lBETURuM RETICE CIRCULATING COPY ;-. ESKDRERPOIS BE~ RETURNED REPORTS-0 gX aT 0m Report No. TO-466a

Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

SAN LORENZO IRRIGATION

AND

LAND SETTLEMENT PROJECT

(STAGE III)

PERU Public Disclosure Authorized

March 26, 1965 Public Disclosure Authorized

Projects Department C JR SX\YC 7 L

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SAN LORENZO IRRIGATION AID LAND SETTLEMENT PROJECT

(STAGE III)

TABLE OF CONTENTS

Page No*

SIkMARY .... o ooo i - ii

I, INTRODUCTION ...... o ...... 1

II. BACKGROUND ...... 1

III. THE SAN LORENZO PROJECT AREA . *...... o. . 3 Location and Irrigable aArea b...... 3 Physical Characteristics.....o 0 ...... 3 Climate ...... a o ...... 9 o. . 4

Population. . * * O * * a* * * * * * , e* * * * V Land Settlement and Development ...... a 4h Land Tenure and Use .d. . .e ... . 5 Irrigation Water Supply ...... 6 Drainage...... a...... a 0 . . . . 6 Services. . . 0 ...... 7 Marketing ...... 7

IV. THE PROJECT -STAGE III.e o o o o a o a 7

Heavy Equipment clTorksand . . e .Q O . 8 Technical Services, Facilities and Equilpment. . . . 0 9 Agricultural Credit . .d .t...... 10 Electric Power...... * . a . . . 11 Basin Program ...... * . . . 12

V. COST ESTIMATES AND FINANCING ...... e 12

VI. ORGANIZATION AND IMiANAGEMENT . .*. .* ...... 15 Government Level...... * . . . 15 Project Level ...... 15 Lending Operations.i gao ...... a. 16 Basin Program ...... a ..... 16

VII. OPERATING RESULTS...... 17 -2-

Page No.

VIII. BEITEFITS AMD JUSTIFICATION . . . .@. . * . 00. . . . 17

IX. CONCLUSIONS AND RECOMMENDATIONS ...... o . . . . 18

ANNEXES

Annex 1 - Map

Annex 2 - Land Sales and Projected Sales by Economic Group of Irrigable Land

Annex 3 - San Lorenzo Agency - Banco de Fomento Agropecuario

Table 1 - Terms and Conditions of Loans to Settlers

Table 2 - San Lorenzo Agency of the Banco Agropecuario del - Summary Balance Sheet (Provisional) as at August 31, 1964

Annex 4 - Projected Schedules

Table 1 - On-Farm Investments

Table 2 - Loan Disbursements

Annex 5 - San Lorenzo Project Investments - Projected Cashflow 1965 - 1985

Annex 6 - Organization Chart - San Lorenzo Irrigation and Land Settlement Project - Organization and Functions

Annex 7 - Agricultural Production and Cropping Pattern

Annex 8 - List of Goods and Services to be Financed PER U

SAN LORENZO IRRIGATION AND IAND SETTLEMENT PROJECT (STAGE III)

S UMMNi A R Y i. The Government of Peru has requested additional financing for the San Lorenzo Irrigation and Land Settlement Project to accelerate land settlement and development. ii. Stage I consisting of the diversion works, canals and tunnels to supplement irrigation water only for the Valley, was completed in 1953 . The cost was met by the Government. A Bank loan of US$18 mil- lionl! was made in 1955 to finance the foreign exchange costs of engineer- ing and construction of additional irrigation works (Stage II). These were completed in 1959 at a total cost equivalent to US$26.6 milliono,/ The local currency costs of appraximately US$8.6 million2/ equivalent were financed by P.L. 480 funds from the United States. From 1959 through August 31, 1964, the equivalent of US$12.9 milliong/ was spent for addi- tional facilities, technical services, investigations, equipment, adminis- tration, and on-farm investnents. In this period 14.,270 ha were sold and partially developed. iii. During the period September 1, 1964, through December 1967, now under consideration, the equivalent of US$29.8 million would be required to meet additional costs necessary to further develop the 14,270 ha and to settle and bring into production approximately 17,700 additional ha (Stage III). This would raise the total irrigable hectares settled and developed in the San Lorenzo area to approximately 32,000 by the end of 1967. Approximately US$6.7 million of the US$29.8 million would be met by the settlers on the Project through water payments, their initial share of on-farm development costs, and sub-loan repayments of earlier settlers, and by the farmers of the Piura and Chipillico Valleys through water payments. The undisbursed portion of the current A.I.D. loan would cover an additional US$3.3 million. However, the Government lacks the resources to provide the balance of approximately US$19.8 million in addi- tion to meeting the debt service charges on the existing Bank and A.ID.

1/ About 68 percent of total Stage II costs of approximately US$26.6 million.

2/ Dollar equivalent adjusted to present exchange rate. - ii -

loans and providing short-term agricultural credit for the settlers. Hence the need for additional Bank financing (Stage III) for equipment, technical services, drainage works and medium- and long-term agricul- tural credit. Financing is also provided in the loan for a Basin Pro- gram for Northwestern Peru for costs of engaging a firm of consultants to survey the water and related resources of the Region, to develop plans for the financing and implementation of projects to utilize these resources according to a system of priorities, and to develop recommen- dations for instituting the most effective regional organization for local administration of the Program.

iv. Despite delays and problems, the Project is emerging as a suc- cessful one financially, economically and socially. It is estimated that the total Project will yield an internal rate of return to the economy of 14 percent and the incremental benefits of Stage III would result in an internal rate of return on Stage III investments of 16 percent. The Pro- ject has achieved a balance of services to physical development which is resulting in financiallv secure well-adiusted settlers.

v. The proposed loan would be to the Republic of Peru. The loan funds for Stage III would be exclusively for the Project and would be ad- ministered by the Project Management under authority delegated to the Director General by the President of Peru and the Minister of Agriculture. The San Lorenzo Agency of the Banco de Fomento Agropecuario de Peru would administer the agricultural credit portion of the loan on behalf of the Management, but with the latter participating in the sub-loan determina- tions. The loan funds for the Basin Program would be administered through the Office of the President of the Republic by a local Northwestern Peru Regional Development Service.

vi. The Bank appraisal confirmed the need and justification for Bank financing of US$104. million or approximately 35 percent of total Stage III costs of US$29.8 million, and for US$0.6 million to cover the costs of the consulting services for the Basin Progriam, or a total loan of US$11.0 mil- lion. The loan for Stage III would cover foreign exchange costs estimated at US$5,5 million (approximately 53 percent) and local currency costs esti- mated at US$4.9 million (approximately 47 percent). The loan for the Basin Program would be for consulting services. An appropriate term would be 20 years, including a four year grace period. p E t u

SAN LOPRENZO IRRIGATION AND LAND SETTLEMENT PROJECT (STAGE III)

I. INTRODUCTION

1. The Government of Peru (the Government) has submitted a request for a Bank loan for financing a further stage (Stage III) of the San Lorenzo Irrigation and Land Settlement Project (the Project). Financing totaling US$20.75 million was specifically requested for a program of agri- cultural credit, for graveling of the canal roads, for construction and asphalt surfacing of two main artery roads, for a small hydroelectric power installation and related transmission facilities, and for equipment 0 A Bank appraisal mission visited Peru in September 1964 and eliminated the road construction and hydroelectric components as not being presently jus- tified, and reduced the overall equipment component as excessive. After consultation with the Project Management (Management), however, components were added for technical services, for the construction of drainage works, and for types of equipment to enable Managementfs program of farm-to-market road construction and graveling to continue. These actions result in pro- posed Bank financing totaling US$10.4 million, or approximately 35 percent of total Stage III costs estimated at the equivalent of US$2908 million. US$0.6 million was also added for financing a Northwestern Peru Regional Basin Program (Para. 60).

II. BACKGROUIND

2. The Project is located betwieen the Quiroz and Chira Rivers on the north and the Piura River on the south, about 1,000 kilometers north of near the border (See Annex 1 Map). Works affecting it have been constructed in two stages. Stage I ccnsisted of the diversion works, canals and tunnels to supplement water from the Piura River for irrigating about 31,0001/ ha only in the Piura Valley. These facilities were financed by the Government from its own resources, and construction was completed in 1953.

3. Stage II had the objective of supplying water for irrigating about 50,000 ha of new land in the project area and for providing supple- mental water for the Piura Valley. It consisted of enlarging the Stage I

1/ All hectares referred to in this report are considered to be irrigable. - 2 -

facilities and construction of the San Lorenzo Dam and Reservoir and the canal and lateral system on the Project. It was completed in 1959 at a total cost of S/ 718.5 million (US$26.6 million equivalent, of which the Bank financed the US$18 million foreign exchange costs 2/ From 1959 through August 31, 1964, the equivalent of US$120,91/ was spent for addi- tional facilities, technical services, investigations, equipment, admin- istration and on-farm investments.

4. Effective and expeditious development and settlement did not take place as expected in Stage II. Causes of delays were many, Local pressures from farmers of the Piura Valley who desired a greater share of the water supply at the expense of the development of part of the project area were at the root of the problem. There was divided responsibility and authority between the several agencies of the Government associated with the Project, and little authority was delegated to Management. Nec- essary legislation was delayed. Effective regulations and procedures failed to materialize. Funds were insufficient for development of land and for support of essential services and facilities. Water meant for the project area was utilized by farmers of the Piura Valley for approximately 18,000 ha additional to the 31,000 ha for which they were entitled to water from Stage I and II or a total of 49,000 ha.3/ This increased the pressure frcm the Piura farmers to delay or abandon development of a substantial portion of the project area on the argument that use of Project water in the Piura would be more economic. The need for a basin survey to resolve this problem prior to consideration of development beyond the 32,000 ha contemplated in the proposed Bank loan is specified in paragraph 22,

5. In 1961 the Bank reviewed the Project with special reference to soil conditions. It recommended continuation of the original plans for the project area with certain reductions. Further studies basic to the most economic development of the lands of the Project were recommended. The Bank also established an office in Peru to maintain constant liaison with the Project,

6. In early 1962 the Government approached the Bank for additional financing for Stage III. The Bank pointed out that progress in land sales

1/ Dollar equivalent adjusted to present exchange rate.

2/ See Report No. T.0. 24-c dated March 25, 1955. 3/ This figure has since been reduced to an estimated 40,000 ha due to salinity. A survey is currently underway to determine the magnitude of the problem and to recommend solutions. This survey would support the application for the Chira-Piura Project presented to the Bank in mid-1964. The object of this project would be to divert water from the to the lower Piura Valley to further supplement water for the area. -3

and in settlement had been disappointing, and outlined the steps needed to insure the Project's success. It agreed to consider the request for a further loan only after the Government had taken necessary remedial action.

7. In 1963 the new Government accorded greater priority to the Pro- ject. A more effective organization with more autonomy stemming from the President of Peru was created. Steps were taken to provide more funds. Effective regulations and procedures were implemented, and a competent and experienced Director General of the Project appointed. The pace of development and settlement and provision of the necessary supporting serv- ices and facilities was accelerated. As of May 1963, only about 6,100 ha of irrigable land had been sold. By September 19644, 14,270 ha had been sold, and mostly settled out of a possible total of 37,569 ha.

8. For a period it appeared that Management at long last had the continuing operational authority and backing to proceed. In May 1964, however, there emerged a new and complicated law (Law 15037) which changed lNanagement's line of authority from the Presidential level to the Minis- terial level. The necessary Decrees to implement the new arrangement were not issued and the status of San Lorenzo once again became confused,

9. The Bank informed the Government in early October 196)4, that the requested loan could not be considered until the Government took action to again grant Management adequate operational and budgetary authority and funds. On NTovember 25, 1964, the President signed two Decrees granting such authorities for the Project. These have been studied in the Bank and are considered satisfactory,

III. THE SAN LOIR\EZO PROJECT AREA

Location and Irrigable Area

10. The project area is interrelated with the Piura and the Chipillico Valleys. Approximately 2,148 ha in the Chipillico and 40O,000 ha in the Piura presently draw partially or wholly on the same facilities which supply water to the Project. Planning prior to 1961 envisioned approximately 50,000 ha being settled on the Project. The Bank review of 1961 (Para. 5) and investigations conducted subsequently by Management resulted in a re- duction to 37,569 ha pending further investigations. Annex 1 Map shows the location of the irrigation works and districts of the project area.

Physical Characteristics

11. The project area is 100 to 250 meters above sea level. The to- pography varies from flat lands or gentle slopes in the flood plains of the rivers to rolling, rough topography in parts of the San Isidro, Malin- gas and Hualtaco districts. The soils vary from the loamy sand of the Parkinsonia, Algarrobo and Somate districts, to sandy loam in the Hualtaco, M4alingas and San Isidro districts, to clay loam and clay in the Partidor and parts of San Isidro and Malingas districts.

Climate

12. Although located in the tropics, the zone has a desert climate. Rainfall is negligible--about 3 inches annual average in the project area-- and its economic significance to the Project is nil. With irrigation a full 365 day growing season is enjoyed and most crops can be planted at any time, W^Jinter (May to November) temperatures range between 20- and 242 centigrade (682 to 750 Farenheit) while summer (December to April) tempera- tures are above 24Q, sometimes moving as high as 370. Relative humidity is fairly constant at 65 percent to 75 percent. Prevailing winds are from the south.

Population

13. The present population of the project area is approximately 750 families. These are largely former goat herders who had squatted on lands in the project area, and former farm hands on haciendas of the area, each of whom was entitled by law to purchase and settle a 6-8 ha-farm on the Project. When fully developed and settled, approximately 1,570 families could be settled. Settlers additional to the existing 750 families would come from all sections of Peru, and would qualify for eligibility accord- ing to a system being used by Managements which rates each applicant accord- ing to such factors as need, experience, industry, education and credit- worthiness. Moreover, a new project headquarters known as San Lorenzo is being built in the San Isidro district. It is estimated that when the Pro- ject is in full production, more than 50,000 people of the project market area would derive their livelihood from it either directly or indirectly. The in which the Project is located is estimated to have a total population of approximately 670,000, but only about half this number could be considered to be in the project market area. Four towns-- Piura, Sullana, and --easily accessible to the Project, have a combined population of approximately 181,000.

Land Settlement and Development

1h. At the outset of Stage II it was projected that land development and settlement of the Project would be completed by the end of 1962. This target was not realized. In 1963, recognizing the inadequacy of funds for land development and agricultural credit, the U. S. Agency for Interna- tional Development (A.I.D.) made available us$5 million for these purposes. These funds, together with improved management and services, enabled the pace of land development and settlement to accelerate.

15. Settlement and development during the 1965-67 period depends greatly upon the continuation of adequate operational authority and funds - 5 - for Management, and the availability to the settlers of agricultural credit. Demand for the land is great. As land has come into production and the favorable yields have become known, applications exceed many times the land available under each sale. Late in 1964 nearly 10,700 ha were being pro- cessed for sale.

16. Management has prepared a schedule of sales of irrigable and classified land (Annex 2) divided into five economic soil types. If sales proceed within a six month tolerance of schedule, it is estimated that by the end of 1967 approximately 32,000 ha of the potential 37,569 would be settled and under cultivation.

17. Development, consisting of such improvements as leveling, ditch- ing, fencing, construction of the farm dwelling and other farm buildings etc., takes place after the settler assumes ownership, except in the Parkin- sonia and Algarrobo districts where they would precede sale of the land, The farmer is entitled to receive medium- and long-term credit for approxi- mately 80 percent of the total of such costs. He may elect to do the work himself in a manner approved by Management; or to have the work done by Management on a reimbursable basis. Most farmers elect the latter method for such items as leveling, ditching and dwelling construction.

Land Tenure and Use

18. Farm sizes range from 6 ha minimum to a small number over 80 ha. Each farm is classified by economic soil type (Para. 16 and Annex 2). The minimum size of each is determined by its potential productivity according to the formula based upon these soil types, As of August 31, 1964, approxi- mately 60 percent of the total number of sales were in small sizes of 6 to 8 ha. This resulted from the provision of the law requiring the first sales to be to the squatters and farm hands (Para. 13) of the area. Only 3,000 ha of the 14,270 ha were divided into these small farros, The ave--age size of all farms sold was approximately 19 ha. iWhen the Project is fully de- veloped, the average size of all farms would be approxiriiately 24 ha.

19. At the time the settler receives title to his land he must agree to keep the farm and to cultivate it in a manner satisfactory to the Manage- ment for a period of eight years. Land thus far settled is being farmed principally in cotton, maize, root crops, fruit and other tree crops, vege- tables and forage crops. Rice production is being discouraged because of its high water requirements. The range of possible cropping patterns is large, due to the year-around growing season and favorable soil types. Cotton is grown only in the so-called winter season because of insect pests. Management is strongly encouraging a diversified cropping pattern includ- ing livestock, to spread water use, work, and income more evenly through- out the year. It is expected that livestock production, especially dairy production, would be a major source of income in the Algarrobo and Parkin- sonia districts where more sandy soils predominate and forages thrive. -6-

Irrigation Water Supply

20. 1Monthly water allocations are specified in each farm plan for each year. These are based upon the hydrological and soils studies. Cur- rently, water requirements are higher in the Parkinsonia, Algarrobo and Somate districts of sandy soil than in other districts. There is not yet sufficient experience in the Project, however, to determine the optimum applications of water for each crop in each district. Management is cap- able of solving this problem.

21. Despite below average flow of the rivers for the past few years, water supplies have been adequate for the Project and for the Piura and Chipillico Valleys. The reservoir was drawn down to the extremely low figure of 18 million m3 (maximum capacity is 250 million mi3 ) by the end of the dry season in September 196h. Heavy rains during late September and October raised the reservoir to approximately 94 million m3 at the end of December. This reserve, plus estimated availabilities from the rivers in 1965--based upon 1964 availabilities which were below average-- should produce a net availability of approximately 730 million m3 in 1965, after deduction of 90 million m3 for a technical reserve in the reservoir and for water losses. This would barely cover a full requirement totaling 725 million m3 for 1965, assuming an average of 20,000 ha under cultivation on the Project, 40°,00 ha in the Piura, and the 2,148 ha in the Chipillico. A normal supply from the Quiroz in 1965 would produce a net availability of approximately 800 million m3 and build scme further reserve. On the basis of these figures the water supply would be tight.

22. Adequacy of water supplies for the Project beyond 1965 would be affected by the degree of enforcement of the provisions of Supreme Decrees of November 1964, specifying annual water allocations to the Project, the Piura Valley and the Chipillico Valley. Given good enforcement, there should be adequate water in normal years for the Project and the Chipillico. There would not be adequate water, however, for the full 40,000 ha now esti- mated under irrigation in the Piura (Para. 4) and alternate sources would have to be found, or the hectares under irrigation reduced. Some Piura farmers are drilling tubewells as a supplemental source, but the problem needs to be treated on a broader basis. A basin survey is required to provide the basis for a regional approach and should move forward without delay. Appropriate assurances were obtained during negotiations that water allocations would be enforced, and the Government would expedite the basin survey.

Drainage

23. Management is conducting some field investigations designed to anticipate drainage problems as the Project develops. These investigations are not sufficient. It is desirable that a comprehensive drainage and salinity survey of the Project be made without delay supervised by an ex- perienced consulting firm, and that construction of an adequate drainage system in critical areas be undertaken during 1966 and 1967 (Para. 33). -7-

Services

2h. The Project has a well developed system of services, thus far concentrated principally in the higher developed districts of San Isidro, Partidor, Malingas and Somate. Services available to the settlers without cost are in the fields of agricultural extension, farm planning, marketing, home economics, education, public health, and social services. Medical and hospital care is available on a partially reimbursable basis. These services are already yielding benefits in terms of better farm planning, higher yields, and more rapid adjustment of the settlers to their new en- vironment.

25. One important service not yet adequately organized is that of the Agricultural Experiment Stations. There are two stations, each con- taining approximately 150 ha in the Partidor and the Algarrobo districts. These have been poorly managed and have provided little useful information. The Partidor station has recently been reorganized. The Algarrobo station needs reorganization. Technical assistance is needed for both stations.

Marketing

26. Marketing has not been a problem so far. Local markets slhould absorb most of the cereals and root crops, and part of the dairy products and fruits. Other Peruvian markets should absorb the remainder of the dairy products and part of the fruit. Export markets would be relied on to absorb the balance of the fruit and all of the cotton fiber production. Cotton fiber and seed processing in nearby mills raise no specific problems. Ex- port demand for the Project's Pima Cotton (long staple) should continue good but prices may drop in the 1970?s.

27. Anticipated problems of marketing relate primarily to tree crop products (mango, citrus, avocado) and vegetables which, partly in processed form, would have to be exported, and to dairy products for the dcmestic market. Marketing of these camodities pose many problems (quality, grad- ing, processing, transportation, packaging, etc.) with which Management is not familiar. Although the volume of tree crop production would not ex- ceed local consumption until the 1970 s, it is important now to undertake comprehensive studies as a basis for good planning. Technical assistance would be needed for this task.

IV. THE PROJECT - STAGE III

28. Stage III is the further development of the 14,270 ha and the settlement and development of approximately 17,700 ha of new land, to bring into full production a total of approximately 32,000 ha by the end of 1967. It would include the following: Operations and Maintenance (O&M), land development and roads equipment; drainage and ancillary works; technical services and training, and supporting facilities, materials and - 8 -

equipment; agricultural credit to finance on-farm investments and produc- tion costs; and financing to the Government to cover the costs of consult- ing services for the Basin Program. Bank financing would supplement Government and settlers contributions and the remaining A.I.D. funds for the programs. Cost estimates and financing by source are presented in paras. 52 and 53.

O.&M., Land Development and Roads Equipment; Drainage and Ancillary Works

29. A. O.&M. and Land Development Equipment

Management would have a heavy and continuing responsponsibility for operation and maintenance of the irrigation facilities and canal roads, and for leveling and ditching of land. These require heavy mechanical equipment. Much of the existing equipment has outlived its useful life and must be replaced,

30. B. Roads Equipment

The Government requested Stage III road financing for construc- tion and asphalt surfacing of approximately 104 kma of main artery roads, and for equipment for graveling about 200 km of canal roads.

31. The great bulk of traffic which would use the project road system for the foreseeable future would originate in the project area or would be closely related to the people and products of the Project. The basic justification must therefore arise from the Project. Asphalted roads rate a relatively low priority until the Project is more completely developed and the production of the project area generates enough traffic, supported by increased traffic from without, to justify the necessary expense.

32. Gravel roads are justified, however, in these areas not serviced adequately by the canal roads. Some such roads have been constructed by Management using its own or rented equipment and its own engineers. They are well ccnstructed, and cost only about 60 percent of the estimates of the consulting engineers. It is therefore proposed that the Bank act on the experience Management has gained and finance equipment for Management to continue its program of constructing necessary gravel roads, as well as to continue its practice of graveling canal roads. The same equipment is needed for land development and for operation and maintenance work. Its provision would enable Management to have alternate but complementary uses for both engineering personnel and equipment at considerable savings in cost.

33. C, Drainage and Ancillary Works

Some drainage and salinity problems have emerged and would be further identified by a proposed survey (Para. 36). Financing has been provided in the proposed loan to enable construction in 1966 and 1967 of - 9 -

a system of drainage works to service approximately 5,000 ha in the most critical areas. Construction would be dependent on prior Bank approval.

34. Management would provide the necessary ancillary works and facil- ities for the Project. These would include service centers still required, improvement of the experiment stations, and construction of better head- quarters' facilities. Service centers would provide administration, opera- tion and maintenance facilities, technical services, machinery pools, schools, stores, hospitals, auditoriums, etc. All service centers are scheduled to be completed by the end of 1965.

Technical Services, Facilities and Equipment 35. A. Services

The original request for Stage III financing did not contain any element of technical assistance. In the course of the project apFraisal, however, the need for technical assistance and related training in specific fields clearly emerged and was agreed by Management.

36. There is sufficient experience on the Project to indicate that some drainage and salinity problems can be expected. The problem areas would be identified without delay and an appropriate drainage system would be designed and constructed in the critical areas (Paras. 23 and 33). Management would engage a firm of consultants, satisfactory to the Bank, to supervise a comprehensive drainage and salinity survey, to prepare the general plan of the recommended project drainage system, and to prepare the preliminary design, plans and specifications for the most critical areas.

37. Work at the experiment stations has lagged (Para. 25). Moreover, there is too little coordination of research at these stations with that of the National Agricultural University and the Ministry of Agriculture. A team of short-term consultants from an experiment station located in an arid area is needed for approximately three months to study the Project research program and to recommend a future program. The services of one consultant is needed on a continuing basis for two years to assist Manage- ment in implementing such a program.

38. The equipment management program needs improvement. An effective preventative maintenance program would be instituted and enforced by Manage- ment. More effective use of project vehicles is needed. Other aspects of equipment management can be improved. A consultant for a two-year period is required to assist Management in instituting and implementing such a program, including training.

39. As agricultural production increases, the settlers are expected to encounter marketing problems (Para. 27). The services of a consultant is needed for a two-year study with particular reference to fruit, live- stock and vegetables. - 10 -

40. Vocational and artisan schools are needed and a limited amount of equipment is proposed for such schools (Para. 42)e The services of a consultant experienced in this field is needed for approximately three months to study the curriculum and facilities, to recommend a course of action and to assist in the refinement of the education equipment list ac- cordingly.

41. The local technical services for the settlers and the necessary O.&M. and administrative services for the Project would be provided by Management. They will also provide the local research and investigative services0

42. B. Equipment and Facilities

Some imported equipment is necessary to continue and improve essential services. This would include vehicles, laboratory and agricul- tural equipment for the experiment stations, and equipment for vocational and artisan schools.

43. While justification exists for these items during the develcp. ment phase, Management would avoid the temptation of purchasing equipment to provide marginal services or those which could be provided by private operators at reasonable costs. If development and settlement proceed on a reasonable basis, the need for Project-otmed equipment, other than for O.&4. services, would possibly be limited to three or four additional years by which timethe provision of such services as extension, health and education would possibly be assumed by the respective Government agencies or by a regional organization.

The Agricultural Credit Progran

844 The settlers would require short-term credits to finance annual recurring production costs, as well as medium- and long-term credits to finance on-farm investment costs. The short-term production credits would be provided entirely by the Banco de Fomento Agropecuario (Banco) from its ovn resources, through its San Lorenzo Agency (the Agency) (Annex 3) lo- cated at the San Isi To service center. No Bank funds would be used for short-term credits./

45. Bank funds would be for the medium- and long-term. credits to the settlers through the Agency. The on-farm investments to be financed would include land development, housing, machinery, livestock and semen, and tree crops. The projected schedule for on-farm investments is shoTri in Annex 4, Table 1.

1/ Further financing to the Banco for a country-wide program of medium- and long-term agricultural credit is currently under consideration by the Bank. 46. Land development would include leveling, ditching, fencing and construction of farm structures except dwellings. The housing program would finance approximately 850 additional farm homes of minimal standards for settlers, Construction would be approximately 90 percent from local materials. Houses would be built by the Housing Division, or by private contractors in accordance with plans and specifications designed or ap- proved by the Project architects and under their supervision. The rate of construction is reaching one house per day. As of August 31, 1964, 365 houses had been built and the results were very good. Satisfactory housing has contributed much to successful development of land thus far settledO,

47. The livestock program would be principally one of financing breeding herds of imported Brown Swfiss or other breeds of cattle proven adaptable to the area, or semen, for selected farms. As such, it would constitute an extension to San Lorenzo of the National Livestock Policy and Program the Bank has been financing for some years through the Banco. Bank loan funds for such cattle would be limited to settlers with expe- rience in cattle management and whose operations are sufficiently large to support a breeding herd of approximately twenty or more producing cows. Some financing to smaller settlers is contemplated for domestically pro- duced improved cattle&

48. The machinery program would finance the settlerst needs for tractors, implements, tools and related sPare pa: -ts. The tree crops pro- gram would finance the purchase of stocks from nurseries operated by Management, and the establishment and initial care of tree crops on an area approximating 5,000 ha. Plantings would be carried out over a ten- year period, only four years of which would be financed under the loan.

Electric Power

49. Reference has been made in paragraph 1 to the request for a small hydroelectric power installation and related transmission facilities. The plant would be located at a drop on the Yuscay Canal on-the Project. Power for the service centers is presently being provided in each service center by diesel electric generators. Power is not available for farm electrifi- cation. As settlement and development progress and agricultural production increases, electric power on the farms would be important both in terms of economic and social consequences.

50. A power survey is currently being made by a qualified firm of consultants. This is not yet completed, however, and too little is known as to the merits of the various alternative sources of power, their possi- ble interrelationship with other consuming areas, and costs, to make a reasonable appraisal of the power request at this stage. Accordingly, finance for power development is not involved in the present loan. - 12 -

Basin Program

51. Northwestern Peru is an area of much potential development. Such development, however, has and will continue to be hindered until a regional, integrated approach to the use of its scarce water and related resources is adopted. As indicated in Paragraph 22, the resources of the Region should be surveyed, plans should be developed for financing and implementing projects for the utilization of these resources in ac- cordance with a system of priorities, and adequate arrangements should be made to administer such a Basin Program at the local level. Bank loan funds would finance the services of a firm of consultants with an international reputation in the field of regional development to conduct the basin survey, to prepare the plans for financing and implementation of projects, and for preparing recommendations and assistance for the im- plementation of these plans.

V. COST ESTIMATES AND FINANCING

520 Cost estimates have been calculated on the basis of interna- tional prices for imported equipment and technical services. Costs of local services, facilities, ancillary works, administration and on-farm investments have been checked against approximately three-year experience on the Project. Cost of drainage works have been checked on a per hectare basis against similar works with which the Bank has had experience. Short- term on-farm production costs have not been included in the cost estimates because they are of a recurring nature and are liquidated annually through crop liens and would not be financed under the loan. Cost estimates for the 1964-67 programs of the Project, excluding debt service, short-term credit and costs of the Basin Program, are shown below and on the follow- ing page:

Program Cost Estimatesl/ Million U.S. Dollar Soles equivalent millions A. O.&M., Land Development and Road Equipment; Drainage and Ancillary Works 245.3 9ol B. Technical Services, Facilities and Equipment 100.2 3.7 C. Cn-farm Investments (Medium- and Long-Term Agricultural Credit) 399.4 12.6 D. Administration 120.0 4.4 Total 804.9 29.8

1/ Costs of the Basin Program totaling $0.6 million are not included because they are not costs attributable to the San Lorenzo Project, - 13 -

53. The proposed sources of financing the costs of these programs are shown below, in millions:

Programs to be Financed.i/ Sources A. B. C. D. Total Soles US$ Eqv. Percentage

Farmers2/ - - 66.8 11514 182.2 6.7 22.8 Government 178.1 71.8 .7 4.6 255e2 9.4 31.6

A.I.D. - - 89.o0/ - 89,0 3.3 11.1

T.B.R.D. 67.2 28.4 182.9 - 278e5 10,4 34.5

Total 245.3 100l2 339e4 120.0 804.9 29,8 100l0

1/ See paragraph 52 for title of each program. Does not include Basin Program.

2/ Includes farmers initial share of on-farm investment costs, repay- ments on land and investment loans, and water charges. 3/ Contributions cease about mid-1965.

54. The Bank loan for Stage III would be divided into £oreign ex- change and local currency estimated as follows, in millions:

LC FX Program Soles US$ Eqv. Soles - Soles

A. 67,2 2.5 25.4 37,8 41.8 62.2

B. 28.4 1.1 - - 28.4 100.0 C. 182,5 6.8 100.4 57.1 78.5 42.9

D. - _ _ _ _ _

Total 278.5 10.4 129.8 46.6 148.7 53.4

55. In addition to the contributions shown in paragraph 53, the Government would also be responsible for debt service (See Annex 5) total- ing the equivalent of soles 203 million through 1967. Moreover, the Banco would be expected to provide a revolving fund of approximately soles 180 million for short-term production credits to the settlers. The Government would also be responsible for debt service for the Basin Program.

56. The projected schedule of disbursements under the proposed Bank loan is presented in Annex 4, Table 2. Documentation which the Bank would - 14 -

require for disbursement would be different for the imported equipment and services, and for agricultural credit. Disbursements for equipment imported by Management would be against standard purchase and shipping documents, and should occur largely in the first year of the loan. Dis- bursements for imported technical services would be for service rendered and associated costs as specified in each contract. A disbursement pro- cedure satisfactory to the Bank for the construction costs of the drainage works would be determined when the survey is completed and the method of construction is agreed upon.

57. The agricultural credit program would involve disbursements for sub-loans to the settlers for procurement locally--either from local dealers, private contractors or Management--of eligible items whose origin is both local and imported. Inasmuch as Management performs most of the land development services, constructs housing, imports livestock and semen, and produces tree crop nursery stock for resale to the settlers--all on a reimburseable basis--a revolving fund was established in order that Manage- ment would have the funds to perform these services and purchases. The funds for the revolving fund were initially derived from an A.I.D. advance and Government contributions. Services were performed by Management, the costs were allocated to each farm, and the settler received a sub-loan from the Banco to reimburse Management for those costs which Management had incurred on his behalf. A statement of sub-loans to settlers is pre- sented periodically by the Banco to A.I.D. and this certified statement serves as the documentation for A.I.D. disbursement to the Banco of further funds for re-lending.i/ The same method is used for the settlers purchases of farm machinery from local dealers.

58. The Bank loan funds for agricultural credit would become effec- tive as soon as the A.I.D. funds are exhausted about mid-1965 and would be used to finance the same items A.I.D. is now financing. Under the pro- posed Bank loan the system of documentation and disbursement presently employed by A.I.D. would be continued in a similar fcrm. Bank disburse- ments would be made against statements of expenditures presented by the Banco showing sub-loans made to settlers for eligible items under the Bank loan. Bank disbursement would be for 100 percent of the amounts of sub- loans made to settlers shown on each list.

59. Sub-loans would average up to 80 percent of the total cost to the settler for land development, machinery, livestock or semen, and tree crop plantings. The remaining 20 percent would be borne by the settler. Sub-loans for housing would each have a maximum financing level of 45,000 soles (less than US$1,700) per house. The settler would bear all costs over this figure. Most houses thus far ccnstructed have been within the maximum cost figure.

1/ The Bank uses a similar system of documentation under Uruguay Loan 245 U.R. and Paraguay I.D.A. Credit P.A. 4 7. - 15 -

60, Costs of a contract for consulting services and supporting fa- cilities for the Basin Program through December 31, 1967, are estimated at the equivalent of US$0o6 million. Disbursements against such contract would probably be spread rather uniformly throughout this period on a monthly basis.

61. Documents executed or payments made after August 31, 1964, for eligible items on all programs in which the Bank is participating would be acceptable for disbursements.

VI. ORGANIZATION AND MANAGEMENT

Organization and Management at the Government Level

62. The National Agrarian Council (C.N.A.), chaired by the lMinister of Agriculture, is the policy making body for the Project. The Director General of the Project reports directly to the Minister as Chairman. The agency within the Ministry responsible for providing backstopping for the Management is the Institute of Agrarian Reform (I.R.P.A.), formerly I.R.A.C. I.R.P.A. also Reviews the procedures, budgets, and operating policies of Management and makes appropriate recommendations to the C.N.A. It is yet too new to enable an accurate appraisal of its efficiency.

63. The Supreme Decrees signed by the President and the Minister on November 25, 1964, grant the Director of San Lorenzo adequate operational authority and funds which, when supplemented by the proposed Bank loan, would be sufficient to enable the operations of the Project and develop- ment and settlement to proceed.

Organization and Management at the Project Level

64. Operation of the Project is the responsibility of Management, headquartered on the Project. The organization is shown in Annex 6. It consists of the Director General, his deputy, four staff offices (Legal, Planning, Social and Welfare and Public Relations) and five operating divisions (Administration, Agriculture, Engineering, Economics and Hous- ing).

65. The project area has been divided into seven irrigation districts. Responsibility for operation and maintenance of the irrigation works is vested in the Chief of the Engineering Division, a civil engineer with ex- tensive experience. Both the Chiefs of the Maintenance and Operations De- partments are civil engineers and operate under the Chief Engineer. Both have had adequate experience.

66. The central equipment repair shop is operated by the Administra- tion Division and is supervised by a chief mechanic. While a reasonably satisfactory job of equipment management and maintenance has been done, - 16 -

some improvement is desirable. Technical assistance would be provided under the loan to help implement such improvements (Para. 38).

67. Most of the technical assistance or services to settlers such as extension, home demonstration, adult education and operation of the tree nurseries and experimental stations operate under the Chief of the Agriculture Division. Although relatively new on the Project, he has had extensive experience and is qualified*

68. All inventory control, accounting and internal auditing is per- formed in the Administration Division. The Chief is adequately trained. The Division appears to be operating efficiently, The accounts of the Pro- ject are further audited annually by the auditors from the Government and also by a private firm.

Administration of Lending Operations

69. The present status of the system of credit to settlers is de- scribed in detail in Annex 3. The San Lorenzo Agency of the Banco is the agent for making loans to the settlers for their capital requirements0 Since July 1961, when it was set up, the Agency has developed into an ef- ficient and sound credit institution worling in close cooperation with Management. The continuation of the Project at the proposed accelerated pace would call for staff increase which would be met in time by the Banco's head office. The organization, lending policies and procedures, which have proved efficient, would remain unchanged.

70. The Agency is assisted by the technical staff of the Project in administration of the agricultural credit program. They assist in the preparation of the farm plans, and in determining the credit needs of each settler. They help determine each settlers credit-worthiness and serve as members of the credit committee which recommends the sub-loans.. Follow- ing sub-loan approval the extension agents and other technicians work with the settlers to assist them to make their operations most effective. This system of assistance and supervision is working well.

71. Management can provide valuable assistance to the future loan operations of the Agency by instituting more systematic collection and recording of the operating results of established farms. Precise data are indispensable as a basis for orienting development and eventually for deciding upon changes in cropping patterns and for extending credit to settlers.

Udministration of the Basin Program

72. Responsibility on behalf of the Government for administration of the Basin Program would be vested in the office of the President of the Republic of Peru. A Northwestern Peru Regional Development Service, with headquarters in that Region, would bear, under the President of the Republic, - 17 -

the responsibility for carrying out the Basin Program. The firm of con- sultants would conduct the survey, and advise and assist the Service in its responsibilities.

VII, OPERATING RESULTS

73. The cash flow of the Project has been projected through 1985-- the life of the loan--and is shown in Annex 5. During the investment period 1965-67 Project revenues would be small. From 1967 through 1970 revenues would increase substantially and expenditures would decline. From 1971 forward through 1979 revenues would be sufficient to meet all costs and provide some reserves. From 1980 forward substantial surpluses would occur annually, and would be available to be returned to the Govern- ment development budget for financing other development projects.

74. Water charges and the proceeds from land sales would pay for O.&M. costs and would recover investments since 1955 in the irrigation facilities and ancillary works (Stage II and Stage III) in 40 years. Ac- cording to projected production and income figures, farmers would be able to make water payments and repayments of loans for land and on-farm in- vestments without undue strain, and obtain a discounted rate of return on their investments of approximately 18 percent, after taxes, and deduct- ing the value of farm labor.

VIII. BBIEFITS AND JUSTIFICATION

75. Present gross value of agricultural production in San Lorenzo at about 145 million soles (Annex 7) is seven percent of the value of agri- cultural production in the Piura Department and only about one-half percent of the agricultural production of Peru. However, at full development in 1977, valued at 560 million soles, this share might increase to over 25 percent of the Piura Department and be 2-3 percent of the total Peruvian agricultural production. For specific commodities the share of national output of San Lorenzo production would be higher. For fruits (citrus and other, but excluding bananas) it may be around ten percent; for cotton, yuca and maize about seven percent; for pasture over five percent, The expected pace of development is based on recent past experience and future prospects.

76. Most of the incremental net value of production would be due to increases in fruit trees, cotton and pasture/milk, the remainder being taken up by maize, yuca and vegetables. Yields, prices and gross and net production figures are shown in Annex 7. The annual increase in the net value of production in the San Lorenzo and the Lower Piura areas since the beginning of the investments in the irrigation facilities in 1955 when Stage II began, and projected over the 50 year project life is estimated - 18 -

as equivalent to an internal rate of return to the economy of approximate- ly 14 percent. The incremental net value of production of the area to be settled resulting from the presently proposed investments is estimated,as equivalent to an internal rate of return of approximately 16 percent.1 !

77. In 1966, the San Lorenzo area would produce more than US$7 mil- lion equivalent foreign exchange revenues from cotton exports. Cotton, fruit and vegetable exports together would provide more than 50 percent of the total agricultural gross income of San Lorenzo, or appraximately US$12 million equivalent by 1977 excluding incremental cotton exports from the Lower Piura. The Project would also reduce imports for dairy products, or at least prevent further increases, as growing population and increasing income lead to a fast graxing demand for milk and milk productso

78. The Project is the biggest of its kind ever undertaken in Peru and represents an important step toward relieving a very heavy population pressure for arable land in the country. It would also provide a substan- tial increase in employment due to the intensive character of production. The production of vegetables, fruits and milk should favor the establish- ment of processing plants in the area.

79. The importance of San Lorenzo as a pilot scheme for the rest of the country is already noticeable in the fields of irrigation, settlement, agricultural education and social services.

IX. CCMCLUSICNS AND REC0MMETDATIONS

80. Further development of the San Lorenzo Project should enable the settlement of approximately 850 families on an additional 17,700 ha of land and bring a total of approximately 32,000 ha into production by late 1967e Such settlement is warranted by the yields and production being obtained from the land on the Project now settled, by the estimated internal rate of return of the proposed investments, and by the projected net rate of financial return to the farmer.

81. The Project is technically sound and is economically justified. A loan totaling US$11.0 million is warranted for project equipment, drain- age works and technical services and medium- and long-term agricultural credit, and for the Basin Program. The Borrower would be the Republic of Peru, the administering organization would be the Project Management for the Stage III portion of the loan, and an appropriate term would be 20 years, including a grace period of four years0

?./ The costs of the Basin Program have not been considered in these cal- culations since such costs are attributable to the entire Northwestern Peru Region and not to the Project. - 19 -

82. During negotiations assurances satisfactory to the Bank were obtained as follows:

a. Funds totaling at least soles 255 million in addi- tion to approximately soles 203 million for debt servicing, would be provided by the Government during the 1965-67 period as required for the Pro- ject (Paras. 53 and 55).

b. Water charges as provided in the Supreme Decrees of November 25, 1964, would be collected, and projected cost deficits during the investment period and there- after in the first years of operation would be met by Government allocations (Annex 5)e

c. Operational authority contained in the Supreme Decrees, or as otherwise agreed to by the Bank, would continue to be delegated to Management during the life of the loan to assure satisfactory operation and management of the Project (Parao 9).

d. The Bank's funds for financing credits to settlers for imported cattle would be limited, except as the Bank may otherwise agree, to settlers with experience in cattle management and whose operations are sufficient- ly large to support a breeding herd of approximately 20 or more producing cows (Para. 47)

e. Management would obtain technical assistance to be financed under the Bank loan, satisfactory to the Bank, to study and assist in implementing improved programs of research, equipment management, vocational educa- tion, and marketing (Paras. 35-40).

f. Management would engage a firm of consultants under the Bank loan, satisfactory to the Bank, to conduct a comprehensive drainage and salinity survey of the entire project area (Paras. 23 and 36).

g. The system and percentages of water allocations con- tained in the Supreme Decree of November 25, 1964, would be enforced and water-use managed in a manner which would assure adequate water for the Project (Para. 22).

h. The Government would engage a firm of consultants with international experience in the field of regional de- velopment to undertake the Basin Program (Paras. 22 and 51).

March 26, 1965 SAN LORENZO PROJECT PE RU ECUADOR

J,~~~~~~~~~~~~~~~~~~~~~~C

JANUARY~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~tSi 195oBR-160

S..ate~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~o Sric etr

a Gasping Station

0 5 0 0 T.2.Tusei

JANUARY i965 PERU - SAN LORENZO PROJECT

LAND SALES AND PROJECTED SALES BY ECONOMIC GROUP OF IRRIC-ABLE LAND

A B C D E Total Cumulative

- Hectares -

Sales through August 31, 1964_1/ 3,553 225 8,o75 1,875 542 14,270 14s270

Projected Sales through June, 1965 12585 12 69,02 1,954 730 10,683 24,953

Projected Sales June 1965 - Decemnber 1966 - - 2,253 4,547 316 7,11.6 32,069

Projected Sales after 1966 730 2]5 2,h38 1,761 356 5,500 37,569

Total 5,868 452 19,168 10,137 1,944 37,569

1/ Sales by size of Parcel were as follows:

Up to 8 Total Area No. of Sales 801 to 13 (hectares) 13.1 to 20 39000 448 1450 146 20.1 to 40 906 55 40.1 to 60 13s934 67 3,695 714 60,1 to 80 2,006 29 M4ore than 80 2,279 29 Total 14s,270 748 ' ANNEX 3

P E R U

SAN IOREN70 AGENCY

BANCO DE FOMENTO AGROPECUARIO

1 The San Lorenzo Agency (the Agency) of the Banco de Fomento Agropecuario del Peru (Banco) was opened in July 1961 to cater for the credit requirements of the settlers under the San Lorenzo Project. Its head office is in San Isidro, an important service center of the irrigated area; a nobile office is to function shortly to serve four other service centersl1 once a week.

2. The staff of the Agency has been adequate to handle the credit operations of about 750 settlers and a few deposit accounts. The staff would be increased as new settlers are brought in. The accounting system is satisfactory and up-to-date. Auditing is carried out by the inspectors of the Banco.

3. Like similar agencies of the Banco it is empowered to carry out lending operations with farmers or settlers. It can conduct banking opera- tions with any depositors.

4. Medium- and long-term loars to settlers are made on a special trust fund 4eposited with the Banco by the Institute of Agrarian Reform (I.R.P.A.)!/ and U.S. A.I.LT. contributions of S/ 115 million (US$0.4 million) and S/ 134 million (US$5 million), respectively. A.I.D. made available an initial advance of $200,000 to the trust fund and replenishes the fund as loans are disbursed. The amount still undisbursed and the availabilities on the I.R.P.A. contribution amounted to S/ 89 million (about US$3.3 million) as at August 31, 1964.

5. An agreement of March 1962 between the Banco and I.R.A.C. set forth the general lending policies and defined the relations and respon- sibilities of each institution. It gave the Agency full authority to carry out lending operations with settlers, including the assessment of the settlers' repayment capacity and credit ratings, approval of the loan agreements, the keeping of records of loans and loan collections.

1/ Partidor, Malingas, Hualtaco, Somate. 2/ Formerly I.R.A.C. 3/ This includes advances to a "Revolving Fund of the project adminis- tration" in an amount of S/ 23 million (about US$0.9 million). ANNEX 3 Page 2

6. Farm and credit plans are worked out by technicians of the San Lorenzo Project Mainagement in agreement with the settlers. The procedure involves the cooperation of the Bancots Agency in charge of the appraisal of the settlers' creditworthiness and the various elements of the Manage- ment; (1) the Division of Agricultural Engineering makes all plans related to the settlement lots; (2) the Division of Construction makes the design and cost estimates of buildings; (3) the Department of Rural Administra- tion within the Economic Division is in charge of planning the settlerst needs for farm equipment and livestock and of working out a land-use plan.

7. Loan applications and related plans are submitted to a Credit Committee, including the Chief of the Agency and representatives of the departments of the Management involved in the installation of farmers, The Banco's representative is entitled to reject applications on the grounds that the settlers' repayment capacity is insufficient or that their former repayment records are unsatisfactory. An Administrative Committee of the Agency which consists of the Chief of the Agency and the Chief Accountant reviews each case before the loan is finalized. The procedures are exe- cuted expeditiously.

8. Short-term crop loans are made by the Banco from its own resources on the recommendation of the Credit Committee of the Agency. When a repre- sentative is in conflict with the other members of the Credit Committee, these may recommend the loan to be made on the Trust Fund. The Bancots risks regarding short-term loans are very small because they are repayable on the settlers' proceeds of crops prior to the payment of other types of loans which are themselves repayable prior to the payment for the land. Short-term crop loans are eligible for discount with the Banco Central de Reserva (Central Bank) at a rate of 2 percent.

9. Specifications and terms and conditions of loans are summarized in Table 1. Short-term loans are made for a period up to one year; long- term loans are up to 20 years, including a period of grace up to three years. The rate of interest on short- and long-term loans is 7 percent. The security is a crop lien for short-term loans, a chattel mortgage for farm machinery and livestock loans and a property mortgage for long-term loans.

10. The Banco's remuneration consists of the 5 percent margin between the rate of discount of short-term loans with the Central Bank and the to- tality of interest at 7 percent charged on long-term loans. The operating and administrative expenses of the Banco's Agency for the year 1963/64 are estimated not to exceed 2 percent of the average amount of loans outstand- ing leaving, therefore, a sizeable margin to take care of the Banco's general expenses.

11. Lending operations to August 30, 1964, carried out by the Banco with the San Lorenzo settlers include over 2,000 long-term loans for an amount of about S/65.9 million (about US$2.5 million) and 1,264 short-term ANTEX 3 Page 3 loans for about S/60 million (about US$2o2 million). The settlerst repay- ment records have been excellent so far; they are expected to remain so if favorable conditions of marketing continue to Irevail. The provisional balance sheet of the Agency as at August 31, l964, is given in Table 3.

12. Since it started operations, the Agency has gained valuable ex- perience and is now capable of handling a considerably higher volume of operations efficiently. It will need, however, some additional staff as operations develop further, especially if the pace of lending is speeded up. TABLE I

SAN LORENZO PROJECT

TERKS AND CONDITIONS OF LOANS TO SETTLERS

Terms Srace Purposes Amount Incl. Grace Period Paymant Security Interest Repayment

Short-Term Crop Loans Operating 4 living Up to 80% of 1 yr - By install- Crop lien 7% on amount Principal expenses until the gross output & interest crop is sold ments as outstanding at maturi- ty dats expenditures from tium to Long-Term Loans Farm machinery Purchase of farm Actual cost 8 yrs are made Chattel tima; not Annuities machinery, imple- mortgage compounded ments' draft within cail- on machin- inclpfined animals ery and/or ings for livestock amount on Livestock loans Purchase of breeding stock each cate- 12 yrs 3 principal

Development loans Erection of houses gory 20 yrs 5 Property & earmed & farm buildings; mortgage all land improvao interast

Agricultural loans Establishment of 15 yrs 5 Property tree crops planta- mortgage & tions crop lien

Ceilings on Loans Ceilings are set for each category of loans and for each settler in accordance vith the capabilities of the land and budgets of investetnts and costs of production0 AN NEX 3

TABLE 2

SAN LORENTZO AG&JCY OF THE BANCO AGROPECUARIO DEL PERU

Summary Balance Sheet (Provisional) as at August 31, 1964 (in S/fOOO)

A S S E T S Cash in hand 2,193.2 Loan Portfolio Short-Term Loans to settlers l44hlO.O Advances on loans 3.0 Miscellaneous debtors 30O Advances to personnel 68e.1 Sub-total 14,484.l

Long-Term Agricultural loans 718.2 Livestock loans 456.o Farm machinery loans 10,329.9 Development loans 38,693.7 Advances on loans 144eiO Sub-total 50341.8 64,82509 Miscellaneous assets 42.2

Fixed assets 406.6

Expenditures 716 3 Total Assets 68,184h2

L I A B I L I T I E S IRAC (Trust Fund) 47, 518.2 Piura Branch 15,77h46 Suspense account 3p179.2 Sundry liabilities 550e3

Income 1, 162,0

Total Liabilities 68,184.3 ANNEx 4

TABLE 1

SAN IDRENZO PROJECT

PROJECTED SCHEDULE FOR ON-FARM ITVESTMENTS

Sep 1964- Dec 1965 1966 1967 Total

- Moillion Soles - E2cpendituresl/

Land development 86.2 54.0 24.1 164.3

Houses 18.0 14.O 9.1 41.1

Machinery, implements 45.3 19,2 12e8 77.3

Livestock and Semen 8.2 4.8 6.0 19.0

Tree Crops 9,2 10.5 18,0 37.7

Total 166.9 102.5 70.0 339.4

Soiuces

AID 89.0 - - 89.0

Banco 2.3 - - 2.3

IBRD 50.1 81.8 51.0 182.9

Loan collections 3,8 7.2 9.0 20e0

Farmers 21c7 13.5 10.0 45.2

Total 166.9 10265 70.0 339.4

1/ After 1967, expected investments in plantations will amount to S/39.5 million, 20 percent of' which would be financed by the farmers ANN

TABLE 2

PERU - SAIN IORENZO PROJECT

PROJECTED SCHEDULE OF DISBURSEl.TS OF BANK LOAM BY -AJOR CATEGCQ EST7/

Item Total 1st Year 2nd Year 3rd Year

- Thousand Dollars - A. Operations and Manage.- ment, Land Development and Roads Equipment 1,250 1,250 --

B. Drainage Works 1,250 - 600 650

C. Technical Services, 19070 790 170 110

D. Agricultural Credit 6,780 1,860 3,030 1,890

Total 10,350 3,900 3,800 2,650

1/ Does not include disbursements for the Basin Program, which are ex- pected to take place uniformly through the third year. P E R U

SAN LORENZO PROJECT INVESTMIENTS

PROJECTED CASHFLOW 1965-1985

1965 1966 1967 1968 1969 1970 1971 1972 197; 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Millions of Soles

CASH FLOW

0& land development and roads equipment; drainae and ancill1ary worksa7 56.5 106.9 81.9 ------Technical services, facilities and equip- ment 58.5 33.3 8.4 - - _------Administration (O&w)/ 4O.o hOxo 4Oxo 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 10.0 10.0 10.0 10.0 10.0 10.0 On-farm investment 166.9 102.5 70.0 10.7 11.9 9.2 5.3 2.0 0.4 ------

Sub-total 321.9 282.7 200.3 23.2 2h4. 21.7 17.8 1.5 12.9 12.5 12.5 12.5 12.5 12.5 12.5 10.0 10.0 10.0 10.0 10.0 10.0 Debt Service2/ 57.8 63.4 81,8 83.7 95.1 95.1 95.1 95.1 95.1 95o1 95.1 95.1 95.1 95.1 95.1 77.2 40.2 26.4 26.14 26.1, 26.4 Total 379.7 346.1 282.1 106.9 119.5 116.8 112.9 109.6 108.0 107.6 107.6 107.6 107.6 107.6 107.6 87.2 50.2 36.4 36.4 36.4 36.4 CASH INFIOW AID loan 89.0 ------IBRD loan 105.1 102,0 71.3 ------Government 128e2 185.1 144,5 31.7 19.8 2,9 - - - - Farmers' own resources 21.7 13.5 10,0 2,0 2,3 1.8 1,0 o.4 - - ______

Sub-total 34405 300.6 225,8 33.7 22,1 4i7 1,0 04 - - Fanrsrs' repayments on land and on-farm in- vestment loans 11,7 20,0 28,9 245,8 70.0 84.7 88,7 90.1 8544 82.9 81,3 81.3 80.0 79,3 78A4 76,2 75,1 72,4 72.4 72.4 61.3 Water chargos: Louar Piura 17,3 17.3 17,3 17.3 17.3 1701, ).7,3 MI 17,3 17.3 1703 1703 17,3 17,3 173 17,3 17.3 173 17.3 17.3 17.3 SCn Loranzo and Chipi]Llico 6,2 8,2 10,1 10,1 10,1 101 10.1 10,1 ,Ool 10,1 10.1 10,1 10,1 10.1 10.1 10.1 10.1 10,1 10.1 10.1 10,1 Total 379,7 3246.1 282,1 106.9 119.5 116.8 117.1 117.9 U2,8 110,3 108,7 108,7 107,24 106.7 105,8 103,6 102,5 99.8 99.8 99.8 88.7 Deficit ------0.2 0.9 1,8 ------Surplusk/ - - - - 242 8,3 4.8 2.24 1.1 11 - - - 16.4 52.3 63.24 63.4 63.4 52.3 Balance, cumulative ------242 12.5 17.3 20.0 21.1 22,2 22.0 21.1 19.3 35.7 88.0 151.24 214.8 278.2 330.5

Includes service centers, experimental stations, other works and 33.8 million soles for construiction of drainage works. Includes O'3¶for the Banco de Forento Agropecuario at s/2.5 million a year. T/Tn'ludes comnounded annuities equivalent to soles 17.9 million and 37.0 million to A.I.D. and I.R.R,D. for existing Stage JI loans through 1979 an1 1980 respectively. Balance annually through 1985 he would for A.T.D. -urrent $5 million loan for agricultural credit and pronosed new J.9.r.D. loan. Does not include debt service on the portion of the loan for the Basin Program. ,/ Surplus in 1986: S/ 21108 millinn. From 1987 on: 5/17.24million. PEU

SAN IORENZO IRRIGATION AND LIND SEfLEMENT PROJECT ORGANIZATION CHART D I R E C T O R G E N E R A L

DEPUTT PTJBLIC REIATIRTS------URBAN AND REGICMAL PIANNING

LEGAL SERVICE------____SOCIAL SERVICE ADI~TNSTRAJON DIVISION ENGINEERING DIVISICN BJILDIN DIVISICN AGRICUL'UY L DIVISIC ECONOMICS DIVISION Personnel Department. Operations Departent Settlcws' Hcusing ReeGae h and Propagaion Rural Administration Depaltaient 0 Departzant, Dapartnento General Services Dept. Maintenance DepartRent, Eztenaion and FQmily Cooperativee Workshops Dapartmente Agricultursl, Engineer- Public Buildinge Education Dsorbsstai Dapartnent. ing Deritmento pent. A.rcolint5 Department. kGting part Population Centers Cortructicn Pugra,

Special prcgransg 9spfid1 ~reogrnaao Spocial pragraz=t Lot subdivsnio 2ao &vo gplloitstion Hydrological studi.eeo of Puit-g7cngo MauEbial areae! Roads, Steokfavaing Telephones. 0 ELsctric powers Soil conservation,

This organization functions Prom the Head Office at Laz LemasD the Piura Office and the service centers nts Son Isi&-O Hzlingaz, Sozate, PartidorD, Hualtaco, Algarrobo and Parkizneniao ANNEX 6

P E R U

SANT LOREZO IRRIGATIOT AND LAND SETTLEMENT PROJECT

ORGANIZATION AND FUNCTIONS

The San Lorenzo Organiz-ation

1. As shown in the attached organizational chart, the authority responsible for all works at San Lorenzo is the Director General who rep- resents the Minister of Agriculture. The Director General acts through the Deputy Director and the Chiefs of the Administration, Engineering, Building, Agriculture and Economics Division. He also has a Public Rela- tions Office, a Legal Service, a group of technical specialists for the Town and Regional Planning Program and another group of experts to provide social welfare services for the settlement. Under the chairmanship of the Director General, the Division Chiefs make-up the General Planning Group at the Project level; the Chiefs of the Agricultural Engineering, Rural Administration and Agricultural Extension Departments, together with a representative of the Agricultural Development Bank at San Lorenzo, form the Settlers' Loans Committee under the chairmanship of the Chief of the Economics Division.

The Director General

2, He is responsible to the Minister and shall perform the follow- ing duties subject only to such limitations as may be imposed by the Minister:

a. to provide guidance in the carrying out of the land settlement scheme;

b. to submit a quarterly report to the CNA on the work he has been doing, and also the relevant Annual Report;

c. to comply with, and cause to be complied with, the Resolutions of the CNA concerning the land settle- ment scheme for which he is responsible;

d. to sign agreements of any kind relating to the San Lorenzo Land Settlement Project with Peruvian, for- eign or international public or private bodies; ANNE 6 Page 2

e. to perform any acdinistrative, civil or commer- cial acts that the law may allow for the more effective discharge of the tasks laid down in the relevant Development Plan;

f. to engage office staff and workpeople, and to sign the employment contracts in question;

g. to propose to the CNA the appointment, promotion or dismissal of the permanent technical and administra- tive staff of the Land Settlement Directorate;

h to put forward candidates for the granting of fellow- ships;

i. to draw up the programs of land settlement and submit them to the CNA for approval;

j. to administer the waters of the San Lorenzo system in accordance with the regulations that have been ap- proved by the issued Supreme Decree;

k. to draw up the detailed plans relating to the parcel- ing of land, carry out the valuation of the parcels of land, issue the necessary invitations and publicity matter for the sale of lots and deal with applications, grading the applicants in accordance with the relevant Award Regulations;

1. to draw up the draft Budget-Annual Program of the Land Settlement Directorate in accordance with the Organic Law concerning the Operational Budget and the relevant annual Acts;

me to obtain direct from the Public Treasury, administer and render account of the funds allotted to him in ac- cordance with the law and the provisions of the stat- utes and also to submit an Annual Balance Sheet in respect thereof; and

n. to exercise the remaining powers contained in Article 103 of Act No. 15037.

Deputy Director

3. He shall deputize for the Director in his absence and perform the following duties: Page 3 a. to control and superintend the work carried out in various departments of the San Lorenzo Project; bo to deal with enquiries made by the staff and the general public; c. to make decisions himself in al1 matters that do not require the approval of the Director General; and de to handle such matters as may be assigned to him by the Director General. PERU - SAN LORENZO PROJECT

PRODUCTION AND CROPPING PATTERN./

1964 AND PROJECTED 1972

Area Yield - Million Soles Hectares kg/ha Price Thousands Thousands Soles/kg Gross Value Costs Net Value 19T 111972 16 1 194 T7 2 194972 196h 1972 1964 1972

Cotton 6.78 15.00 2.8 2,5 6.0 5.00 llh.0 188,0 47.5 102.0 66.5 86.0 Beans/Corn Beans/Sweet Potatoes 1.49 7.90 - - - - 6.8 69.0 4.2 41.0 2.6 28.0 Beans/Groundnuts

Yuca .4o 1,50 16.0 20.0 1.0 0.95 6.4 29.0 1.6 6.0 4.8 23.0

Vegetables .16 1.90 18.0 25.0 1.2 1.00 3.5 49o0 1.2 22.0 2.3 27.0 (2 crops)

Pasture .26 6.20 3.8 5.5 2.0 2.00 2.0 68.0 1.0 36.0 1.0 32,0 (liters milk (per liter) equivalent)

Fruits .80 5,00 - 8.0 - 1D05 - 42.0/ 2.7 24.0 (2.7) 18.0

Otherl/ 1.18 - - 12.4 - 6.7 - 5,7

Total 11.07 37.50 145.1 445,01/ 64,9 231.0 80.2 214.0

1/ Gross annual value of fruit production should progressively increase up to Soles 158 million by 1977, making a total gross value of production of Soles 561 million a year. 2/ Rice, peanuts, etc. ANNEX 8

P E R U

SAN LOREFIZO PROJECT

LIST OF GOODS AND SERVICES TO BE FINANCED

Item Sub-Total Total

Thousand Dollars A. Operations and Management, Land Development and Roads Equipment 1,250 1. Heavy Equipmentl/ 950 2. Vehicles 60 3. Spare Parts and Repair Equipment 240

B. Drainage Works 1,250

'. Technical Services, Facilities and Equipment 1,070 1. Salaries, Amenities and Contract Services 550 2. Vehicles 160 3. Education and Extension Facilities and Equipment 150 4. Research Facilities and Equipment2/ 80 5. Spare Parts and Repair Equipnent 130

'. Agricultural Credit 6,780 1. Land Development3/ 3,280 2. Housing Development 820 3, Agricultural Machinery 1,550 h. Livestock and Semen 380 5. Tree Crops 750 ). Basin Program 600 VOTAL 10,950 / Includes trucks above 1 ton.

./ Includes trucks, tractors and farm tools for experiment stations.

B/ Includes fencing and miscellaneous farm. structures other than housing.