crops can be taken by irrigating after the first harvest and letting the sorghum head out again. Yields average 3.1 tons per ha, but, at research stations, they have reached 4.2 tons per ha and yields should continue to rise. One of the biggest problems has been the birds that eat the grain before it can be harvested. Prices paid to farmers for sorghum have been lower than those paid for corn and amount to only S/. 2,800 per ton; however, the importance of the crop as a foodgrain is expected to grow. 5. Cotton. Land farmed to cotton in 1971 totaled 136,000 ha, producing an average yield of 1.7 tons per ha. The long staple type, Tanguís, is the mnost popular variety, with Pima next. The major portion of the crop is grown under irrigation in the north and central coastal areas, but cotton hectarage has been dropping steadily, with some 32,000 ha having gone out of production over the period. Low prices and low yields are the primre reasons for this decrease and even though prices have shown some improvenent recently (the average price was S/. 11,600 per ton in 1971), it is expected that the amount of land devoted to cotton will continue to go down. Government, however, is interested in maintaining production for the foreign exchange to be gained through export. In 1970, 73% of the crop was exported and in 1971, 62%. 6. Potatoes. Potatoes occupied some 320,000 ha in 1971, with average yields ranging fron 3.7 ton per ha at Ayacucho in the Sierra zoné wíthout irrigation te 20 tons per ha at Lima and Callao in the coastal zone with írrigation. The average price received in 1971 was S/. 2,290 per ton, and, even though prices are set by the Governnent, large variations occur between periods of over supply and short supply. Farm Model 7. The annual crop farm model (Annex 14, Table 2) is similar to some of the farms found in the north and central coastal region where sorne water table and salinity problemis exist. One-third of the land of the farm in the model was not farmed because, In the past, it was easier to abandon land than to correct the problens. In addition, yields were affected on the remaining land. New, under the agrarian reform law, farmers are strongly encouraged to reclaim or improve the land they are responsible for. Twentv percent of the fartn required sub-surface drainage, at a cost of SI. 4,257 per ha; land tevelilng xwould bp necessary on 30% of the farm, at a cost of S/. 9,675 per ha- anc 5,000 mn of the main distribution dítch would be lined to eliminate seep,ge, at a cost of S/. 120 per mi. As a resuilt of the reclamnation of abandoned I.and and the need for better land utilization through double cropping of sone crops, additional investment in tractors and implements would be made. Cropping intensity, 91% before the investment, would increase to 166% pt ful1 uroductioni. In tlie first year after investment, the land brought back into production would prcbably yield less than that part of the farm which was being used but sone improvemrent could be expected e in the yiclds the second year. Then, in the third and fourth years, with

79 e ANNEX 4 Page 3 increased levels of inputs, yields t7ould continue to increase, and, in the fifth year, full production could be reached. Income values of full production income used in the model were 35% the first year, 50% the second year, 70% the third year, 90% the fourth, and full value the fifth year and onward. The financial rate of return has been estinated at 39% over a 20- year period, with reinvesttent for equipment in the llth year. Project considerations and investment costa are discussed in Annex 6.

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81 ANNEX 5 Page 1 PERU AGRICULTURAL CREDIT PROJECT Marketing of Products to be Financed Under the Project Introduction 1. Production generated from investments under the Project would consist mainly of: (a) Fruits (including avccados, mangos, bananas, olives, grapes, pineapple and lemons); (b) Maize and sorghum; (c) Cotton; (d) Potatoes; e (e) Meat; and (f) Milk. Attention ls therefore focussed on the marketing arrangements for these products, although it is necessary first to give some general background information on price and marketing policies and problems in Peru. General Productíon and Price Polícy 2. Under the National Development Plan , priority treatment is accorded to the following three main groups of agricultural products: (a) Deficit products (including wheat, vegetable oils and oilseeds, meat and milk) which traditionally Peru has had to import to meet consumption needs. Here, the emphasis is on expanding production in order to keep imports within bounds in the face of rising demand. e (b) Regulated products (rice, maize, potatoes, vegetables and poultry), where, for varying reasons controlled expansion is called for. In the case of rice, for example, self-sufficiency has already been reached at levels above world market price, while increased maize production, although needed for livestock (particularly poultry) expansion, has to be kept in balance with cotton in the coastal region.

82 ANNEX 5 Page 2 (c) Export products, including not only the traditional export crops (cotton, sugar, coffee, wool and fibers) but also new products, particularly fruit and vegetables, where, in addition to an expanding internal demand, export market possibilities may exist. Almost all the products to be financed under the Project come under one or another of these priority groups. 3. Recent Bank survey reports on Peru 1/ have stressed the need for the adoption of more appropriate price and import policies to give a greater incentive impact to the production program set out in the National Development Plan Prior to 1967, policy was directed towards maintaining low prices to urban consumers and duty-free imports (particularly of meat) were relatively freely admitted, often at the cost of weakening production incentives. In 1967, the devaluation of the Peruvian Sol (from SI/ to the US$ to S/ ) improved the terms of trade for agricultural producers. Since 1969, imports, now entirely under Government control, have been restricted and have not been allowed to affect adversely producer prices. The Government is now consideríng adopting a strategy, which would involve a balancing of competing objectives, such as, the desire to stimulate production of certain products, to raise incomes of the rural population, and to keep urban cost of living from rising too rapidly. The Bank intends to continue closely to follow the question of agricultural policy in Peru and to review the Government the need to give high priority to production objectives whenever these objectives are not accorded adequate weight. 4. Implementation of this policy remains, however, uneven. While, in general terms, producer prices are at satisfactory levels, as indicated by the financial rates of return on the farm models set out in Annex 14. Controlled prices for beef at S/. 35 per kg ungraded at wholesale market are low compared with current world prices (S/. 108 equivalent per kg U.K. c.i.f. any U.S. port of entry for imported boneless manufacturing frozen beef). In fact, however, effective prices to both producers and consumers are considerably higher than the control price level. For young animals classed as "extra," the producer gets about S/. 30 per kg liveweight (=S/. 62 per kg deadweight), whereas prime beef cuts are retailed at over SI. 100 per kg. Government has its livestock price policy currently under review, but apart from the problem of having to balance consumer and producer interest, there are unusual complications in the present situation in Peru. On the one hand, because beef imports on Government account are sold at the controlled price, a heavy and increasing subsidy to the consumer is involved in these transactions (para 6); on the other hand, as the controlled price is used as the basis for the assessment of livestock compensation payments under the land reform, any increase in its level would automatically raise compensation costs which have to be paid in cash. 1/ Economic Growth of Peru: Problems and Prospects WH-206a, March 31, 1971 and Peru: Economic Situation and Medium Term Prospects WH-212a, January 31, 1972.

83 ANNEX 5 Page 3 5. For most other commodities, Peruvian prices are roughly in líne with world market prices. In the case of rice, however, artificially high prices are paid to producers. The price for paddy delivered rice mill is S/. 5,000 per ton, which gives an equivalent f.o.b. price for milled rice of approximately S/. 9,000 or US$232 per ton. Comparable f.o.b. world market prices (August, 1972) were US$141.7 per ton for Thai rice (5% broken) and US$79.3 per ton for Burmese rice (42% broken), showing that the Peruviai price is two to three times higher than world market price levels. This high price has led to a 65% increase in paddy output during the last decade, enabling Peru to achieve self-sufficiency in rice in 1970, largely at the expense of a reduction in cotton plantings and production. 6. To mitigate the effect of this price policy on consumers, rice is sold by Government at a loss of 74 centavos per kg in Lima/Callao. The growing cost of this and other subsidies is shown by the figures given below: Product Type of Period Estimated Cost' Subsidy S/. m. US$ m. Rice Consumer 1973/ Beef Consumer 1971/ Beef Consumer 1972/ Potatoes Support price 1973/ Operating Costs 1973/ Source: Oficina Sectorial de Planíficacion Agraria. As this represents nearly 11% of total planned expenditures in the agricultural sector during the five years (excluding compensation payments under the land reform), it seems clear that limits will have to be set soon on this charge on budget funds. Price Control Mechanisms and Agencies 7. Price control regulations cover some producer prices and most wholesale and retail market transactions. Measures affecting producer prices fall into three main categories: (a) fixed prices applying to rice and milk; (b) support prices intended to even out seasonal fluctuations in the case of potatoes and beans (the floor price for wheat is nominal); and e (c) contract prices for maize, vegetable, and oils and oilseeds, between producers and mills, which have to be approved by the Ministry of Agriculture.

84 ANNEX 5 Page 4 8. In the main wholesale and retail markets, maximum prices for virtually all commodities are fixed at fortnightly intervals by local Price Commissions (Juntas de Regulacion de Precios Agropecuarios, JURPA), but despite enforcement efforts, these price controls are frequently ignored whenever scarcities develop. 9. The key agency in the implementation of Government's policy for the regulation of prices, imports and marketing is the Agricultural Service Enterprise (Empresa Publica de Servicios Agropecuarios, EPSA), formed in 1969 to combine a number of separate agencies operating in these fields often under the control of different ministries. As an autonomous agency under the Ministry of Agriculture, EPSA is responsible for the purchase, milling and sale of the whole rice crop and for support price purchase of potatoes and beans. It handles all meat imports and is responsible for the National Slaughterhouse and Storage Unit (Frigorifico Nacional) at Callao, which has the largest slaughtering and refrigerating capacity in the country. EPSA also operates some rice mills and fertilizer plants, runs the Governmentes agricultural machinery pools and supervises wholesale market installations and cattle fairs. Recent additions to EPSA's functions include the operation of a Government scheme involving the importation of some 40,000 cattle and their initial fattening on temporary pastures that have appeared in Piura as a result of abnormally heavy rains, and the operation of a chain of 14 supermarkets in Lima, previously owned by a private company that went bankrupt. Marketing Arrangements with Special Reference to Products to be Financed under the Project 10. Excluding the large estates, agricultural marketing in Peru has been characterized by the weak selling position of small and scattered producers, absence of grading and packing standards, high transport costs, rudimentary processing facilities to deal with seasonal surpluses (Annex 8), deficient dissemination of market information, and, on the consumption side, by the existence of not so much a national market as a number of separate and partially isolated markets, corresponding to the main centers of population. The concentration of one quarter of the population of the whole country in the area of metropolitan Lima makes that, of course, the preponderant market. In Lima and other towns, the low income of the majority of the population limits the size of their purchases at any one time and so keeps in existence a mass of small shops relying on high margins rather than large turnover for their profits. Complicated market channels and excessive numbers of intermediaries inevitably add to costs. Specific price and marketing considerations for commodities to be produced under the Project are examined in the succeeding paragraphs. 11. Fruits. Fruit growing accounts for approximately 262,000 ha or 11% of the total ctltivated area of the country. There is, however, considerable scope for production increases in project commodities as indicated by the demand/supply projections given below:

85 ANNEX 5 Page Internal Internal Product Supply Demand Deficit Supply Demand Deficit (All in '000 Metric Tons) --- Bananas Lemon Avocado Mango Source: Oficina Sectorial de Plariíficacion Agraria. 12. Since all the problems noted in para 10 above apply in the marketing of fruit, there are wide margins between producer and consumer prices, high seasonal price variations (the highest price for lemons in November can be as much as four times higher than the lowest price in June), and different price levels for the same product on the same day in different localities in excess of those justified by transport costs. 13. Maize and Sorghum. The livestock expansion program will generate a rapidly increasing demand for maize and sorghum, which can only partially be met by increasing local production, as the following table indicates: 1/ Demand/Supply Projections for Maize- and Sorghum Internal Internal Year Demand Production Deficit Imports --- (All in '000 Metric Tons) / / T T T Source: Oficina Sectorial de Planificacion Agraria. /1 Type amarillo duro only (other types being produced for human consumption). /2 Importa of wheat and sorghum destined for animal feed8tuffs. 71 Projections. 14. In the coastal region, maize and cotton are competing crops for the same scarce irrigated land. Since cotton a a major export crop and maige can be imported relatively easily, world market price trenda and relative production costs are being taken into account by Government before deciding whether the maize area should be increased; in the meantime, the emphasis in production plana a on increasing yields per ha through the apread of the use of hybrid varieties.

86 ANNEX 5 Page Cotton. Peruvian cotton, of long and extra-long staple, is the second largest agrícultural export (after sugar and excluding fishmeal). In 1971, production of cotton lint totalled 80,000 tons, of which 52,250 tons (or 65%) were exported, and the balance used jn the local textile industry. Cottonseea ís the chief source of vegetable oil in Peru and imports of edible olls and fats are íncreasing. While a steady increase ín local demand ls expected, world market prospects rule out any major change in cotton export levels, and targets ln the National Development Plan envisage modest íncreases ín output from higher yielding varieties on a reduced area. 16. Ginneríes are privately owned and prices paid to producers for seed cotton, which have to be approved by the Ministry of Agriculture, vary with changes in world market prices for lint. The payment of an incentive subsidy by Goverament to producers is under consíderation. 17. Potatoes. Potatoes are one of Peru's most important crops, accounting in 1971 for 300,000 ha or 13.5% of total cultivated area and a total production of 1,968,000 tonas. The bulk of the planted area is ln the Sierra, where unimproved varieties and heavy losses due to pesta and diseases result in low yields; production in the coastal area, although smaller, is relatively important because it is virtually all marketed, has higher yields and, by virtue of differing harvesting perioda, complementa the Sierra production in supplying the Lima market. The abnormally cold weather ln the first quarter of 1972 affected both seed supplies from the Sierra and the harvest in the coastal regíon, so that a fall in production of about 250,000 tons ls forecast for Overall, however, a growth rate of 6% per annum is projected for the plan period In an endeavor to even out fluctuations, retail prices are officially controlled at S/ per kg throughout the year. In fact, this control (which has cost EPSA SI. 49 million, or US$1.3 million, to operate) has failed both to provide a floor príce to producers in time of surplus production and to prevent consumer prices from rising on the `black market" t in time of scarcity. 19. Meat. Meat production has falled to keep up with a rising demand and imports have been necessary to meet the deficit, as the following figures for 1970 show: Species Production Demand Deficít Imports (ln '000 tons) --- Beef Mutton Pork Total Source: OSPA.

87 ANNEX 5 Page 7 All imports of meat are now handled by EPSA, and the higher cost of beef imports, due to rising world market prices, has led to some substitution of mutton for beef in an endeavor to save foreign exchange and reduce subsidy costs (para 6). It has been possible to keep imports at a lower level than the estimated deficit because of: (a) restriction of the demand for beef by the imposition of meatless days (15 per month in Lima) when the sale of red meat s prohibited; 1/ (b) substitution of poultry meát and eggs; and (c) increasing fish consumption. 20. In the case of poultry, it is assumed that per capita consumption of chicken and eggs will expand more rapidly than in the past, particularly in the urban areas. Provided there is improvement in marketing facilities, including the provision of more refrigerated storage, and expansion of feeding stuff manufacture, production in 1975 could be more than the 1970 level of 50,000 tons of poultry meat and 26,000 tons of eggs. 21. With rising population and living standards, the demand for beef, mutton and pork is expected to continue to outstrip national production, so the National Development Plan gives priority to livestock development measures. Revised forecasts of production increases made by the Oficina Sectorial de Planificacion Agraria are as follows: Actual Revised Forecast ---- (in '000 tons) Beef Mutton Pork In the achievement of targets of this magnitude, it is recognized that improvements in the present price and marketing arrangements will have to be effected. 22. As regards price policy, the official market price for beef (S/. 35 per kg) has not been allowed to rise since However, the fact that the controlled price relates to non-classified meat ("cabeceada") makes it easy for much higher prices to be charged for quality cuts, and effective produces prices are also at higher levels (para 4). e - 1/ Peru's per capita consumption of beef and veal (15.3 kg carcass weight equivalent) is already the lowest in Latin America.

88 ANNEX 5 Page On the marketing side, there is a particular need to create more livestock markets, to facilitate the movement of animals from breeding grounds in the Sierra to fattening lots in the coastal region and to extend and improve slaughtering, refrigeration and transport facilities. 24. Milk. During the four-year period , total milk production remained at around the 750,000-ton level making imports of dry milk necessary. However, in 1970 and 1971, production rose to 825,000 tons and 897,000 tons respectively, and imports were curtailed. Cow milk accounts for 70% of the total production and ís the fastest growing section. In the National Development Plan demand for cow's milk was estimated to rise from 600,000 in 1970 to over 900,000 in 1975, but revised projections suggest that the rate of production increase will be of the order of 2.5% per annum. 25. The producer price for mílk is officially fixed at SI per litre; and while this is effective for milk produced in the Sierra for industrial use, it is frequently exceeded in the coastal region. The absence of any quality control. and grading system, the shortage of refrigerated storage and transport, and the sale of reconstituted milk (made up partly of imported powder and partly of fresh milk) are recognized marketíng problems that affect the quality of milk sold to the consumaer and adversely affect demand. Future Trends 26. As already noted in para 3, there has been a najor change of emphasis in agricultural price policy towards the maíntenance of producer prices at levels that will provide reasonable returns to efficient production units, and so, through changes induced by the land reform, help raise the living standards of the mass of the rural population. With some exceptions, notably rice prices, which are above, and official beef prices whlch are below, current Peruvian agricultural prices are roughly in line with world market levels. The successful maíntenance of this price policy will depend on whether the new Peruvian agrarian structure can produce on such competitive terms, and this, in turn, will be contingent upon increasing productivity in terms of output per ha and per man. This policy will be tested as the duties on agricultural products between member countries of the Andean Pact are progreasively reduced and finally abolished by At the moment, Peru has only invoked safeguard clauses under the Cartagena Agreement in respect of bananas from Ecuador and apples from Chile. 27. The Governnment 1s aware that more than just agricultural issues are involved, slince increases in agricultural prices would lead to pressures on the cost of living, on wages and on industrial costs, affecting Peru's competitiveness in export markets. While the effect of such increases can be masked by consumer price subsidies, this involves not only strict price and marketing regulation but also a burden on budgetary funda (para 6). On the other hand, without an increased growth rate in agriculture, more imports will be necessary and the balance of payments will be threatened.

89 ANNEX 5 Page 9 e 28. lf some of the marketing deficiencies mentioned above could be improved, the resulting reduction in distribution costs would partially contribute to the solution of the problem of balancing producer and consumar prices. This ís fully recognized by the Government. Much ínvestigation and planning of marketing improvements is being undertaken and in the National Development Plan , SI. 874 million (US$22.6 million, has been allocated for investment in marketing lmprovementa. 29. The cooperatives emerging from the land reform are likely to play an increasingly important part in the marketing improvement process. At the moment, they are concentrating on production problema and, for the most part, continuing to use traditional marketing channels. In the next phase of their operations, they may be expected to develop new marketing channels, such as, for example, direct supply contracts with supermarkets, either those privately owned or those recently taken over the EPSA. The creation of such alternative distribution channels will not only benefit the participanta but also provide the necessary competitive spur to improvements in the traditional marketing system. 30. Apart from public investment in marketing infrastructure, there will be a growing demand, particularly from production and service cooperatives, for long-term credit to finance the installation of on-farm storage, and provision for this type of lending has been included in the proposed project. e

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91 ANNEX 6 Page 1 PERU AGRICULTURAL CREDIT PROJECr Mechanízation, Irrigation and Land Reclamation to be Financed under the Project A. Mechanization Introduction 1. Tractors and other machinery have been used in Peru in limited sectors, such as the sugar plantations, for over 30 years. Fifteen-year records of tractor imports for agriculture show that, for the seven-year period from 1957 through 1964, an average of 465 tractors were brought in annually. For the three-year period, 1965 to 1967, this average jumped to 768 agricultural wheel tractors annually, with the year 1966 peaking out at 820 units. Demands for agricultural tractors, however, fell to 212 in 1968 as a result of devaluation in September of 1967 and a period of uncertainty before the change in Government on October 3, With the agrarian reform law coming into effect June 24, 1969, the period of indecision continued for the farmer, with tractor importa remaining low--about 300 units in Then in 1970, imports doubled, jumpíng to over 600, and, in 1971, they settled back to 450 units. Current estimates place the active Peruvian agricultural wheel tractor fleet at 6,000 units. Representation 2. All major tractor manufacturers are represented in Peru and dealerships are generally well staffed and have good service departments. The four major countries in order of numibers of tractors supplied, are: Great Britain, USA, Federal Republic of Germany, and Italy. At least 12 different tractor brands are represented, with some dealers able to offer the same brand from manufacturers in three different countries. Import License 3. Since May /, all imports of wheel tractors must be authorized by license from the Ministry of Industry and Commerce (MIC). A quota to allow importation of 1,100 units per year has been established and allotments for supply of 860 are understood to have been distributed as follows: e

92 ANNEX 6 Page 2 Wheel Tractors Dealers per year Supplying Countries Ford 160 U.K., USA International Harvester Co. 120 U.K., Federal Republic of Germany, USA David Brown 120 U.K. John Deere 100 Federal Republic of Germany, France, USA Massey Ferguson 80 U.K., France J.I. Case 80 USA Zetor 80 Czechoslovakia Fiat 60 Italy Universal 60 Rumania TOTAL Other companies currently supplying tractors to Peru but not mentioned in the unofficial quota are Leyland (U.K.), Deutz (Federal Republic of Germany), and Allis Chalmers (USA). Since the allotment does not distribute all of the quota of 1,100 units, dealers who have used their quota have had little difficulty in getting additional license for importation. Additionally, the 1,100-unit quota is below the official estimated 1972 market of 1,500 tractors which was included in the S.D. 984/71. Custom Duties 5. All agricultural wheel tractors and implements are fully exempt from customs duties. Implements 6. Most implements are available from all parts of the world. However, any implements such as the three-point hitch plows (2,3,4, and 5 disks) and disk harrows that are manufactured locally are prohibited from importation as long as supplies are adequate. 1/ Supreme Decree No. 084/71.

93 ANNEX 6 Page 3 Tractor Plant Tender 7. On March 2, 1971, MIC published a call for international tenders for a tractor, assembly plant to be located at Trujillo. The purpose of the plant as stated was to manufacture agricultural tractors in Peru in quantities sufficient to supply fully the requirements of the domestic market and to export the surplus. The demand for agricultural tractors is estinated at 1,500 units per year in the national market and 6,000 units per year in the market of the Andean Group. The tractor models to be manufactured in Peru are as follows: Model Number Hp 800 units per year Hp 1,000 units per year Hp 200 units per year Present Status S.. The contract for the establishment of a tractor plant has finally been awarded in late It is estimated that it would take a minimím of 36 months after signing before production would get underway. Project Portion 9. If the 15-year average of agricultural wheel tractor sales (about 510 units a year) continues, the proposed project would finance about 12% of the tractors bought over the four-year disbursement period. Based on the Government's estimated need of 1,500 tractors a year, the percentage of tractors financed under the proposed loan would fall to about 4%. B. Irrigation Water Use e 10. Some 90% of the water consumed in Peru is used for agricultural purposes but water is the principal limiting factor in agricultural development. In the past, little attention was given to actual crop requirements, efficient use of water, maximum development of a `catchment area," characteristics of a given ground water supply, or national needs, but Government now recognizes that a well planned program for utilization of water, as well as land resources, is essential to the successful adjustment of national ouitput based on national demand.

94 ANNEX 6 Page 4 Water Law 11. A new water code came into effect on July 24, 1969 with the publication of Decree-law No , which revokes the 1902 code and a whole seríes of other legal provisions and gives the State absolute ownership of water in all forms and locations. Government is free to determine its use, with human and animal consumption having the overriding priority, followed by agriculture, power, industrial, mining and other sectors defined in the code. Permits are issued on the basis of the end use and period of utilization. Technical Information and Planning 12. As a direct result of agrarian reform, the Direccion General de Aguas e Irrigacion and other departments in the Ministry of Agriculture have had great demands put on them to supply technical information to aid in planning. A rapid expansion has therefore taken place in the Directorate of Water and in the rest of the departments of the Ministry. USAID and other foreign government assistance, both technical and financial, is also being utilized. 13. Cultivation and irrigation plans are to be prepared for each Irrigation District by the water authorities, working in association with all other officials in the agrarian zone, and are to be coordinated with representatives of users through the so-called "Committee of Users." Fortythree basin studies in 56 valleys are now underway--16 are to be in detail, four semi-detailed, and 23 exploratory--and ground water studies have recently started, with water depths in 56 valleys to be monitored throughout the year. Additional studies ranging from soil moisture relationships to irrigated crop production are also underway. Government is aware that the objectives of the new water code cannot be implemented overnight, considering the scale of studies and works, the major investment needed, and the change in attitudes required both by thlose who manage water and by those who use it, but it is nevertheless, intended to accomplish its purposes as quickly as possible. Some agrarian regions of the north coast have already initiated allotment of irrigation water based on the crops needed as specified in the National Plan. A farmer in one of these zones must have his cropping plan approved by the local "Committee of Users" before he can receive crop financing or his water allotment. Water Charges 14. Water charges of S/.220 per ha (US$57) semi-annually have been set for surface water, but, due to various natural disasters such as floods and earthquakes, few collections have been made. Individual water users are responsible for maintaining and cleaning lateral ditches which may service several farms and days are set aside periodically when the affected farmers join together to perform the necessary work. While measuring devices are now available in the existing irrigation systems, all water will in future be allocated on a measured basis. Cooperatives will need to install control e

95 ANNEX 6 Page 5. devices and measuring flumes to allocate their water to the varlous fields, while individual landholders will be responsible for measuring devices from the lateral ditches to their holdings and for those required for proper distributíon on their farms. Improper water use, as well as other poor farming practices, can result in an individual's farm being redistributed under the agrarian reform program. 15. Cooperatives put together from a number of smaller units will require realignment of irrigation water distribution systems and other physical layouts. Under agrarian reform procedures, a complete physical inventory and a farm plan, including timetable budgets and financial requirements, is drawn up on a new farming unit before it is turned over to the new owners and managers. A large amount of capital ís needed to inilement these farm plans and initially Government has helped with the needed investment costs. However, as the unit becoomes viable, it is up to cooperative managers to find appropriate sources of finance. Some of the proposed project loans will come from this demand for long-tenn capital. Wells and Pumps 16. A linited nuiber of new wells will be permitted in specific areas by the Ground Water Directorate. Some of these wells will be in the north coast area, west of Piura, an area of high water table and others will be in areas where exploitation of underground supplies is justified. Some reworking of existing wells will be included where supplies are not adequate and where ground water conditions warrant it. There are now about 9,000 wells in Peru, but this number may be increased to from 12,000 to 15,000, pending the results of the current ground water studies. There are a number of well drillers in Peru, using both percussion and rotary-type well rigs, and steel well casings, as well as steel columns and shafting, are imported. Irrigation Pumps and Mbtors 17. Centrifugal and turbine pumps are manufactured in Peru as well as in some of the other countries of the Andean Group. All motors for irrigation pumps are imported. C. Land Reclamation Drainage e 18. Reclamation needs arise from a variety of causes, such as poor irrigation practices, lack of sufficient natural drainage, improper maintenance of existing drainage systems, flood damage, ungraded fields, poorly leveled land, improper farm layout, or the joining together of small holdings that were previously farmed separately.

96 ANNEX 6 Page Little has been done in the past about drainage in Peru. A few open drains were constructed but maintenance was neglected in most cases. Some of the large plantations put in limited underground drainage tied in with open drains, but for the most part, areas where drainage became a problem were abandoned, some as long ago as 40 years. In 1971, the Arena Pilot Drainage Project was started west of Piura on land that had been abandoned many years ago because of high water table and resulting salinity. Variation in surface and underground spacing of drains is being evaluated and improvement in firstyear rice crops is already apparent. A shallow underground water supply makes this an attractive area for reclamation if costs are not prohibitve. 20. For example at the Cayalti Sugar Cooperative (near Chiclayo), it is considered that about 20% of the land in this area needs subsurface drainage to eliminate surface salt accumulation and that some lands that are no longer farmed could be brought back into production with a limited investment in drainage facilities. To avoid inefficient irrigation and future drainage problems, the land benefiting from irrigation projects like Tinajones, close to Chiclayo, is surveyed and mapped. Farms should be laid out with irrigation distribution system, main drainage systems, and proper land leveling before any farming is allowed. Land Level_ng 21. Many farmers are attempting to upgrade their farming techniques by leveling their fields to facilitate better water application and utilization. The land leveling component of the Project would also be necessary where new lands are coming into production, where releveling is required for tree crops, and where abandoned land is being reclaimed. Flood Protection 22. Many of the farms of Peru are adjacent to streans which occasionally cause flooding. This situation has resulted in a demand by farmers for longterm capital to cover investments in flood protection. D. Project Considerations 23. Due to the shortage of medium- and long-term funds over the last few years, many on-farm improvements have been neglected, which now must be attended to. Also, long-term plans of cooperatives are ready for implementation and require capital funds for fulfillment. These needs, coupled with the pressure applied by agrarian reform for improved yields and better water and land use, have caused management personnel to accelerate the pace of investment. The need for additional mechanization has increased, partly because newly formed cooperatives in some areas have reduced the labor available to independent farmers. About 250, 60- to 70-hp wheel tractors with the necessary

97 ANNEX 6 Page 7 ímplements are included in the project. Tractor and implemnent loans are expected to be made to production cooperatíves, service cooperatives (rental eqtuipment pools), and farmers who nav or may not do some outside customn tractor work. Other medium- and long--term financing is included for wells, pumps, motors, on-farm irrigation facilities, drainage, minor flood control protection, land levelling and other minor improvements. Some loans would be for only one item but most would probably be for a combination of improvements. Mechanization, irrigation, and reclamation have a combined investment cost of S/.402 million, or 25% of the total lending program. An investment model has been developed (Annex 14, Table 2) which shows a financial rate of return of 39%. The investment 1/ includes drainage, land levelling, lining of main irrigation distribution ditches, and mechanization.. 1/ Discus8ion of Model, Annex 4 - Crops to be financed under project.

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99 e ANNEX 7 Page 1 PERU AGRICULTURAL CREDIT PROJECT Perennal Crops to be Financed under the Pro_ect General 1. Fruit crops occupy about 11% (262,000 ha) of the cultivated area, having an investment value estimated at S/. 20 billion (US$5i7 millíon) and a 1972 production value of over SI. 3.6 billion (US$93 millíon). Fruit imports in 1970 ran to about SI. 249 million (US$6.4 million) and demand/supply (Annex 5) projections in 1972/74 show deficits in supply for all major fruit except oranges. Furthermore, demand is expected to increase with prospects of exports developing under the Andean Pact Trade Agreements in which Peru has special clauses protecting her domestic market from Ecuadorian bananas and Chilean apples. Summaries of major perennial crops likely to be included in BFA's future lending program are given below. Lemons 2. Lemons are grown under both irrigated and rainfed conditions, with the largest group (47% of the area) located primarily on the north coast under írrigation. The second group (36% of the area) is scattered through the Selva, grown mostly under nonirrigated conditions. There are about 6,500 ha of lemons in Peru, 1,200 ha in new plantings. The lemons are spaced 10 m x 10 m (100 trees/ha) and come into bearing in the fourth and fifth years, with a return above annual cost occurring in the sixth year. The biggest annual cost, besides harvesting and packing, is pruning, whlch is extremely important if yields are to be kept to a maximum. Yields in 1971 under irrigated conditions averaged 11.7 tons/ha and under nonirrigation, 10.5 toms/ha. Lemons are harvested the year around, with peak production occurrlng in June. Lemon oil plants process the surplus fruit during this peak period and new plants are under construction. The national production of lema»ns in 1971 was 60,000 tons at a farm-gate value of SI. 86 million. Lemona for the fresh market are graded and packed in wooden boxes adjacent to the grove. Olives e 3. All of the olives in Peru are irrigated and 70% are located on the south coast. Trees on half of the 4,900 ha are less than eight years old and average yíelds are 3.7 tons/ha, with some from older trees reaching 4.7 tons/ha. Most of the olives are processed in wooden barrels at the grove and marketed in Lima but some interest has been shown by USA buyers. Quality

100 ANNEX 7 Page 2 is difficult to control, however, with the present batch method. Olive oil is made primarily out of cull olives, but growers who do not process their own receive l very low price fromn wholesale buyers. Since lack of processing facilities is also one of the factors limiting new plantings, growers plan to build a plant of their own. Bananas 4. Bananas occupy the largest portion--70,981 ha-- of the land devoted to fruit. About 78% of the plantings are in the Selva, mostly in the south part of Peru. The 15% grown on the coast are irrigated, primarily in the north near Piura and Tumbes. Most of the plantings are not resistant to "Mal de Panama" or Moko disease but, as a result of problems in recent years, the BFA finances only resistant varieties. Plantings in the Province of Moropon (near Piura) are recording yields of 27 tons/ha while average yields in nonresistant plantations are only around half of that figure (14 tons). If bananas are planted at the right time of the year, a 30% crop or better can be expected in the first year, with the next year yielding at least 70% of the yield of a mature plantation. Many of the new plantings are going to higher density, running from 1,600 to 2,500 per ha. The yield (20 tons/ha) used in the farm model is based on a plant population of 1,875 palms per ha. The price of bananas roadside at the plantation is about SI. 2,000 per ton, compared with the world market price of SI. 2,500 per ton. Avocados 5. Avocados total about 10,260 ha bearing and 1,750 ha nonbearing, with 50% grown in the Selva without irrigation and 35% in the coastal region with írrigation. Two-thirds of the plantings are in the central part of Peru and a large portion of the remaining third is located in the north. Normal plantings use 120 trees/ha although some experimental plantings have been made at a higher density to gain an earlier commercial yield. Avocados in Peru start producing around the fifth or sixth year, with commercial production by the seventh year. National average production is 10.3 tons/ha, although much higher yields are possible, as shown by 26.3 tons/ha recorded for 75 ha in the Province of Lambayeque has showed. Fruit is packed in the orchard and the farm-gate price averages about SI. 6,000 per ton but varíes during the year. Supply and demand projections show a growing deficit, reaching 22,000 tons in 1974, or a need for an additional 1,500 to 2,000 ha, and considerable interest exists to expand plantations, provided long-term credits could be provided. Apples 6. Almost all of the apples grown in Peru are irrigated, with 85% of the 8,100 ha devoted to the crop located in the central part of the country around Lima. The coastal area has 60% of the orchards and the rest are in the Sierra. Almost 1,400 ha were nonbearing in Coastal yields average around 12.6 tons/ha while the average yield in the Sierra is 9.3 tons/ ha. The farm price in 1971 averaged S/. 2,870 per ton.

101 ANNEX 7 Page 3 Mango 7. About 72% of the mango groves in Peru are located in the coastal area and are irrígated. These groves are concentrated in the north around Piura, with the major portion north of Lima. Some 23% of the orchards are ín the Selva where they grow without irrigation. Out of the total 7,057 ha used for mangos, about 26% are young trees and classed as nonbearing. Mangos start producing in the fifth year and continue to increase in yields at least through the 10th year. Although good mature groves average 10 to 12 tons/ha, a 45-ha planting in the Province of Lambayeque prod!uced an average of 20 tons/ha in For the most part, the picker sorts and packs the mangos in the area of harvest. Prices vary throughout the harvest period but average about SI. 5,000 per ton. Pineapples 8. Pineapples are primarily grown without irrigation in the southern Selva, with some 83% of the 4,390 ha of plantings located south of Lima. The main coastal plantings, all of which are under irrigation, are at La Libertad. Yields of both the Selva and coastal area average around 15 tons per ha. Prices vary considerably, probably due to transportation problems, but the average 1971 prices for the Selva were S/. 1,270 per ton, while coastal areas received an average of S/. 2,900 per ton. Considerable interest exist for new plantings in the north coastal area. Grapes 9. The commercial grape growing area is confined to the irrigated central coastal area, with 85% of the total 12,000 ha located in the Ica, Lima, and Callao areas. About 20% of this hectarage has not yet come into bearing. Commercial production starts in the fourth year but 25 to 30% of a normal crop can be harvested in the third year, depending on date of planting. Yields of mature vines range around 6.4 tons per ha and 1971 prices averaged SI. 6,260 per ton. Grapes are marketed fresh to the winery or the distillery. The national liquor, 'pisco," is distilled from grapes and has found favor ín the export market. Plane for 1975 call for the exporting of 26,700 Uters. Other Perennial Crope 10. Another crop which does well in the coastal area is white asparagus, but only 570 ha are planted under irrigation in this region. Another 400 ha in the La Libertad area produce crops of excellent eating quality. The yields range from 4 to 5 tons/ha and are marketed fresh or to the cannery. The cannery in Trujillo a paying an average of S/. 5,000 per ton delivered. Project Considerations 11. BFA has been financing the establishment costs of the perennial crops but a shortage of medium- and long-term funda has caused a slowdown

102 ANNEX 7 Page 4 in planting. The Ministry of Ag-iculture's Department of Planification shows a defkcit in the production of perennial crops and it is encouraging expansion by the growers, many of whom are ready to diversífy since they feel that present annual crops such as cotton are not producing a sufficient income. The farm model (Annex 14, Table 2) depicts a farm, formerly producing cotton, corn, and sorghum, on which one-third of the area would be converted to perennmal crops, replacing part of the cotton hectarage. Bananas and mangos were selected for the model, but any of the other perennial crops discussed could have been used. The financíal rate of return for the model is estimated to be 26%. The Project would provide medium- and longterm Financing for any of the perennial crops as long as investments could be justified on the basis of commercial yields and a proven market and assurance that other BFA requirements were met. Investments would be mainly in olives, lemons, mangos, and bananas. In total about 600 ha of perennial crops, depending on the final mix selected by the farmers, would be financed. Project funds would cover the first three years of development costs, while BFA would likely provide further financial assistance as needed until the plantings reached the commercial bearing stage. w

103 ANNEX 8 Page 1 PERU AGRICULTURAL CREDIT PROJECT Agro-industry to be Financed under the Project Background 1. In general, food factories in Peru are small in scale, involve much handwork and use makeshift production lines. The number of products is small and the quality extremely variable but development of more modern and efficient processing plants is constrained by the following factors: (a) the limited internal market for processed products because of the low income of the bulk of the population; (b) the difficulty of maintaining quality control due to the absence of grading standards for fresh or processed foods, which gives little opportunity to gain export markets, although canned asparagus to Europe and lemon oil to the USA are exceptions; (c) the relatively high costs of capital, equipment, raw materials and containers; and (d) Government's policy on overseas capital investment in industry, which restricts the possibility of participation with established firms operating in international markets. 2. It is not, therefore, surprising that developments in the agroindustrial field have been uneven, as the following examples show: (a) Maria Laura (Trujillo). A complete plant for the canning of asparagus, including can making equipment, was established on a private estate in 1968 at a capital cost of about S/. 20 million (US$510,000), of which the Banco Industrial del Peru (BIP) provided S/. 12 million (US$300,000) and the Banco de Fomento Agropecuario (BFA) SI. 4 million (US$100,000). Partly because of technical and management defects, but mainly because the estate was taken over under the land reform and its production diversifie.d under its new cooperative ownership, the factory has been closed for over three years. e

104 ANNEX 8 Page 2 (b) Freeze Dry Plant (Arequipa). Costing approximately US$20 million, provided by the local regional development corporation, this plant for the processing of garlic and onions oparated for only 100 ays and has been closed for two years, due to faulty forecasting of the availability of both raw material and potential markets. (c) Tomato Processing. Efforts by a USA manufacturer to establish a platt in the Trujillo area to produce tomato paste for the USA market have failed and three high quality Italian plants are all working at low capacity because of difficulties in both the supply of raw materials and in market outlets. (d) Dairy Plants. Most existing dairy plants (mainly designed to produce evaporated milk) are operating well below their rated capacities. Cheese production is almost entirely a cottage industry. (e) Meat. Standards of slaughtering and processing of meat are poor in existing plants but studies are underway to suggest ways to improve the situation and this is a likely field for future investment. (f) Fruit Processíng. Under the. National Plan , considerable expansion projected in the production of certain fruits, notably lemons and mangoes. To counteract seasonal fluctuations in producer prices some small-scale lemon oíl plants have operated successfully in the northern coastal area. In anticipation of the expansion of production, the establishment of more similar extraction plants is already under consideration. (g) Rice-milling. Although the majority of mills are in private hands, an increasing proportion have been established by service cooperatives, and this trend is likely to be accentuated. Instituto de Investigaciones Agro-Industriales (IIA) 3. Recognizing the need to improve developments in the agro-industrial field, the Government established the Instituto de Investigaciones Agro- Industriales (IIA) in July /. An autonomous agency under the Ministry of Agriculture, its directing board consists of representatives of the Ministry, the Empresa Publica de Servicios Agropecuarios (EPSA), the Ministry of Commerce and Industry, the Banco Industrial del Peru (BIP) and the BFA. 4. At its site near La Molina University, Lima, the IIA has offices, laboratories and specialized equipment costing S/. 70 million (US$1,810,000), of which S/ million was provided by Government, S/. 5 million each by 11 ecrto ey 777 o Juy 2, 169 1/ Decreto Ley of July 22, 1969.

105 ANNEX 8 Page 3 BFA and BIP and the balance under a five-year UNDP project due to be completed in The latter also provides eight FAO experts to reinforte the 33 professional staff employed by the Institute. 5. Concentrating in its initial phase of operation on the problers of the food processing industry, IIA functions include: (a) laboratory and pilot plant investigations into specific processing and conserving problems; (b) applied research into the conservation of fresh and processed products during storage, transport and distríbution; (c) economic and feasibility studies, including market surveys; and (d) technical assistance to the processing industry, including training of personnel, designing of plant and renting of pilot plant for trials runs. 6. Both from the standpoint of laboratory and pilot plant facilities and of technical personnel, the IIA is well equipped for its purposes and although its installations were not completed until 1971, it is already undertaking investigations on behalf of EPSA, the fishing industry, the BFA and the BIP as well as private ínterprises. Because of the dearth of reliable and qualified full-time private consultants, the Institute is likely to play a major role in future agro-industrial development in Peru. Finance for Agro-industrial Enterprises 7. As is to be expected in a borderline field between agriculture and industry, both State banks--bip--and the BFA as well as the commercial banks are sources of long-term finance for agro-industrial enterprises. Because of its shortage of long-term funds, BFA lending has been small in recent years (S/ million in 1970 and S/. 6 million in 1971), but BIP has been more active as the following table shows: e

106 ANNEX 8 Page 4 Loans Approved by the Banco Industrial del Peru in 1971 for Agro-Industrial Purposes No. of Percentage in US$ Percentage ClassifZcation Loans of Total Number míllion of Total Loans Agriculture and Livestock Livestock and meat preparation and preservation Milk products Packing and conservation of fruit and vegetables Sugar refining Various food industries Total: Source: Banco Industrial del Peru: Annual Report These figures probably include loans for enterprises more industrial than agricultural in character (e.g., ice cream factories under milk products), but they do show that the average loan size is SI. 350,000 (US$9,000), reflecting the small size of most existing processing plants. 8. BIP will normally lend up to 70% of the fixed and liquid assets of the project and its interest rates, governed by decree, vary between 7% and 9% per annum, according to the size and purpose of the loan. In companies with foreign participation, BIP can only make loans if the Peruvian shareholding is 80% or more. 9. Both BIP and BFA have collaborated in the past in the joint financing of large projects, which usually involve separate loans for specific portions of the project because of the differing interest rate structures of the two banks, but they have recently agreed on new procedures to speed up the handling of such cases. Although, appraisal is made by their respective Departments of Economic Studies, use is already being made of the Instituto de Investigaciones Agro-Industriales, with which both banks are associated. e

107 ANNEX 8 Page 5 Possible Lending under the Project 10. lecause of the uncertainties created by the agrarian reform, investment in agro-industry has been limited in the past three years, but already there is a revival of interest. As a result of the preferences accorded to cooperatives under Government poiícy, a large proportion of future borrowers will be service cooperatives, but it is probable that some existing or new individually owned enterprises will also be able and willing to make new investments. In the absence of any valid past experience, it is impossible to forecast what the proportíons between these two types of sub-borrowers will be. 11. In its submission, the BFA listed the following as examples of the type of agro-industrial enterprise for which they would expect to provide medium- and long-term finance: Estimated Total Cost S/. million US$ (i) Lemon oil extraction plant in Lambayeque ,000 (íi) (iii) Milk pasteurization plant in Trujillo ,000 Olive oil extraction plant in Tacna ,000 In addition, within the diversification plans of the sugar cooperatives, the following agro-industrial projects appear: Estimated Total Cost S/. million US$ (iv) Three sausage making plants each costing ,000 (v) Three animal feedstuff mills each costing ,000 Conclusions 12. Since agro-industrial projects have been identified only by type, and considering to past experience in this field in Peru, which underlines the need for proper economic as well as technical appraisal, it is suggested that: (a) all such sub-loans should require prior Bank approval;

108 ANNEX 8 Page 6 (b) a copy of the pre-appraisal report by the Instituto de Investigaciones Agro-Industriales should accompany the submission of such loan applications; and (c) in cases where joint financing with the Banco Industrial del Peru is involved, full details of both banks' participation should be provided..

109 ANNEX 9 PERU * AGRICULTURAL CREDIT PROJECT Disbursement Estimate IBRD Fiscal Year Disbursements Oumulative Disbursements and Quarter During Quarter Endixw at End of Quarter ---- (in US$ 00) /74 December 31, Y' March 31, June 30, /75 September 30, December 31, 197s 1,000 1,800 March 31, ,500 3,300 June 30, ,700 5, /76 September 30, ,000 7,000 December 31, ,000 9,000 March 31, ,000 11,000 June 30, ,500 13, /77 September 30, ,500 16,000 December 31, ,000 18,000 March 31, ,000 20,000 June 30, ,000 22, /78 September 30, ,000 24,000 December 31, ,000 25,000 e 1/ Estimated dato of loan e±gjmng: July 31, Estimated date of effectiúenes.s October 31, Jurne 11, 1973

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111 ANNEX 10 Page 1 PERU AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario del Peru Background 1. The Banco de Fomento Agropecuario (BFA) is a Government owned agricultural credit and development institution. Its main function is the provision of short, medium and long-term loans for financing agriculture and forestry and it provides about 80% of institutional tredit to this sector. BFA also has a marketing monopoly on natural rubber and jute. 2. BFA was established ín 1952 as a successor to the Banco Agricola del Peru established in A new basic law governing the Banco was enacted on August 16, 1968 but since then a number of decrees have affected its status, organization and operations. These changes have been mainly due to the Agrarian Reform Law which includes directives on the broad credit policies to be followed by BFA. Emphasis is to be given to cooperative organizations, which are to receive priority for credit in a situation where fundo are limited; they are aleo to receive preferential interest ratea. A new BFA law, under preparation i8 expected to incorporate these modifications and further define BFA's role. The recent changes have strengthened BFA's role in agricultural lending and made it more responsive to Government agricultural policies. BFA a responsible to the Ministry of Economy and Finance and by law coordinates its credit policies with the Ministry of Agriculture and the Committee of Government Credit Policy. Resources e 3. The resources of BFA have more than doubled over the last five yeara and amounted to S/ 8,786 míllion (US$226 million) at December 31, 1971 (Table 1). Paid-up capital (authorized capital la S/ 10,000 mlllion (US$258 million) comprised SI 1,663 million (US$43 million), an increase of 120% over the last four years, while reserves were S/ 124 million. Other major resources include: Central Bank advances of S/ 1,295 million (US$33.5 million) provided at concessionary discount rate of 2%; curretit deposits, S/ 1,115 million (US$29 million), which are mainly excesa funda of the commercial banks; provisions S/ 1,081 million (US$27.9 million); an IBRD loan S/ 477 million (US$12.3 million); Government S/ 495 million (US$11.9 million); foreign banks S/155 million (US$4.0 million); savinga deposits S/ 94 million (US$2.4 million); aud S/ 1,648 million (US$42.6 million) interest free trust funda mainly from AID and IDB. Government usually provides additional capital based on BFA's requirements for servicing international borrowings and through budget appropriations calculated every two years. BFA also expects Government capital contributions to offset bad debts resulting from the Agrarian Reform and losses resulting from low interest ratea to small farms.

112 ANNEX 10 Page 2 4. Use of Resources; Lending Operatíons. BFA's outstanding loans from ito own funds (excluding trust funds) increased sharply from just over SI. 3,000 million (US$112 mllion) ijin 1966 to S/. 6,500 million (US$168 million) in 1971 (Seo Table 2 and Annex 12). However, when viewed against inflation and high overdues, BFA's annual lending volume in real terms has increased at only a moderate rate. New long and medium-term loans granted durlng 1966 were SI. 250 million (US$9.3 million) and increased to only S/. 300 million (US$7.6 million) in 1971, actually a decrease in real teros, reflecting BFA's lack of long-term resources since IBRD loan funds were fully drawn in During the fírst six montha of 1972, BFA was able to make only 4% of ita new loana on medium- and long-term, while 96% was on short term. New short-term loans, however, rose from S/. 1,780 million (US$66.4 million) in 1966 to SI. 5,000 million (US$129 militon) in 1971 and BFA ís able to meet most requests for these loans. Increased access to Central Bank funds has been a major factor in this. 5. Besides the lendíng operations from its own resoures, BFA administers the credit aspects of various Government trust funds for the agricultural sector. These funds are extended on agreed rates to stimulate activities under special Government policies. Outstanding loans from trust funds for which BFA is only a fiscal agent (the Ministry of Agriculture appraises and approves loans and covers the risk) rose from SI. 307 million (US$11.5 million) in September 1966 to SI. 1,332 million (US$34.4 million) at December 31, Of this amount, SI. 857 million (US$22.1 million) was for long-term and SI. 475 million (US$12.3 million) for short-term. During 1971, new short-term loans amounted to S/. 267 milllon (US$6.9 million million) and long-term loans to SI. 281 militon (US$7.3 million). (See Table 2) While the short-term lending is small compared to short-term lending from BFA's own funds, the present rate of long-term lending almost equals that from BFA's own funds. Loan appraisals are carried out by the Ministry of Agriculture. Loans have usually been made to poorer farmers and those suffering from some natural calamity. Arrears are about 25% of outstanding loans, but in view of the increases in lending in recent years it is thought likely that this percentage will increase. This particularly applies to long-term lending. BFA also acts as the channel for payment of Agrarian Reform Bonds; this does not require a great deal of time and assists BFA to collect debts in some cases. e 6. Non-Banking Operationa. BFA's non-banking activities mainly concern a monopoly on the purchase of wild rubber and import of natural rubber. Other activities include purchase of jute. Over the past several years BFA has made little profít or lasa on these activities. Total volume of purchase was about SI. 200 million (US$5.2 million) ín 1971, resulting in a deficit of S/. 3 million (US$80,000). In earlier years, there was a similar volume producing either a small surplus or deficit. The Fundo Iberia, a large rubber plantation and agency in a remote part of the Selva, has been highly unprofitable for many years. In 1971 losses were about SI 17.5 million (US$450,000) a figure similar to those recorded for previous years. BFA has for a number of years been trytng to get rid of the Fundo Iberia. At present, a bill is awatting cabinet consideration for ita removal from BFA to Government. The following table shows BFA'B total losaes for its non-banking operations over the previous years: 1/ Calculated at exchange rate at time of consideration.

113 ANNEX 10 Page 3 Sales Loss SI. million (US$80,000) (US$170,000) 1968/69 (15 months) (US$180,000) 1967/ (US$130,000) Financial Situation 7. The BFA has been making only small surpluses for a number of years (Annex 13). While BFA lends at fairly low interest rates, its cost of resources ís also very low, 1.2% of all resources, thus allowing a spread of about 7% on its loan portfolio, which ia high by most atandarda. Most of this apread is taken up in operating costa, which equal about 5% of the loan portfolio and allowances for provisions, mainly bad debts, equal to about 2% of the loan portfolio. Income is adversely affected by arrears of interest, e.g., in 1971 SI. 98 million (US$2.5 million), or 16% of interest due to the books was not collected. Table 3 to this Annex shows a detailed breakdown of BFA's íncome and costo on a percentage basis which, amongst others, shows that non-bankíng activities do not have a major effect on ita overall activities. 8. BFA has a satisfactory líquidity position -- at December 31, 1971 its current asaeta (i.e., leas than 12 months) were about S/. 4,100 million (US$115 million) compared to correspondíng current liabílíties of about SI. 3,300 million (US$90 million). Ita debt equíty ratio of 2.4:1 ís fairly low and reflects BFA's limitation on borrowing except when funds are available at very low interest rates. With low on-lending rates (para 24) for much of ite lending, fairly high overheads and large provísiona against bad debts, BFA had to keep ita financial costo down to prevent loases. 9. Recovery of loans by BFA has been a problem for many years and as can be seen in the table 4 arrears have been a faírly constant percentage over the past 3 years. Before that they were as high as 30% in the early 1960's declining to 20% in 1966 before rising again but thís may not be a true reflection of the position as many loans have been and are rewritten. At June 30, 1972, overdue loana amounted to 27.1% of the loan portfolio. Of these amounts 3.3% was due lees than 90 days and a high percentage of this would be recovered in the near future. However, the position of overdues over 90 days íb more serious as branches usually extend the date of the loan before the end of 90 days íf payment la expected shortly. The posítion of arreara has been aggravated by the Agrarian Reform which has largely eliminated a free land market. In addítion, some large scale leasees and other non-owners sold their produce from their last crop and left without paying the BFA. BFA expects that Goverament will increase capital contributions to offset these losses. Other reasons for arrears have been, natural dísasters and Governnent requiring BFA to defer repayments ia case of severe drought etc. A further reason ia that BFA's branch managers are making shortterm loans for long-term purposes in order to overcome ahortage of long-term

114 ANNEX 10 Page 4 funds, and bypass approval of the head office. BFA's provision for bad debts is about 40% of overdues and 11% of the total portfolio. These are considered to be a realistic estimate of uncollectibles. e 10. Three years ago BFA established a special Overdues Department, reporting to senior management, to improve collections and many large and medium overdues are now under its control. While these constitute only 1,200 of the 26,000 loaus overdue they include about 45% of the total amount overdue aud about 50% of the amount overdue by more than nine months (Table 4). The Overdues Department has been giving priority to the larger overdues to have a maximum impact and is progressively reviewing loans and either taking legal action, agreeing to a rearrangement (debt still remains as overdue) or recommending a write-off. Although improving, the present rate of progress is slow and needs to be accelerated. 11. The efficiency of BFA is affected by the physical difficulty of the country and by the need to provide services to remote and high cost areas. This is best illustrated by comparing the operating costs of the five lowest cost branches (all on the coast) with the five highest cost branches (see Table 5). For one group the administration costs are 3% of BFA's own funds and in the other 10%. In the highest cost branch (Iquitos), where travelling ís difficult and all costs are high, operating costs are 2-1/2 times groas income. It ia partly to offset these disad'vantages that Government has in recent e years provided substantial amounts of capital contributions and it is anticipated that these contributions will continue. A further reason ís the high overdues which diverts staff from productive work to chasing overdues which in many cases may give no return. Also, high overheads are common with most Peruvian banks and reflects the comparatively high wages in Peru in relation to the volume of work handled per man. 12. BFA has in recent years increased staff fairly rapidly. This combined with generally rising salaries (despite a cut back in 1971) has resulted in operating costs increasing more or less in líne with the loan portfolío. It should be possible for BFA to streamline its procedures and improve efficíency sufficiently so that staff numbers are kept reasonably atable. The growth in lending to cooperatives (i.e. large loans) should reduce BFA'8 costs per million soles and BFA should concentrate its future efforts for improving efficiency on: (a) reducing the percentage of operating costs by holding the present costs and increasing the future portfolio; (b) improving debt collection efforts; (c) streamlining present procedures. 13. The BFA has historically lent the greatest amount of its portfolio to large and medium size individual farmers. The position has altered since the Agrarian Reform particularly in the last 12 to 18 months and a substantial part of BFA's loans now go to the cooperatives that have replaced many of the individual farmera. While BFA now views cooperative lending as lending to

115 ANNEX 10 Page 5 small farmers (based on the concept of dividing the loan to the cooperative by the number of members) the Agrarian Reform has not to-date caused a radical change in either the number of loans or BFA's workload. The larger sugar and other cooperatives before they were expropriated generally dealt wlth the commercial banks. Since expropriation they have made limited demando on BFA, but they are expected to develop a substantial demand for both long and short-term funds as proposed development plans are carried out. These loans to cooperatives will be very large and should lower average operating costa for BFA and help improve ita efficiency. Organization and Management 14. The BFA's highest authority is ita Board which consista of four nominees of the Ministry of Fínance and four nominees of the Ministry of Agriculture. All membera are eligible for 2 year terms with the possibility of re-nomination. The Board la responsible for policy and for the approval of loana over SI. 12 million (US$310,000). There is also an Executive Committee comprised of the President, two directora and the General Manager which resolves or advises on all matters entrusted to it by the Board. The President of the Board who is appointed by the Minister of Finance ís a full time employee of the BFA, and has a key role in matters of general policy. 15. The General Manager is responsible for the general operations of BFA and ia appointed by the Board. The present General Manager has been in office for about two years. The BFA has a Central Manager, (Senior Credit Manager), and five department managers. There are two Credit Managers each responsible Lor credit operations for approximately half the country. The Manager for Finance, handles external transactiona, deposits and commercial activities (e.g. rubber). The Manager for Planaing and Economnic Studies ls responsible for planning, preparation of requests for external--aid and assistíng in appraisal of large scale loan requests. There la also a Manager for Technical Development who coordínates technical staff and distributes information. Sub-managers responsible for Debt Collection, Trust Funds, and Internal Audit report directly to seníor management The BFA is organized on the basis of 14 semi-autonomous branches covering the whole of Peru (See Map). Under the control of the branches are 42 agencies, which have functions similar to the branches, and 46 inspections which receive and prepare loan applications for consideration by agencies and branches and provide asaistance to farmers. The total number of offices has risen from 92 in 1965 to 100 at present. Coverage a considered satisfactory. The branches and agencies have considerable autonomy in termas of short-term loans but little in the case of long-term loans. Personal liaison between the head offices and branches needs to be improved. Most contact la through written correspondence. Key credit personnel from the head office need to visit branches more often and branch managers and senior branch staff need more contact with the head office and other branches. The branches have very little contact with the Department of Planning and Economic Studies and more exposure would benefit both sides.

116 ANNEX 10 Page Present staff totals 2,186 including 247 professional agricultural specialists, 55 lawyers, 24 accountants and 6 economists (see Table 6). Included in the total are about 200 workers, employed on non-banking activities (i.e. rubber, jute, etc.). Staff numbers have expanded quite sharply in recent years from 1,788 at May 1969 and 1,925 at September This is approximately in line with the expansion in portfolio in real terms and reflects little improvement in efficiency. The central office staff of 468 is considered high and is a reflection of the undue amount of paper work. 18. Under a previous Bank loan, BFA some seven years ago underwent a reorganization with the assistance of a French consulting firm. It mainly strengthened the accounts and separated the banking activities from the nonbanking activities, but the problems BFA has been encountering since 1968 are rising staff costs while medium-and long-term lending funds decreased considerably. This situation led to a reduction of branch authority and gradual centralization of the Lima head office. Management is aware of the problem and with additional funds now available from Government and under those that would be supplied from the proposed Bank loan, steady improvements can be expected. 19. In 1969 BFA concerned with the hígh level of overdues established a special Department to improve collections. This Department has had most of the large size overdues transferred to its control but branches have retained the small overdues. It lf progressively reviewing and either taking legal action, agreeing to a rearrangement (debt still remains as overdue) or recommending BFA to write-off debta considered uncollectible. To-date the procesa has been fairly slow but ls being speeded up witn priority on the larger debts so as to have a maximum impact. Officers of the Overdues Department have been stationed in most branches to improve loan collection and to review overdue loans. 20. Under the proposed IDB loan to BFA for cooperatives, signed in June 1972, the BFA agreed to the following conditions with respect to reduction of overdue debts as related to BFA's own portfolio: (a) wíthin 12 months (June 1973) overdues exceeding 90 days would be reduced to 18% and those less than 90 days to 6%; (b) within 20 months (February 1974) overdues exceeding 90 days would be reduced to 12% and those less than 90 days to 4.5%; (c) within 24 months (June 1975) overdues exceeding 90 days would be reduced to 10% and those less than 90 days to 4%. 21. To achieve these results BFA needs to make a major and rather hurried effort. In recent years there has been little write-off of bad debts even though the BFA knows it will not collect on many debts. With the formation of the Overdues Department, BFA is now in a better position than previously to decide on write-offs. However, the Overdues Department is only looking at write-off as part of its full review of larger overdues. While substantially íncreasing provisíons BFA has been reluctant to writeoff debts. This is partly due to its efforts to obtain additional capital e

117 ANNEX 10 Page 7 from Government as recompense for debts arising from the Agrarian Reform and other Government aponsored programs and partly to encourage farmers to meet debts as there is little hope of the debt being written off. The overdues position i5 a major problem and BFA needs to place continued emphasis on debt collection, review of the loan portfolio and write-off of uncollectibles. Lending Policies and Procedures 22. At present BFA's lending procedures are based on various categories of loans. A loan can only cover one category (e.g. cropping requirements or livestock or machinery) and is either short, medium or long-term. Therefore, one borrower may have several individual loans, each separately recorded and filed. This with the various cross references increases BEA's workload for little gain. Under BFA's proposed new law it is likely that this duplication of files and work will be largely eliminated and there will only be shortterm and long-term production loans ánd loans for short-term storage of producto. BFA divides its present lendíng into four categories which affects interest rates, approving limita, etc. The groups are: Single Loans (Maximum) S/. Total Lending (Maximum 4 loans) SI. Small farmers 150,000 (US$3,900) 600,000 (US$15,500) Medium farmers 300,000 (US$7,800) 1,200,000 (US$31,000) Large farmers 4,500,000 (US$116,000) 18,000,000 (US$465,000) Cooperatives No Maximum No Maximum 23. BFA's present policies and procedures for the termz of loans are fairly well defined and are as follows: (a) Short-term loan--up to 2 years but most often seasonal loas for annual cropping expenses. On receipt of the application by the branch or agency a BFA technician vlll appraise the proposal visiting the property if necessary. Loan amounts are generally based on standard operating costa, which are frequently reviewed and generally satisfactory. The technician's recommendation is then reviewed by an approving officer (usually an agronomist) who has differa depernding on the size of the loan under consideration and how many other loans the borrower has. Approving officers' limito for loans for individual purposes and for individual borrowers are:

118 ANNEX 10 Page 8 Per Loan SI. Per Borrower SI. Ageney Chief (covers most small farmers) 150,000 (US$3,900) 300,000 (US$7,800) Branch Credit Sub-Administrator (covers remaining small and most medium farmers) 300,000 (US$7,800) 600,000 (US$15,500) Branch Managers (covers remaining medium and many large farmers) 1,200,000 1,200,000 (US$31,000) Various Principal Office Personnel 10,000,000 10,000,000 (US$260,000) General Manager 12,000,000 12,7000,000 (US$310,000) Board over 12,000,000 over 12,000,000 In addition to loans made for production, BFA also lends for storage of crop products with loans being made against varehouse receipts issued by Government dr private storage facilities. In general farmera can get decisions on short-term loans within a short period from the application date: (b) Medium and long-term loans--procedures are similar to short-term loans except the technician almost always visits the property and prepares an assessment of prospects in greater detaíl. However, branches can only approve long-term loans to a maximum of Sl.150,000. All other applications are recommended and then referred to the head office for further investigation and decision Because of the general shortage of long-term funds BFA has not encouraged long-term lending. The time of appraisal is often long and this also has discouraged potential borrowers. (c) Trust Funds--in n addition to its own funds BFA administers the credit aspects of Government trust funds mainly provided by various international agencies. The Ministry of Agriculture or other Government agencies appraise and recommend approval. BFA is responsible for collection of debts but does not' incur any loss because of default. Interest Rates 24. BFA's interest rates for loans from its own funds are based on the Government's policy of assisting agriculture through low interest rates and encouraging certain types of food crops. The average rate of interest on all farm loans made in 1971 was 10.5% and for the first 6 months of 1972, 9.9%. For lending from its own funds, interest rates for loans are as follows: e

119 ANNEX 10 Page 9 SI. Small farmers 0-50,000 (US$1,300) 7% 50, ,000 (US$2,600) 9% 100, ,000 (US$3,900) 10% Storage of Products 10% Medium farmers 150, ,000 12% Large farmers 300,000 upward 13% (12% interest + 1% commision) Loan for basic food crops (e.g. grain) are 7% for loans below S/. 150,000 and 9% for loans between SI. 150,000 and S/. 300,000. Loans in the Selva (Jungle) area have a maximum rate of 12%. For calculating interest rates to cooperatives BFA uses the following formulae: Total loan divided by the number of members in the cooperative. This figure is applied against the relative loan size and interest rates for private farmers. In general interest rates to cooperatives are 7% to 9%. Collateral Reguirements 25. In general BFA's collateral requirements for short-term loans are mortgages on the goods being produced (i.e. crops or livestock). The amounts lent may be up to 75-80% of the estimated value. Long and medium-term security is over land, livestock or machinery. Recently land had lesser security as Agrarian Reform has stopped most land transaction except those under the Agrarian Reform, where land values are based on taxation values and payable in bonds at low interest rates. In practice, BFA's ability to foreclose on cooperative land would be limited. Accounts and Audit 26. In general accounting and auditing procedures are satisfactory. Most information is recorded on a IBM 360 computer and records are up to date. However, the present limited detail in the ageing of overdue loans and the system of multiple loans for individual are deficiencies which need to be corrected. BFA has an adequately staffed internal Audit Department which is now auditing most branches within each 12 month period. They produce a report on each branch for the information of management and for follow up of recommendations given. 27. The external auditors Castro, Alonso and Associates are an experíenced Lima firm with well qualified staff. The Superintendency of Banks periodically reviews part of BFA's activities to ensure compliance with banking requirements and to ensure satisfactory standard of practices.

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121 ANNEX 10 Table 1 P E R U AGRICULTURAL CREDiT PROJECT Banco de Fomento Alropecuario Balance Sheet December (in S/. Million) A S S E T S Disposable Funds L I A B I L I T I E S Capital and Reserves Cash Capital 1,662.6 Other liquil assets Reserves ,786.8 Short Term Loans Obligations Large loans 2,215.7 Savings deposits 94.2 Small loans 1,131.2 Current deposits 1,114.9 Advances Central Bank 1,294.8 Overdue department Government State entities Bonds 70.8 Other 32.3 IBRD Other overseas banks ,969.3 Other Long Term Loans 4,090.1 Large loans 1,286.8 Small loans Trust Funds 1,648.3 Advances 14.5 Overdue department Provisions Special accounts Government Provisions for bad debts Personal loans Depreciation 55.5 Provision for social laws , ,080.6 Trust Fund Loans Other Liabilities Short term Long term Deferred interest Other , Other Assets Profit and Loss 0.7 Buildings and lend Shares bonds 87.8 Rubber etc Vehicles and equipment 68.9 Letters of Credit 16.9 Other Total: 8,785.8 Total: 8,785.8 January 12, 1973

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123 Short term ANNEX 10 PERU Table 2 Page 1 AGR'I, LTURAL CREDIT?ROJE('T _8ANCO DE POMENTC AGROPECIJARIO Loan Portfolio at March 31, 19721' 7nilion Soles) Current Overdue Total lo Amount No. Amount No. Amount Large Lcans - General Agriculture 3,191 1,6ó ,146 1,963 Livestock Rubber ForeEtry StorEge of Products S.mall Loans General Apriculture 25,100 1, , ,296 1,402 Livestock 7, , , Stor ge of Products Lcans under Legal Acticn Smal2 loans Larget loans _ Suncry Subtotal 36,511 3,233 21,235 1,099 57,746 4,332 Mediir. and Long terrn Large Small Loans Loans General Agriculture , Livertcck _ , Machinery Fixec Investments R ubber Genezal Agriculture , Livertock , Machinery Fixe Investments Loans Under Legal Acticn - Small loana - _ Large Loans Sundry Subtotal 9,738 1,309 2, ,638 1,841 Total 1b6,249, ,135 1,632 70,371 6,173 1/ Excludes Trust Funds - for these see table 2 page 2, January 18, 1973.

124 PERU AGRICULTURAL CRFDIT PROJECT (D _anco DE FOMENTO AGROPECUARIO (D Details of Loans under Trust FuniN Loans Disbureed Loans Ottandin _. -1>7I wqi~ JEne=l Type No. Si/ U. '0 'y_y at at_30 - b 72 No. SI. '000 No. S/. '00 Short Tenn Agriculture 6, ,018 1, ,086 22, ,153 21, ,462 Livestock , ,651 2, ,020 2, ,670 Storage 1 1, , , ,366 Special- 5 5,560 >4 1,330 _ 4 1,52 7 1,296 6, ,336 1, ,214 25, ,438 24, ,794 Long Tern Agriculture 487 >42, ,338 3, j028 3, ,503 Livestock ,5L ,168 1, ,657 1, ,697 Forestry , , , ,935 Machinery 78 36, , , ,053 Fixed Equipment 99 51, , ,345 1, ,858 Special ,? , ,078 1, , ,302 7, ,058 8, ,124 Total 8,094 5>548,449 2, ,516 32,797 1,322,496 32,265 1,468,918 N ) *, * e lo

125 *. t PERU AGRICULTURAL CREDIT PROJECT t Banco de Fomento Agropecuario Percentage Income and Costs in Relation to Assets '1 (nmillion Soles) 1967/ /Z9;/ \o Amount Assets Amount Assets Amount Assets Amount Assets Loan Portfolio 4, , , , Income from Loans Operating costs of Loans Financial costs of " Provisions Total Costs Non-Banking Assets Income- Non-banking ing Operating Costs- Non-bank o Provisions Non-banking Total Costs Total Assets 5, , , , Income Banking Non-Bani- g Total Operating Costs ,inancial Costs Provisions 2/ Total Costs / 15-month period 2/ Does not tally with annual profit and lose statemtent ae BFA treats the non-banklng activita,-i -n a iibridiary activity only crediting the surplus to/or deducting the loss from banking operations.» z

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127 *e e,e PERU AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario Distribution of Overdues at September 30, 1972 by Number, Type and Age (in SI. Million) 3Type Period in which Loans became Overdue Total No. Amnt. No. Amt. No. Amt. No. Ant. Short-Term Jan. - Sept and earlier Agricultural Cooperative and Groups Small loans 10, , , , Small loans (Overdues Dept.) Medium and large loans 1, , Medium and large loans (Overdues Dept.) o Sub-total 11, , , ,985 1,456.6 Long-Term Agricultural Cooperatives and Groups Small loans , , Small loans (Overdues Dept.) Medium and large loans o Medium and large loans (Overdues Dept.) Sub-total , , Total 12, , , ,775 1,947.2 % of total H!3!

128 P E R U AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario Overdue Loans by Amount and Percentage of Portfolio (in SI. Million) June 30, 1970 June 30, 1971 June 30, % of % of % of e_ Amount Portfolio Amount Portfolio Amount Portfolio Small Loans Long-Term Short-Term Sub-total: Large Loans Long-Term Short-Term Sub-total: , , Term Long-Term Short-Term , , Total: 1, , , *.. 0 C1-

129 P E R U AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario Efficiency of Branches % ~~~~~~~~~~~~~~~~Costs-3/ Portfoliol Income Costs./ Surplus Portfolio c (in SI. Million) Head Office Coast: Lima Chiclayo I.C.A La Merced Piura Trujillo Huacho Other. Arequipa Cajamarca Cuzco Huancayo Iquitos Puno Iberia_4/ Total: 5, / 5.4 1/ ow-n funds (excludes trust funds) at December 31, / Excludes interest which is usually paid from Head Office. 3/ Gives approximate comparison of profitability. Branches on coast are generally larger with lower costs. Inland branches have very high overheads. 4/ Comprises unprofitable rubber plantation. 5/ Before deduction of interest, provisions for debts and depreciation. o

130 P E R U AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario o Staff Composition - August 31, 1972 o, Head Tingo '-a Office Limn Huacho Maria Arequipa Cajniamrca Chiclayo Cuzco Piura Huancaoy La Merced Iquitos Puno Trujillo [oa Iber-a Total Agricultural Sepcialisth LS 11. il b. Veteriniarians Lawyers L 2 h h 5-55 N Accountants Econoiiasts Others 3 _ Sub-Total Professionals Clerical L ,317 Technicians b Workers 5L Others L, 3 4 5h R 205 Drivera L TOTAL ío l ,186 HI o * * e

131 * e P E R U AGRICIULTUAL CREDIT PROJECT Proart C-ah RFov (lo S /. Milliona) Pas-: Total I N F L O W IBRD Loa _ G overrnt Equity Contribution/ Loan Rapayoeot by Sub-borrowera ,291.2 ITtareat Paymenta by Sub-borrower ,2 Total Inflo-: UTF10OW BFA L.aaa to Sab-borrowara ,291.2 Interest and Co,it,ant Charge- to IBRD Prinoipal -- d Interest Payeota t.o IBRD ,527.5 Adxiniatratlva Eopenasea- (inclusive of provisions for bad dabto) Tatal Outflo.: Nat Caah Inflow/(Outflo.) 10.5 (8.9) (50.1) (10.5) (49.7) (84.0) (104.1) (108.4) (114.3) Cumulative Cash Inflow/(Oatfolow)á (46.5) / 75% of aub-borrasora' loar - paya.nta frao IBR0 appro-irataly four mn-tha after diaburemnt by BFA. 2/ 25% of aob-borrowara' las - advan-e payaenta. I/ Tatarest ratas, 107. and 13%. 4/ 47 of outstanding inludtng 1% par bad debts. 5/ Rafora ay llowance fr IPrsa obtasind thr.agh relanding.

132 PERU AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario H lo Condensed Balance Sheets at December 31, , Projections (in SI. Millíon) Actual-Pr Projectios etn actual 19681/ ( ASSETS Cash or Equivalent Normal Loans to Famers Short-Term 2/ 2,095 2,976 3,486 3,767 4,200 4,330 4,570 4,725 4,890 5,170 Mediem and Long-Terma 1,364 1,668 1,748 1,818 2,000 2,150 2,350 2,900 3,400 3,600 Trust Funds- Short-Term Medium and Long-Tem ,000 1,130 1,260 1,310 1,440 1,440 Other Loans and Advances Short-Tern Long-Term Investments and Fixed Assets Other Assets Tetal Asseto 5,776 7,396 8,107 8,786 9,730 10,280 10,990 11,815 12,700 13,200 LIABILITIES Deposits - Current 2,054 2,109 1,599 1,115 1,100 1,100 1,200 1,300 1,300 1,300 Trust Funds ,202 1,648 1,900 2,000 2,100 2,300 2,400 2,400 Central Bank Advances ,450 2,000 2,200 2,200 2,200 2,200 2,200 IBRD ,140 Other Borrovings and Obligations 549 1,148 1,134 1, ,236 1,303 1,610 1,760 4/95 1,4 Capital and Reserves- 945 i,i49 1,617 1,787 1,900 2,100 2,300 2,500 2,650 2,800 Provislons ,081 1,200 1,300 1,350 1,380 1,400 1,400 Other Liabilities Total Liabilities 5,776 7,396 8,107 8,786 9,730 10,280 10,990 11,815 12,700 13,200 1/ September 30, / Includes funds from Project and proposed IDB loan for US$12 rillion 3/ AID, IDB, TBRD and Govermaent funds.loans approved by the Ministry of Agriculture 4/ Goverment contributes to capital through repayment of foreign loans and direct contribution. Allowance made for Government equity contribution under the Project. 5/ Assumed write-off of bad debts and payment of other provísíon equivalent to SI. 471 million from 1972 to *. *. -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

133 PERU AGRICULTURAL CREDIT PROJECT Banco de Fomento Agropecuario a Profit and Loss Accounts Projections Soles millions) ~~~~~~~~~~~~~~~~~~~(in o Actual Projections / L INCOME Interest ) Commissions and Other Income Total ,036 EXPENDITURE Interest Salaries Contribution3/ Other Costs/ Provisions5/ Total Net Profit-ó ,036 1/ Financial year 1968 ended September 30th. 2/ Financial year 1969 onwards ended December 31st; 1969 covers 15 month period. 3/ Includes provisions for retirement. 4/ Mainly operating costs. 5/ Mainly provisions for bad debts. 6/ Transferred to Reserves. H

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135 AS_lX 14 P E AGRICULMUOAL COEDIT PROJECT u 1 Prodncer Incos nd rin--cial Roto of Ratorn of I-nsv t Yield. Cogt snd PrOce A,ssustiaOo Coot/SIsctar (S/.) Total InvMetrént Annu i 700 Gato Pri.c Fntepriíse Yield/lect.re YTar 1-3 Costa y--- plíntation Eotablishoent Ba,sas 20.0 oty , ,000/ot Maceo 11.3 *t}/ 21,525 17, /ot Slechoe2atií- nd Rocloatior3 1 Cotton (<regieed) 2.1 t-/) 16, ,130/.t S-rghue 3.4 st ) 6, ,800/0t Cor- (hybríd) 3.9 ot ) 9, ,450/nt Petat ot 18,845 1 Z.100lrt Paetor. E.tabllehshmt for B ef Prod.ctíee Aanoal ofter (Stocking Rote 1.5 4R /ha) P t 178 kg livewstght Year 8 Pastare eotabllsh_nt liel.ding fertili er oed --- d reat / 25/kg for 460 kg oteor P... ing /kg fr bre.di.g hbilest Raorh otr-rt-res iecívdieg -- ter sopply 1,223 hachinery 2,626 20/kg for sollad ceo. Live-t.ck perchases Pot.re Eatablísh-eot for 81lk Prodactieo m.. í ftee (Stockí,g Re L.5 4U/ho»? 3,660 liter p.r cesyeor YTor 6 5,500 lit.e par haly/- Paetore estebliíh-t i..1.ding fertilleer nd oeed c-otrol 1,968 1,572-9 Silit.r PeO..ing 847 1,575 for 4 dayp old -le coips Ra-h) tr-t-ore t-oloino soto- spppy ,500 for bte.dis hoifera M.dchloory /kg f-o culad resr T.tvestock purehoses 4.3g /kg ftr 100 kg fí.inshd pigo 20/kg ter 200/250 kg cullad aovo ad b-ar Pigs Breeding/Petteni.g 315 Ore.dina So.s Uitt Annu1 ofter 462,000 kg liwvisght Year 3 psr fe Para otrortor-s 4,341,496 5,426,326_/ 25/kg fer 100 kg fintanhd pias Mcnhtnery nd *quip_nt 1,163,250 20/kg fr 200/250 kg eulled aov nd boar Livestock perchases 2,755,560 Peed nd Mediciceo 2,415,189 Labor osd h.aiot-sec , / Yilda: first y..r 30%. aacod yeor 70%, third-12th os oheo. 2/ No lild ontil fifth yea-. iid. grsdollp Ic--.as. 05ta fifth to.th tse. lei o ao as-o. 3/ Under s.aosl costa, depreciatloo se tractor and aple.oto ta not incídad. 4/ syildo lerisae to rote ohpon te forth year. 5/ AU Anim l 1 y--r nd older, di-cadi-s c.l.t- 8/ At tfll d-s--epast building up gr-du lly. N-o-b-r 28, 1972.

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137 P E R U A40IC0LTUN1L CbRDIT 00J020f trodoter OsCo3so sud tíoaucísl sois of Rsut= or ot Isstouuon _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~oc MoiY tesurd Cos6 Fsosa _<10 S. ' h00 - : DAIR (í5 1 of. tsh,h 7.5 ht h.. tu bs sa--blííshd sd 7.5 h.a has oc basoovsd2 taito Dsoslop,ast soíldoinsi tsuu.s sol Wausu Supply 14.Z -_ _ -_ bruidíus 96ork Sob--totl: _. _- Pa.o.s md O-nusí sai- Ruí Leobor C-o a--ats sud ~ iusosi- <IsdíolusasuRd Oqoíptwui S S * 9olls tsolaussl/al _ , i i.-2 u.3 - Sb--total: ' SotolI ' i i Gruía tuodooiíou Velos milk C---ie , total: 64.7 i 11,y Os: Ioouaa kufois trojso t HNft un Yrr1ou <141.1) (5.2) Luso _ 0br Ssoits- Iuítís , ,1 9YIDiP71-16i L t Lha -l 16 _L 1. 1 I.LSI Csch s-u-pl.s<lfti-u --os trro3j ---- a--stt (48.9) (5.1) (8.8) (8.3) , sueo (llo Ss oft,sol 50ola --a lo b esabli-s-d. su 60 Os boa tubo btiout-d) _- Pastora suvstopnsnt Z bollolugí SO.0. - _ _ - "scisoí,sr tsuusa at,d Rsu.r Roppío _ _ lussdi=u Stouk r _ S.b-uuíl: _ tabos Z z Z os----- sud tuoleo l_tsu su oíldíus sod tbau -loy ltl... _ I8.o , IS vsísuíssoy Sotolesí sud eqoioszus , Eolia slusuu.- - M60 6, R..as.r ooh, , ob-totsl: lotal: ll , G-.v rted-uct V&I15 C---le Total: Ntí lo-s BEfC toju t a o Naotíosrg Erosó Poo-jt- (591.4) (424.1) loan _ u 6srVíre -I. teesta I1.S, Ftíooíosl ' i uaa<, Sotoloa/Ootíít uros Proosj- --oist----- (122.1) (176.1) (49.3) 47, t.o.ul.l Raía uf -to-ro: 197 2IG6 (315 B-sdíus Slo' sd Ftait-í S-to-k) Coatí <I-o---atíí1) 6oLldlusa 4, Maohlusy sud Eqolpuoot I1,13.2 _ rstsdíuí 6iSu4 2, toaú 1, , , , , , , , , , , , , , , ,109 4 lobos lsustíuaoy tsppllsa tgt.srtala sud llsloííuoose To-al: i Ososa duoootltu Vahoe <Iuiuonsuil< tiats( tí,a _ 4, , O, , ,10 0,1,0.0 10, , ,10,2 10, ,100,0 10, , ,600.0 ío,íoí.o C dllodooís a8d os.a- To-l1: _ , , st Ylry to -s uuosaíu... -rolslí (10,618.9) (255.9) 5, , , , , , , , , , , ,116.7 Lto 8, _ CoSbt saovíos - loleosit S _-trínoz5ltal ,57651,576, , Casi 9t201/stíiolt tíos tuojsoí ssosst mt 62,986.8) <222.0) 2, , ,90F.7 3, , , , , , , , , luaso.lal Ro s srt-t-: f 355 Jaoosu 17, 1973

138 &OOTUL3?L CRED7t PROOCT Pro-dcor ocoa-- V1o.ooOol b to of Ruro.r of I-ostoat Tao,, Modelo oca Cos ahlor0 To r ANMUAL CROl PRODUCTION lorolofse. 00-fari Irrgetot,L. L e Oveílligg ord M-ehai.ttlo) ",Costo D-sl..go Con_trootioo _ Mloor írot.soloo Cao.rrlctloo _ - _ Lsd Lovslllog - - _8 l Oiobaooartioo 4.925, _ b.0 SOb.tootl: 7,314.0 A--rol Pr-d-írior Coito a , , , , Total: 12, , , , , , , , , , , , , ,147.5 orogo ProdoctloD voíoo/ 3, ,559,5 3, , , ,559.5 Sorglooi 1* , , , , , , , , , , , , , ,380.0 Cbtot 2, , , , , , , , , ,559.5 Poroto _ , , , , , , , , , ,835.0 Coro 2, , , ,8 3, _ T.t.l: 7, , , , , , , , , , , , , , , ,138.3 Set Tncuro rltiuut bro5erí 435.o a33, d ,6 33, B Not Flo from Pro,1ect I-vro--t-t (6,2o6.1) 1, , , , , , , , , ,029,0 3, , , , ,157.0 Loan 5, _ X.bt Sertioe Prrl-ipo ' _ Iúterest Orrpíoo (D.rlolt) froo ( (940.0) PeoroJetloníatoeot 1,889.2 (1,029,0) - 1, , ,157,0 3, ,157,0 3, , , ,157.0 Finroriol l.te o Retur-/ 39 - Yor PIU1NIOJTL 9CFOS )eooíu1lrg Croar) (4 la PorgO. 0 h la loros) 24.0 L.-dPrep,rrtio O4o~ttio oot-río Feittil-Or ood I (.7 lo.b - cti o. - stlaes CuItlo-ti-o Ird M&Oot-ruore So l-totl Ir , A..uol Prodortior Cuo.ti L Totol 2o i 'Drucí Prodootlí V luo Ms0go o bonaríc , o 240.o 240.o o.o 24o.o o.o io.o Total o 294.o o o 465.o 465.o o C o Not InoNe withlout Pr-Je-t Net Plr P- roroot Irootooen ( (31) 27.ú r , Loor ITolrr-t o PCrioipol Mror CRoJle -lru (Dlol) Croo (83.2) (42.3) 15.2 (5.6) la í FinooStol Rato oif rturnr2 26% 1/ 15% o1l-go oaíue ior u-id ---ihry redo-ld r-tr-eotoeot, 2/ Iooooe: Yoro 1, 35%; Yoar 2. 5C; YCrr 3. 70% Yoar 4, 90%: Yre- 5 oowlrd fcll lobo. 5/ RPoseA 1rU,0.t fcio fcro Pr-Jeot. 4/ O^arooo ooroal períroúclío ooot- otor Yoro 2, Margo fil e-e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

139 ANNEX 15 PERU AGRICULTURAL CREDIT PROJECT Econoinc Rtate of Return 1. The rates of return from the Project to the economy have been calculated separately for each farm model as shown in the attached table, on the basis of the following assumptions: (a) World market prices as projected by the Trade Policies and Export Projects Division of IBRD's Economic Department have been used to estimate benefits for all products, except pork, milk and potatoes, which are regarded as "non-tradeable" commodities and for which current Peruvian prices have been applied. In calculating the equivalento of world market prices, a 2% allowance has been made in favor of imports in view of their lower average transport cost to Lima, the main consuming market. (b) Current price levels have been used for investments with no allowance for cost increases. (e) Deductions have been made in respect of prevaíling taxes and custons duties on imported items. (d) Salvage values proportional to unexpired asset life have been íncluded where appropriate. (e) Labor has been costed at current prevailing rates. 2. When weighted according to the relative share of each model in total project costa, the average economic rate of return ís 26%. 3. The following table shows a comparison of local prices and world market prices whích have been used for calculating the economic rateas of return.

140

141 ANNEX 15 Table 1 P E R U AGRICULT1JAL CREDIT PROJECT Outp]ut Price Assnnptions (SI. per m ton) Financial Rate Economic Rate Comodity of Return of Return Crops: Cotton (unginned) 1,130 1,096 Sorghum 2,800 2,800 Potato ,100 Maize (hybrid) 3,450 2,800 Bananas 2,000 2,,400 Mango 5,000 5,000 Livestock- Steers (460 kg liveweight) 25 ) ) 108 for chilled Breedlng heifers 37.7 (20,500 per head) ) rump boneless Culled cows ) Male calves (4-day old) 1,575 per head Milk 5 per liter 5 per liter Culled sows (200/250 kg) Finished pigs June 11, 1973

142 p_e R U AGRICULTURAL CREDIT PROJ3ECT Eeeflemic Rateo e! Return te the letezptiaeo M 0 D E L _ airy (15 ha) Net I--reocotel ete- (16.4) Capital Inveat=ent (116.7) (16.2) - NeCt Iere=- toe Flow (133.1) (1) ' gcononict Rato of Return: 267. Beef (110 ha) Net Inremo-tal I-co=e 8.0 (81.8) ,092.3 Capital Iov--to,eat (587.4) (412.5) Net I.neteo,tal Flow (579.4) (494.3) Icecemle Rate of RRttun: 217. Pige (315 00w eeit) NeCt Io-eoeotal Incave (2,193.7) (255.9) 4, , , , , , , ,977,5 4, ,801.5 Capital lnvaot,oaot (7,720.0) Net Ieerooootal Flow ( ) (235, _ , , Econo=ic Ratoel ReCto; 36% Aoneul Crep Praductile Net Inre=eontal 1epe,-e ,360,3 1, , , ,914,3 2, ,9L4.3 2, , , , ,914.3 Capttal I-ve-Cefet ( > _ (3,851,0) - Nat IIereoeetal Floee ) ,3 3 1 _ ,914.3 E.o.oe.c Rate of Return. 38% pecoennel CrePa Net I-e-e-r tal Ineco- (7.1) (9.7) Capital Ievest.tet (255.5) (20.3) (207.1) Net Ioeeemtaí Flo (262.6) (30.0) , (74.1) Eeneo=ic Rete ef Rúturo: 25% 1/ Joclade- valee -aleage el hord - S / Iocludes óalvag. value ef herd - S/. 1, / Includes oelv.ge palue ef hed - S/. 5, * e

143 J/CN-, g. i t~~~~~~~~~~~~~~~~~ o r te > v 4 %»%X < ox>q>: :> >> z -~~~~~~~~~~~~~~~~~~~~~~~~~ "~~~ 88 r W s r < 4 D n (. _ 8 o > 4;; % u» < ' _~~~~~~~~~~~~~~~~~~~

144

145 IBRD-3056R 1 JUNE 19 SRAZIL b 2 EfC U A DB Gulv of Guoyaqui/a / 1 SU / J t / ~~~~~~~L O R\E, T 0dt Iquitos i E < - M A R TI N B R A Z I L 8 P At, LA LIBERCINC P A C / F / C \ HUNUCP \g 24~~~-s) PA S I LORETO< OCEAN PERU C/< cal Qr5 a ~~~~~MARDE ) (J-EDE DIOS l \ a AGRICULTURAL CREDIT PROJECT,.' Areo sub;ect to agrarior reform os of Moy i972z 'E Arro Za es Departnsenta1 baundaries uzco * Oepartmeslol copitois * Notion-l copiel oy --- Internationol bondaries c > 0 50 i00 i CUCHO e i P U N lis.to#ers N 1 M 200 'R.t 2 > AN", <, ArCáUiPO* 7q_ X H f ' i.la wsurtham u ~ ~ E ~ ~ X E A - PERUJ>^ Moqu< la> R 1 t LWd ukuuir f/ >S4tnyrcDtDXf Pec ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Wt ~~~p tt*'fd t T CN