Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-3230-PE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOP?

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

PETROLEOS DEL PERU

WITH THE GUARANTEE OF

THE REPUBLIC OF PERU

FOR A

PETROLEUM REFINERIES ENGINEERING PROJECT

March 3, 1982

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

The exchange rate is being adjusted daily roughly in line with thedifference between domestic and international inflation. The exchange rateand currency equivalent in 1981 and as of February 15, 1982 were as follows:

Currrency Unit - Sol (SI.)

Calendar 1981 February 15, 1982

US$1 = SI. 426.60 S/. 540.66S/. 1 = US$0.0023 US$0.0018S/.-1,000 = US$2.34 US$1.85

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS

bpd - Barrels per day

COFIDE - Corporacion Financiera de Desarrollo(State Development Finance Corporation)

ERP - Economic Recovery Program

IDB - Inter-American Development Bank

IPC - International Petroleum Company

MEM - Ministry of Energy and Mines

MW - Megawatt (1,000 kilowatts)

PETROPERU - Petroleos del Peru(National Petroleum Company)

toe - Tons of oil equivalent

tpd - Tons per day

typ - Tons per year

USAID - United States Agency for International Development

FOR OFFICIAL USE ONLY

PERU

PETROLEUM REFINERIES ENGINEERING PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Petroleos del Peru (PETROPERU). In accordancewith Peruvian law, the Corporacion Financiera deDesarrollo (COFIDE) would act as PETROPERU'sfinancial agent.

Guarantor: Republic of Peru

Amount: US$5.3 million

Terms: Repayable in 17 years, including four years ofgrace, at 11.6 percent interest per annum. Theloan includes a capitalized front-end fee ofUS$78,000.

roject Description: The objectives of the project would be to carryout studies, and prepare possible investmentprojects to: (i) reduce energy consumption inPeru's largest energy-intensive industry -- oilrefining; (ii) improve the overall efficiency ofrefining and other PETROPERU industrial oper-ations; and (iii) strengthen planning forPETROPERU's industrial operations. The projectwould consist of: (i) preparation of a program toreduce operating costs through the introduction ofequipment and techniques for energy saving,process optimization, and pollution and corrosioncontrol; (ii) development of a maintenance programand reorganization of the maintenance system forindustrial plants; (iii) training for the staff ofthe Technical Department which is responsible forPETROPERU's industrial operations; and (iv) otherstudies to improve industrial operations andproject planning.

Special Risks: The project poses no environmental risks. It alsoinvolves no special technical or managerialrisks. PETROPERU's Technical Department, whichwould be responsible for project execution, hascapable staff and would be strengthened to insureadequate counterpart personnel and support for theforeign specialists to be hired in connection withthis operation. The risk of PETROPERU's losingexperienced professionals, a problem in the past,has been reduced since the company was recentlygranted authority by the Government to paysalaries competitive with those offered by theprivate sector.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

- ii -

Estimated Costs:

Local Foreign Total--------US$ millions--------

Studies and Programs

(i) Energy savings, efficiencyimprovements and pollutionand corrosion control,including testing equipment 0.8 2.1 2.9

(ii) Maintenance Program 0.2 0.6 0.8

(iii) Training Program 0.4 1.2 1.6

(iv) Other Studies 0.3 0.6 0.9

Base Cost 1.7 4.5 6.2

Contingencies 0.3 0.722 1.022Front-end fee on Bank Loan - 0.078 0.078

Total Cost 2.0 5.3 7.3

Financing Plan:Local Foreign Total------ US$ millions-- -----

Bank 5.3 5.3PETROPERU 2.0 - 2.0

Total 2.0 5.3 7.3

Disbursement Estimates:

Bank FY 1982 1983 1984 1985------- US$ millions------

Annual 0.3 2.0 1.8 1.2Cumulative 0.3 2.3 4.1 5.3

Rate of Return: Not applicable

Staff Apppraisal Report: None

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRDTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PETROLEOS DEL

PERU WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR APETROLEUM REFINERIES ENGINEERING PROJECT

1. I submit the following report and recommendation on a proposed loanto Petroleos del Peru (PETROPERU) with the guarantee of the Republic of Perufor the equivalent of US$5.3 million to help finance a Petroleum RefineriesEngineering Project. The loan, which includes a capitalized front-end fee of1.5 percent, would have a term of 17 years, including 4 years of grace, withinterest at 11.6 percent per annum.

PART I - THE ECONOMY

2. An economic report entitled "Peru-Major Development Policy Issuesand Recommendations" (Report No. 3438-PE) was distributed to the ExecutiveDirectors on May 4, 1981. This part is based on the report's findings and onthose of economic missions to Peru in June and September 1981. Country datasheets are attached as Annex I.

Natural and Human Resources

3. Peru, the fourth largest country in Latin America, is divided bythe Andes mountains into three distinct regions: the coastal region (Costa),with 46 percent of the population and most of the country's modern economicactivity; the mountain region (Sierra) with 44 percent of the country'spopulation; and the sparsely populated tropical rain forests east of theAndes (Selva). The country's rugged topography limits trade between thethree regions.

4. Peru's natural resources include large deposits of minerals--particularly copper, iron, silver, and zinc-located mainly in the Sierra andthe southern Costa. There are also large phosphate deposits located in thenorthern Costa. Petroleum resources found in the jungle areas and offshoreare also substantial, but their full extent has not yet been ascertained.Another major natural resource is the large fishing potential in coastalwaters, although the magnitude of the catch is subject to sharp fluctua-tions. Only a small portion of Peru's total land area is arable, and most ofthe soils suitable for intensive agriculture are already being farmed.

5. Although Peru's energy resource base is relatively diverse, withscope for expanding hydro- and coal-based power generation, petroleum isexpected to remain the major energy source in Peru through the rest of thiscentury. Peru increased domestic oil production almost threefold between1976 and 1979 to about 190,000 barrels per day and became a net exporter ofabout 60,000 barrels per day. To enable Peru to remain a net petroleumexporter, the Government has embarked on a strategy of accelerated secondaryrecovery and exploration efforts to increase production and of rationalpricing policies to contain demand growth. Prices for domestically consumedpetroleum products have been increased at regular intervals. In addition,

- 2 -

new legislation was enacted offering special tax incentives to domestic andforeign investors (see para. 18), and response has been positive. TheGovernment strategy is already bearing fruit with petroleum output expectedto increase in 1982 to an average level of 207,000 barrels per day.

6. As a result of three decades of rapidly falling mortality rates,Peru's population groluth accelerated during the 1930-1960 period. Since theearly 1960s, birth rates have fallen gradually, mainly caused by theurbanization process and improved education. But with declining death rates,population has continued to grow at about 2.6 percent p.a. and is currentlyestimated at about 17 million. It is expected that population growth willfall only slight.y to about 2.4 percent p.a. over the next 20 years, unlessan effective population control policy is adopted. The Government isconscious of the need to slow down Peru's demographic growth rate and is nowdeveloping a primary health care program which would contain a familyplanning component. The urban population is increasing at 4.3 percent p.a.,and about a quarter of all Peruvians live in the Lima area. Given thestructure of Peru's population, the labor force is expected to grow in excessof 3 percent per year during the next 20 years.

Past Development Policies and Performance (1968-78)

7.o 9-tac snessive Hilitary Governments, in office from October 1968untitl July 1980 followed a develo?ment strategy aimed at promoting economicg-rowth and improving distributi:on of income and wealth, not only betweenirndi.viduals but also between regions. The pattern of asset ownership in theeconomy changed drastically through nationalizations and a sweeping landreform. The Government took direct control of key economic sectors andimposed complex legislation to control the private sector.. Many of thepolicies carried out after 1968 hacd an excessive cost and theirimplementatic:n ias inefficient.

3. > c~-Ln;\-4een 1968 and 1977, Peru's Governments followed expansionaryfiscal and credi' polI4 cies. As a result, aggregate demand considerablyexceeded aggregate supply resulting in strong inflationary pressures andwidening external gaps. Inflation accelerated from 5 percent per year in1970 to 38 percent in 1977. Interest rates, however, remained substantiallynegative in real terms, discouraging financial savings and stimulatingcapital flight. Moreover, the exchange rate remained practically constantbetween 1968 and 1975, thus contributing to the overall disequilibrium.

9. Tihe gra -ir ing disequilibrium was reflected in the balance of pay-ments. The current account deficit averaged US$1.1 billion per year in1974-77, equivalent to nearly 9 percent of GNP. To finance this deficit,Peru accumulated a massive external debt, which at year-end 1977 stood atalmost US$8.4 billion (including short-term indebtedness), equivalent totwo-thirds of GDP and almost four times annual exports of goods and non-factor services.

10. Following the 1968-74 period of rapid expansion during which GDPgrew by more than 6 percent per year, the growth rate dropped progressivelyand became negative in 1977 and 1978. In this two-year period, GDP percapita dropped by over 6 percent and unemployment and underemployment rose toalmost 60 percent of the labor force, up from less than 50 percent during theearly 1970s.

- 3 -

Stabilization Policies and the Economic Recovery Program (1978-80)

II. From 1975 on, several unsuccessful attempts were made to cope withPeru's deteriorating economic situation. By mid-1978 the economic crisis hadreached grave proportions, with a drop in real GDP and inflation approaching100 percent on an annual basis. Moreover, the private sector was finding itincreasingly difficult to open letters of credit for new imports and thebanking system's net international reserves had dropped to a negative levelof US$800 million.

12. Beginning in May 1978, the Government adopted a number of importantmeasures aimed at strengthening public finances, improving the balance ofpayments and curbing inflation. The Government also negotiated a stand-byarrangement with the IMF in support of the stabilization program. Peru'sdebt outstanding to the IMF as of December 31, 1981 amounted to SDR 578.9million.

13. Major debt-relief operations carried out through the Paris Club andwith the Soviet Union and commercial banks in 1978 enabled Peru to reduce thedebt service burden for 1979 and 1980 by postponing repayment of about US$1billion to the 1982-1986 period. In view of the strong balance of paymentsperformance in 1979 and 1980 (para. 15), the Government decided to foregoparts of the rescheduling options in exchange for slightly better conditionsfor new loans from commercial sources.

14. To overcome the economic recession, in late 1978 the Governmentadopted a comprehensive Economic Recovery Program (ERP), which, in additionto the above-mentioned stablization actions, included measures to open up theeconomy, promote non-traditional exports, strengthen the tax system bybroadening its base, and generally improve the efficiency of resourceallocation in the private and public sectors. These policy changes --together with a declining domestic market because of the recession resulted in a major reorientation of industrial development, with a largeincrease in the value of manufactured exports from US$200 million in 1977 tothe US$750-800 million range in 1980-81 (equivalent to about 8 percent ofoutput). The Government also drew up a public sector investment program thataimed at redirecting investment towards projects of clear economic priorityand with positive effects on production and employment. In support of theERP, the Bank approved a US$115 million Program Loan in May 1979.

15. The Government's stabilization-cum-economic recovery programresulted in a strong improvement in public sector finances in 1979. Public

v sector current account savings rose from -0.5 percent of GDP in 1978 to about3.7 percent of GDP in 1979, and the overall deficit was reduced from 5.7 per-cent of GDP in 1978 to 1.7 percent in 1979. In spite of Peru's improvedfiscal performance, inflationary pressures remained strong with consumerprice increases of 67 percent in 1979 and of 59 percent in 1980. The morecareful management of public finances also had a positive impact on thebalance of payments. Moreover, an increase in petroleum exports and asubstantial improvement of Peru's terms of trade contributed to high overallsurpluses of the balance of payments in 1979 and 1980. At year-end 1980, thenet reserve position had improved to about US$1.3 billion, equivalent toabout 4 months of imports. Peru also made greater use of assistance fromofficial bilateral and international sources thus improving the structure ofits external debt. Real GDP growth rebounded to 3.7 percent in 1979; in1980, growth dropped to 3.1 percent owing, in part, to a drought whichaffected the agricultural sector.

-4-

Recent Developments and Outlook

16. In July 1979, the militairy Government promulgated a new constitu-tion, written by a popularly elected constituent assembly. Elections wereheld in May 1980 and, following hLs electoral victory, President FernandoBelaunde was inaugurated on July 28, 1980. His Government faced a challen-ging economic and social situation including a number of acute problems whichhad been disguised by the apparently solid financial situation. Theseincluded: high levels of under- and unemployment, particularly in urbanareas; higher underlying inflation than had been reported because of pricecontrols and deferred price adjustments for public goods and services; apublic sector deficit that had been reduced by freezing expenditures foreconomic and social services (including education, health and housing),combined with a rigid expenditure structure which did not leave much marginfor any significant reallocation of funds to these and other high priorityareas; a balance of payments situation which showed a substantial surplus,but which was partly due to high commodity prices and to the fact that importlevels were depressed; and, finally, deteriorated income distribution overthe previous several years resulting in increased social unrest.

17. The Government named an experienced economic team committed toeconomic efficiency, decontrol of the economy (including divestiture of someof the State-owned enterprises), promotion of the private sector (includingforeign investment), and policies aiming at a more equitable sharing of thebenefits of development through job creation and specifically targeted socialprograms. A major difference between the present Government's philosophyand economic program is its reliance on, and promotion of, private initia-tive.

18. The Government has made important headway in a number of areas. Itwas successful in accelerating import liberalization by eliminating non-tariff barriers and lowering tariffs. At the same time, export incentiveswere streamlined and revised to eliminate abuse and make the system moreresponsive to exports of products with high manufactured content. TheGovernment also enacted new legislation for the agricultural, mining andpetroleum sectors offering greater financial incentives to investors.Finally, it made significant institutional changes in the financial sector,revised the interest rate structure through substantial upward adjustments,and is preparing a new banking law which would allow further rationalizationand liberalization of the financial system.

19. In an effort to improve resource use, the Government made progressin correcting major price distortions. Food subsidies were greatly reducedand most controlled agricultural prices were adjusted to internationallevels. The marketing of agricultural products was liberalized, and publicutility and petroleum prices were adjusted at regular intervals. Moreover,the Government endeavored to rationalize public investment and its financing-- an effort that was supported by a Bank sponsorerd Consultative Groupmeeting in May 1981.

20. The above efforts were complemented by measures to strengthenpublic sector institutions. The important public enterprise sector, forexample, was granted greater autonomy by transforming most public enter-prises into State-owned limited liability corporations operating under

-5-

private law. This measure gives these companies, inter alia, greater freedomin fixing staff compensation and, thus, helps them to recruit or retaincapable personnel. Many of the above measures have already had positiveshort-term effects and have laid the ground for medium-term structuraladjustments of the Peruvian economy.

21. In spite of the above policy initiatives, economic performance in1981 lagged behind expectations. GDP grew only at about 4 percent andemployment generation was also sluggish. The balance of payments deterio-rated substantially as a result of declining export prices, high interestrates on the country's debt with commercial banks, and a rapid expansion ofimport-s. The loss in net reserves is estimated to have amounted to overUS$700 million, equivalent to about 3 percent of GDP. A major factor in thedeterioration of the balance of payments was the large public sector deficit,which is estimated to have reached about 8 percent of GDP. On the positiveside, some progress was achieved on inflation during May-December 1981 whichdecelerated to an annual rate of about 50 percent, mostly because of theopenness of the economy and the price dampening effects of an increase inimports. The Government is aware that this level is still too high, however,and is following actions which it expects will result in a further drop ininflation in 1982.

22. Reducing the public sector deficit has, once again, become themajor challenge facing Peru's economic managers. While the deterioratedexport situation has had a negative impact on tax revenues, the deficit ismostly the result of steep increases in expenditures and somewhat laggingadjustments of petroleum and rice prices. Excess expenditures over initialbudget allocations were incurred mostly for investment projects of lesserpriority. To tackle the difficult public finance situation, the Governmentis drawing up a restrictive financial program for 1982 with tight creditceilings and limits to foreign indebtedness. It is also expected that theGovernment will trim the public investment program in line with its invest-ment priorities. The Bank has an ongoing and frank dialogue with thePeruvian Government on these issues.

23. Based on cautiously optimistic assumptions with regard to economicmanagement, through the medium term the country is expected to have economicgrowth of about 4-5 percent per year and a manageable balance of paymentssituation. Peru's balance of payments could, however, become precarious, ifthe exportable surplus of oil declines. While measures are being undertakento speed up petroleum exploration and to increase manufactured exports, theresults of these endeavors may not come in time to countervail the potentialforeign exchange shortfalls. Against this background, there is a continuingneed for official development assistance. Taking the above factors intoaccount, considering an expected debt service ratio hovering around the 30percent mark and assuming that the Authorities continue the initiated courseof economic policies, Peru is creditworthy for Bank lending.

PART II - BANK GROUP OPERATIONS IN PERU 1/

24. The Bank has approved 45 loans to Peru for a total amount ofUS$1,053.4 million, net of cancellations. About 35 percent of the Bank'slending to Peru has been for transportation (mainly highways and ports),17 percent for agriculture, 16 percent for the energy sector, 17 percent for

1/ This part is an updated version of Part II from the Peru Eighth HighwayProject President's Report of January 25, 1982 (Report No. P-3193-PE).

-6-

mining and industry, about 4 percent for education and urban development and11 percent for a program loan in support of the ERP in 1979.

25. As of September 30, 1981, US$ 360.9 million was undisbursed on Bankloans currently in execution. (Annex II contains a summary statement of Bankloans as of September 30, 1981 and notes on the execution of on-goingprojects.) Disbursements on Bank-financed projects moved slowly in the mid-and-late 1970s, primarily because of weak project execution capacity and ashortage of counterpart funds that worsened as the economy deterioratedduring this period. In an effort to improve disbursements: (i) the Bankopened a resident mission in Peru and restructured a number of slow movingprojects; (ii) the Government toolk steps to provide adequate counterpartfunds for Bank financed projects; and (iii) the Government also set up aspecial commission to monitor loan execution and resolve administrativeproblems. These actions are bear:Lng fruit. About US$44.0 million wasdisbursed on project loans in FY1980 and US$70.5 million during FY1981. Thiscompares with average yearly disbursements of US$27.5 million duringFY1977-79.

26. The main objectives of Bank lending to Peru are to assist in (i)the creation of the physical infrastructure needed to sustain and fostereconomic development; (ii) the expansion of productive capacity in crucialsectors, i.e., petroleum, agriculture and mining; (iii) the strengthening,through technical assistance loans and regular operations, of local capacityto prepare, implement and operate projects effectively; and (iv) theimprovement of living conditions for the urban and rural poor. In the past,Bank lending concentrated on infrastructure in the transportation and powersectors. More recently, the Bank's emphasis has shifted to more directlyproductive fields -- mining, petrcleum, agriculture and industry -- to helpPeru to strengthen its balance of payments. Lending for social projects hasalso grown. As part of its assistance strategy, the Bank convened aConsultative Group Meeting for Peru on May 25-26, 1981 to help the Governmentarrange financing for its public investment program. The next operationsthat would be ready for the Executive Directors' consideration includeprojects in power, agricultural research and extension, water supply andpetroleum production. These would be later followed by projects in ruraldevelopment, health, education and housing. The Bank is also considering atechnical assistance loan to lhelp strengthen public sector management.

27. Bank loans constituted an estimated 5.8 percent of Peru's total publicexternal debt outstanding and disbursed at the end of 1980, and absorbedabout 2.6 percent of the country's external debt service in 1980. Assumingincreased recourse to long-term bilateral and multilateral aid by Peru, theBank's share in the country's outstanding public foreign debt by 1985 couldreach about 10 percent, and its share of debt service would be around 4.5percent.

28. IFC commitments as of September 30, 1981 were US$38.3 million(including US$15 million to the Southern Peru Copper Corporation for theCuajone Copper Mining Project) of which US$15.9 million were held by theCorporation. A summary statement of IFC investments as of September 30, 1981is presented in Annex II. The IFC is now considering assistance for apalm oil venture.

-7-

29. The other principal lending agencies active in Peru are theInter-American Development Bank (IDB) and the United States Agency forInternational Development (USAID). Total loan commitments as of December 31,1980 by IDB and USAID were US$652.4 million and US$348.6 million, respec-tively, and their shares of debt service as of end-1980 were estimated at 0.6percent and 0.5 percent, respectively. In its future lending, IDB isexpected to emphasize lending for agriculture, industry, mining, roads, andsmall scale irrigation. USAID is expected to stress rural development andhealth.

PART III - THE ENERGY AND PETROLEUM SECTORS

The Energy Resource Base and Balance

30. Peru has large, diverse energy resources consisting ofhydroelectric power, oil, coal, natural gas, some geothermal power, andrenewable resources such as firewood and bagasse. However, in spite of therecent acceleration of exploration and production activities, Peru's energyresources are relatively untapped. The country's economically viablehydroelectric potential, for example, is estimated at 60,000 MW of which onlyabout 1,650 MW are currently being exploited. Estimates of total oil, coaland natural gas reserves vary from 970 to 3,500 million tons of oilequivalent (TOE), and the current annual rate of energy consumption isestimated at 12 million TOE.

31. Known (proven and probable) oil reserves are estimated at about 110million TOE or 800 million barrels. Some coal deposits suitable for thermalpower generation or for metallurgical coke have been identified but most ofthe country has not been adequately explored. The Government has recentlyformed a coal exploration company to stimulate coal exploration efforts.Further, there are some natural gas reserves and substantial geothermalpotential which the Government is now beginning to study systematically.

32. Peru's gross energy balance in 1980 was estimated to be as follows:

Primary Energy Source 2 Share End Use % Shlare

Oil 60.0 Industry and Agriculture 36.3Firewood and Dung 26.0 Residential and Commercial 36.2Hydropower 6.2 Transportation 21.4Natural Gas 4.7 Public Sector 3.0Bagasse 2.5 Other 3.1Coal 0.6

100.0 100.0

Source: MEM - National Energy Balance, 1980

33. As is evident from the preceding table, the country depends heavilyon petroleum to meet its energy needs. Oil accounted for about 60 percent ofthe country's energy consumption and about 80 percent of commercial energyrequirements. Even with the accelerated exploitation of hydroelectric powerand coal resources, oil will continue to be the most important source ofenergy during the next two decades, and its share in total energy consumption

-8-

is expected to be around 50 percent by the end of this century. The secondmajor source of energy in Peru is firewood, principally in the rural areas.About 60 percent of Peru's land surface is covered by natural and cultivatedforests. However, measures to pr,event deforestation and the continued shiftof population from rural to urban areas will tend to decrease, in the longterm, the share of this resource in total energy consumption.

Energy Sector Organization and Planning

34. Operational responsibility for the various energy subsectors inPeru is divided among several autonomous Government entities. PETROPERU, thenational petroleum company, has principal responsibility for all phases ofproduction, refining and distribution of petroleum products. Internationalpetroleum companies (such as Occidental and Belco) explore for, and produce,petroleum under contracts with PETROPERU. Primary responsibility for powergeneration lies with the national power company, ELECTROPERU, and variouslocal State-owned companies handle distribution in the larger cities. Coalexploration and development are matinly undertaken by the state miningcompany, MINEROPERU. Development and conservation of forestry resources isunder the aegis of the Ministry of Agriculture.

35. The Ministry of Energy and Mines (MEM) is responsible for overallplanning and policy making in the energy sector and for initiating pricingactions, which must be approved by the Minister of Economy and Finance.In recent years, MEM has received considerable technical assistance forenergy planning. This has included an energy balance study (completed in1976 by UNDP) and an assessment of energy resources and energy planningefforts (done in 1979 by a team composed of U.S. Government and Peruvianofficials). The German Government financed a survey of hydroelectricpotential in 1979 and has, together with the Bank under the Fifth Power Loan(Ln. 1215-PE of 1976), financed a power sector master plan (completed in1980) in order to develop a least-cost investment program for the sector.HEM thus has sufficient knowledge of the country's energy situation -- exceptin the areas of coal resources and geothermal potential -- to develop acomprehensive resource development program. The Government is nowconsidering the establishment of a national energy council to develop such aprogram and coordinate sector policies.

Government Energy Sector Strategy

36. The principal objectives of Government policy in the energy sectorare to increase hydroelectric capacity and expand petroleum production tocontinue to satisfy domestic requirements and maintain oil exports, whilereducing the growth of demand through adequate pricing and other demandmanagement measures.

37. Currently, installed hydroelectric generating capacity accounts forless than three percent of Peru's estimated 60,000 MW of economically viablehydro potential. The failure of previous Governments to develop this poten-tial in a timely manner has put Peru in the position of having to install atleast one, and perhaps more, thermal plants to meet growing power demand. Inorder to minimize costly investment in thermal plants, the Government hasadopted an ambitious hydro power development program, which calls for theexpenditure of about US$500 million per year through the late 1980s. TheBank's recent US$25 million Power Engineering Loan (Ln. 2018-PE of June 1981)will finance the preparation of 12 hydroelectric projects. The constructionof most of these would begin in thie next two to four years. The high cost of

-9-

this program, which is in large measure a result of the location of mosthydroelectric sites on the eastern side of the Andes mountains far frompopulation centers, will require a substantial increase in power tariffs.Toward the end of 1980, the Government initiated a program of monthly powertariff increases, which are now averaging close to three percent per month inreal terms. The objective of these increases is to enable the sector tofinance one-third of the cost of its investment program from internallygenerated resources.

38. As a result of petroleum exploration and development in Peru'snorthern jungle, which began in the early 1970s, the country had becomeself-sufficient by mid-1978. Total oil production in 1981 -- primarily fromOccidental and PETROPERU -- reached 70 million barrels, of which about 19million barrels, or 27 percent was exported. Nevertheless, because of lowlevels of petroleum exploration and development in the second half of theseventies and growing domestic demand, Peru faces the possible need to importpetroleum in the late 1980s. To avoid this, the Government has adopted astrategy of promoting investment by foreign companies, underproduction-sharing arrangements with PETROPERU. To attract foreigncompanies, the Government put into effect a reinvestment tax credit andeliminated restrictions on their participation in secondary recoveryprojects. On this basis, Occidental and Belco have increased theirinvestment programs. Exploration contracts for northern and southern jungleareas have been signed with Shell and Superior Oil and discussions areunderway with a number of other firms. PETROPERU would restrict itsoperations to two jungle blocks and the coastal area, and the company isbeing strengthened so it can more effectively exploit these traditionalareas. Its administration, staff and operations are being upgraded withsupport from the Bank's US$32.5 million Petroleum Rehabilitation Loan (La.1806-PE of 1980). This support would be continued under the engineering loanrecommended in this report and a petroleum production enhancement projectunder preparation.

39. In order to induce energy conservation and make PETROPERU finan-cially viable, the Government has been periodically raising domestic petrol-eum prices. In 1981, prices were increased 25 percent in real terms, and theGovernment's objective is to continue a program of regular price increasesso as to gradually reach international levels for average petroleum productprices in the medium term. More recent action on domestic prices issummarized in para. 48. Attention is also being given to reducing demand byimproving energy efficiency in industry and, where feasible, by electrifyingurban transport systems. The proposed engineering project would help in thiseffort by preparing a project for the reduction of energy consumption in oilrefineries -- Peru's largest energy-intensive industry.

The Petroleum Sector

40. Production Prospects. Peru has four major geological zones, eachof which contains sedimentary basins with hydrocarbon potential: (i) theCosta, particularly around Talara in the north where, until the 1970s, almostall of Peru's oil production was concentrated; (ii) the Selva region - the

- 10 -

low jungle plain east of the Andes mountains -- currently the source of mostproduction and the area with the largest potential reserves; (iii) theoffshore regions lying between the Peru_-Chile trench and the coastline wherefour basins have already been detected; and (iv) the Sierra, where the like-lihood of finding commercially attractive oil deposits appears low. Peru wasone of the world's first oil producing countries and was self-sufficient inpetroleum for many years. During the 1950's, however, with domestic pricesfor petroleum products as well as producers' margins at low levels, domesticconsumption began to out-strip lagging production. As a result, Peru becameincreasingly dependent on crude oil imports in the 1960s and during most ofthe 1970s. As noted in para. 38, in the late 1970s-following the discovery Iof oil in the Selva--Peru became once again self-sufficient in petroleum andbegan to export.

41. Based on increased production from the Occidental-Bridas secondaryrecovery project on the coast and the incorporation of new reserves recentlydiscovered by PETROPERU in its jungle area, petroleum production is expectedto increase to about 75 million barrels per year in 1982, of which 25 millionbarrels would be exported. Not taking into account the possible results ofnew exploration now being undertaken by private companies and PETROPERU, theoutlook is for total production in Peru to remain above 73 million barrelsper year through the end of the 1980s. With demand expected to grow at arate of five percent p.a., Peru would again become a net importer by the late1980s unless the new explorat:Lon 1program is successful.

42. PETROPERU. The State-owned national petroleum company, PETROPERU,was established in 1969 following the nationalization of the InternationalPetroleum Company (IPC), a subsidLary of Exxon. PETROPERU incorporated theassets of IPC, and those of a sma:Ll Government-owned oil company and severalother privately owned oil firms. Currently, PETROPERU's own operationsaccount for 22 percent of the country's crude oil production, 100 percent ofrefinery capacity and 98 percent of the marketing of petroleum products. Inaddition to conducting all State exploration and production activity, it ownsand operates the Transandean pipeline and produces petrochemicals andfertilizer. Although the Government's strategy calls for foreign companiesto continue to be the major petroleum producers, PETROPERU is expected toretain its dominant position fn petroleum refining and distribution.

43. PETROPERU is the largest: public sector corporation in Peru andemploys about 8,700 staff. It has a Board of Directors of 10 members. Fourare appointed by the MEM, three by the Economy and Finance Ministry, one bythe Armed Forces, and two are representatives of the employees of PETROPERU.The Company's President, who is also Chairman of the Board, has broadmanagement authority within the Company. PETROPERU's senior management isgenerally competent and has extensive experience in the petroleum industry inPeru. PETROPERU's middle management, especially in its explorationoperations, on the other hand, was weakened by the loss of many of itstechnical and administrative personnel in 1977/78, primarily because of thelimitation placed on salary levels. However, the Technical Department ofPETROPERU, which is responsible for all refinery and industrial operations,was able to retain a substantial number of its capable and experienced middlemanagers since they had more limited opportunities in the private sector thanhad exploration and production personnel. In early 1981, PETROPERU was givengreater autonomy to improve its salary structure (see para 20). As aconsequence, its salary scales are now competitive with those of the privatepetroleum companies in Peru and the loss of experienced personnel hasdeclined.

- 11 -

44. The headquarters of PETROPERU, which include the IndustrialDepartment, are located at Lima. Diverse functions such as personnel manage-ment, training, finance and budgeting, marketing, legal, planning, researchand development, engineering and project management, and procurement arecontrolled from headquarters. The operations of the company are divided intofive units: (i) Northwest Operations including the Talara Refinery andpetrochemical plants; (ii) "Selva" Operations, including the Luis F. DiazRefinery; (iii) Pucallpa Operations; (iv) Oil Pipeline Operations; and(v) the La Pampilla and Conchan Refineries operations.

Jr 45. With financing provided under the FY80 Petroleum RehabilitationLoan, PETROPERU has appointed Price Waterhouse to review its financialmanagement system and make recommendations for its improvement with emphasison management information systems, financial planning and capital budgeting.In addition, PETROPERU has hired the consulting firm of Arthur D. Little tomake a detailed study of its management and organization at the corporatelevel. There is also a need to review management and organization at theindustrial plant and regional levels. PETROPERU has, therefore, agreed toexpand the scope of the ongoing studies and/or carry out an additional studyto include a review of industrial plant and regional level management andorganization with a special emphasis on introducing improved budgetarysystems and cost and inventory controls. PETROPERU has further agreed tofurnish to the Bank the findings and recommendations of such studies notlater than December 31, 1984 (Section 4.04 of the draft Loan Agreement).

46. PETROPERU's Financial Situation. Aside from the loss of profes-sional staff, PETROPERU's most serious problem in recent years has beenfinancial. A number of factors resulted in a financial crisis in 1979, whichrequired Government action to help PETROPERU avoid bankruptcy. Thesefactors included: (i) the incurrence of US$400 million in short-term debt bythe company to finance petroleum purchases which were sold domestically atsubsidized prices; (ii) the contracting of almost US$800 million in loans onrelatively stringent supplier and commercial terms to finance the TransandeanPipeline which, until the late 1970s, yielded no revenue; and (iii) therequirement under its production sharing contracts with foreign oil companiesthat PETROPERU pay all their taxes. In 1979, the Government took a series ofmeasures to help resolve PETROPERU's financial problems and restore itscreditworthiness. Further measures were taken in connection with thePetroleum Rehabilitation Loan. These actions included provision of SI. 70billion (about US$242 million) in 1980 to strengthen PETROPERU's capitalstructure and SI. 30 billion (about US$65 million) in 1981 as equity tofinance the company's capital investment.

47. Due primarily to the large equity contributions made by theGovernment, PETROPERU's financial situation improved considerably in 1980.As a result, the company complied with the financial covenants of thePetroleum Rehabilitation Loan (Ln. 1806-PE of 1980). In 1981, however,despite the substantial progress made in increasing petroleum prices (para.39), there was again a serious deterioration in the company's financialposition. The main contributing factors were: (i) the continued need topurchase oil supplies at international prices from its contractors

- 12 -

for sale at subsidized prices on the domestic market; (ii) a reduction inPETROPERU's production; (iii) passage into law of a reinvestment tax creditwhich reduced the income tax liabilities and payments by foreign oilcompanies to PETROPERU; and (iv) a decrease in export earnings because oflower spot market prices. As a result, PETROPERU is estimated to haveincurred losses of about US$27 million equivalent in 1981. The companycovered its cash flow needs through extensive short-term borrowing, and itwas not able to meet the 1.4 debt service coverage ratio agreed under Loan1806-PE for 1981; the actual debt service coverage is estimated to have been1.0. PETROPERU, however, was able to substantially meet all other financialcovenants for 1981 under that loan. The quick ratio for the year isestimated to have reached 0.6:1 as compared to the agreed level of 0.7:1, andthe debt/equity ratio is estimated at 69/31, well within the agreed level of75/25. Financial data on PETROPERU for 1980 and 1981 are contained inAnnex IV.

48. In order to help deal with PETROPERU's financial problems, in mid-December, 1981, the Peruvian Congress passed a law authorizing MEM toincrease domestic prices for regular gasoline from US$0.95/gallon at the endof December 1981 up to US$1.25/gallon by June 30, 1982. The prices of otherpetroleum products would be raised in line with gasoline prices. The lawprovides for an overall increase of 25 percent in petroleum product prices inreal terms for calendar year 1982. This is being achieved in monthlyincreases. Two consecutive increases, averaging approximately 4.5 percent inreal terms, were implemented in January and February 1982. The proposedprice increases would put PETROPERU's finances on a sound footing and wouldenable the company to substantially meet its financial covenants under Loan1806-PE for 1982, including the 1.9 times debt service coverage ratio and the70/30 debt/equity ratio. The quick ratio is expected to reach 0.8:1 comparedto the agreed level of 0.9:1.

49. PETROPERU's Refinery Operations. PETROPERU has six refineries,with a total capacity of 178,400 bpd. Two of these--the La PampillaRefinery, near Lima, with a capacity of 100,000 bpd and the refinery atTalara, 1,000 km northwest of Lima, with a capacity of 65,000 bpd togetheraccount for approximately 92 percent of the total refining capacity in Peru.The remaining four refineries are suall--their average capacity is about3,350 bpd. Although Peru's two major refineries operate at an average rateof 90 percent of capacity, this is achieved by operating them continuously,without allowing for reasonable mainatenance. The refineries, therefore, facethe risk of breakdown and consequent stoppage of production over prolongedperiods. In general, the maintenance system in the refineries is weak, asinadequate attention is given to forward planning of maintenance needs andto carrying out preventive maintenance on a systematic basis. Moreover,energy consumption in the refinerieis is high since they were built at a timewhen energy was cheap and the main emphasis was on keeping capital costslow. As a result, inadequate attention was paid to energy saving. Theproposed engineering loan would help PETROPERU carry out studies and developprograms for overhauling the maintenance system, achieving energy saving andimproving the operational efficiency of its refineries.

- 13 -

50. Supply/Demand Balance for Refinery Products. Consumption ofpetroleum products grew at an annual average rate of 6.2 percent during1960-75, reaching 1.78 billion gallons in 1975. During 1975-80, however,consumption grew at only 2.3 percent a year mainly because of the economiccrisis and increases in petroleum prices. The consumption of light andmiddle distillates -- such as gasoline, diesel, kerosene and jet fuel -account for nearly 70 percent of total consumption.

51. Although Peru had a surplus of some petroleum products in 1980, by1990 it will have to import most refined products except gasoline unless thecountry's refinery capacity is expanded. This is based on the assumptionsthat the demand for refinery products would grow by about five percent during1980-90, as the economy resumes growth, and that only the new plants/expansions currently firmly planned and/or underway would be completed duringthe 1980s (see para. 52). These projections indicate a need for additionalcapacity during this decade. The size and configuration of additionalfacilities required will depend largely on the demand for individual productswhich, in turn, will depend on overall energy demand growth and the successof conservation and inter-fuel substitution efforts. It is, therefore,important that future refinery investments be based on careful planning andon an analysis of alternatives. The planning assistance proposed under theproject would improve PETROPERU's capabilities for carrying out such anassessment.

52. Expansion Plans. Currently, PETROPERU has only one major indus-trial project under execution--a 10,500 bpd new refinery at Iquitos (sched-uled for completion in 1984) to replace the existing small, old refinerywhich serves the remote selva region. Furthermore, the company has decidedto carry out some minor refinery expansions at Talara at a total cost ofabout US$15 million to more closely adjust the product mix to demand. Thecompany is now doing feasibility studies for: (i) an 80,000 bpd refinery ata location yet to be decided, and (ii) a new fluid catalytic cracker at theexisting refinery complex at La Pampilla.

53. Other Industrial Operations. In addition to refineries, PETROPERUalso operates an ammonia/urea complex, an isopropyl alcohol plant, an acetoneplant and a carbon black plant, all located at Talara. The ammonia/ureacomplex consists of a 300-ton per day (tpd) ammonia plant and a 510 tpd ureaplant. The production of ammonia is based on associated natural gas obtainedfrom oil production in and around Talara. Ammonia is used as an intermediateproduct to produce urea, a high-nutrient fertilizer for use in Peru. Theisopropyl alcohol plant has a capacity of 10,000 tons per year (tpy) of which5,000 tpy is for the production of acetone in an adjacent plant and the restis for outside sale to local chemical enterprises. Acetone is used in theproduction of methyl methacrylate, an input for the manufacture of certainplastic goods. It is currently in short supply in the world. The carbonblack plant has a capacity of 7,700 tpy and uses low-value residual oil fromthe nearby Talara Refinery to produce carbon black, which is used mostly inthe production of rubber products.

- 14 -

54. The ammonia/urea complex commenced operation in February 1975 andits capacity utilization increased gradually to about 75 percent in 1980 butwill probably decline to 63 percent by 1985 unless the maintenance system isimproved. The isopropyl alcohol and the acetone plants were commissioned onJanuary 1, 1980 and their capacity utilization in that year was 29 percentand 15 percent, respectively. The low capacity utilization rates in thesetwo plants are due to process and (design defects. It is unlikely that theircapacity utilization could be increased beyond 45 percent and 30 percent,respectively, unless bottlenecks in the production processes are eliminated,technical deficiencies are overcome and maintenance work is improved. Thecarbon black plant was commissioned in March 1976 and its capacity utiliza-tion gradually increased to 71 percent in 1980. In the first part of 1981,however, its capacity utilization declined to about 50 percent, partlybecause of lack of proper maintenance and other technical problems. Theproposed project would finance studies to determine whether their continuedoperation is economic, if so, what improvements are necessary to increasetheir capacity utilization from present levels.

Previous Bank Energy Lending and Strategy

55. The Bank began supporting the development of Peru's petroleumsector through a loan of US$32.5 million made in February 1980 (Ln 1806-PE).This operation aimed at helping PE1ROPERU to finance rehabilitation of itsexisting producing wells, reactivate temporarily abandoned wells, anddevelop new production potential through seismic and reservoir studies andpreparation of a secondary recovery project. After getting off to a slowstart, satisfactory progress has been achieved in recent months. Bids formost equipment are either now being evaluated or invitations will be issuedin the second quarter of CY 1982 and seismic and reservoir studies are nowwell underway. Disbursements currently stand at about US$4 million, butshould increase substantially in coming months.

56. The Bank's lending strategy in the petroleum sector is to continueto help strengthen PETROPERU's ability to effectively carry out the roleassigned to it, to support the Government's petroleum pricing policy, and toassist its efforts to attract foreign investment to the sector. Substantialinstitution building would be a major feature of the proposed engineeringloan and of follow-up operations in the sector. This would help upgrade thecompany's management systems, staff quality, financial administration, andexploration, production and industrial operations. In addition, the Bankwould give special attention to putting PETROPERU on a sound financial foot-ing. The Bank's participation in the petroleum sector would also continue toprovide a vehicle for a dialogue on a rational domestic pricing policy forhydrocarbons. Finally, as in the p.ast, the Bank would support an increasedrole for foreign investment in petroleum exploration and development.Through lending to the sector, the Bank has been in a position to provide theGovernment with an objective assesstment of PETROPERU's capabilities. Such anevaluation has helped the Governmenl: define an important but limited role forthe company consistent with its operating capacity. Bank staff have alsohelped the Government in the design of incentives to attract foreigninvestors. The Bank would continue to support these objectives in Peruthrough the proposed engineering loan and the upcoming petroleum productionenhancement loan for PETROPERU.

- 15 -

PART IV - THE PROJECT

57. The project was identified by a Bank mission which visited Peru inMay 1981 and it was appraised in September 1981. Negotiations took place inWashington from January 28 to February 3, 1982, and the Peruvian delegationwas headed by Mr. Jorge Fernandez Cornejo, Manager of the TechnicalDepartment of PETROPERU. Because this is an engineering loan, there is noseparate appraisal report. Supplementary project data are contained in AnnexIII.

Objectives and Project Description

58. The proposed project, developed by PETROPERU in close consultationwith the Bank, would complement the Bank's effort under Loan 1806-PE tostrengthen PETROPERU's petroleum production operations by providing consul-tant and technical services and training to improve the company's industrialoperations. This project represents the first effort by the Government toplan for conservation in its largest energy-intensive industry--oilrefining--and to improve the overall efficiency of PETROPERU's refinery oper-ations, as well as its other industrial plants, with particular attention tomaintenance, organization and management.

59. The studies and programs to be developed under the project aretechnically complex and PETROPERU is counting on Bank experience and supportin their execution. Furthermore, the Bank's continuing technical assistancewould be available to back PETROPERU's management as it undertakes institu-tional improvements with respect to its industrial operations. Bank involve-ment in the technical assistance project would also make it possible for theBank to ensure that the designs of the follow-up projects are sound, thusimproving subsequent financing prospects for them. The follow-up projectsare expected to increase substantially the production of refinery productsand industrial chemicals. The project also affords the Bank an opportunityto continue a dialogue with the Government regarding petroleum product pricesand rehabilitation of PETROPERU's finances. Terms of reference for thestudies and programs under the project are contained in Annex V.

60. The project would consist of the following four components:

(i) consulting services and procurement of related laboratoryequipment and instruments to carry out studies of energysaving, efficiency improvement and corrosion and pollutioncontrol investments for the La Pampilla and Talara refineriesand other PETROPERU industrial plants;

(ii) consulting services to develop a maintenance program andreorganize the maintenance systems for the La Pampilla andTalara refineries and other PETROPERU industrial plants;

(iii) consulting services to develop and implement a trainingprogram for PETROPERU's industrial staff. Specializedoverseas training for about 40 staff members would also beprovided; and

- 16 -

(iv) consulting services to strengthen PETROPERU's TechnicalDepartment to carry out industrial project planning, studiesof possible improvements in PETROPERU's chemical plants, andto develop a program to improve product quality in its greaseand lubricating oil plants.

These four components are discussed in detail in paragraphs 61-64 below.

61. Development of Energy Saving, Efficiency Improvement and Corrosionand Pollution Control Programs. There is substantial scope for saving energyin the Talara and La Pampilla refineries through such techniques as: (i)waste heat recovery from refinery heaters and gas turbines; (ii) energyrecovery from regeneration of flue gases of the fluid catalytic crackers;(iii) co-generation of power and steam; and (iv) use of improved instrumen-tation and process analyzers to mLnimize energy requirements. Under thiscomponent, a proposed investment program and basic engineering would be.prepared to apply these techniques, taking into consideration their technicaland economic feasibility. Studies and basic engineering would also beincluded for possible process optiLmization, efficiency improvement and pollu-tion control investments in the refineries and other industrial plants.Further, the existing engineering and construction standards used byPETROPERU would be reviewed in order to modify them in line with modern prac-tices. In addition, PETROPERU would establish a computerized system forreliably estimating construction and operating costs for its future indus-trial projects. Finally, the project would include provision for the pro-curement of instrumentation and laboratory equipment, which is critical forcarrying out the necessary studies. This component would require 112 man-months of consultants' services arnd represents about 46 percent of totalproject costs.

62. Development of a Maintenance Program. PETROPERU's maintenancesystem is weak, and its capacity for forward planning of maintenance needsand for carrying out preventive maintenance on a systematic basis has notbeen developed. Under this component, the maintenance needs of the refin-eries and industrial plants at Talara and La Pampilla would be analyzed, amodern maintenance program would be developed, and the maintenance systemswould be reorganized. Development of the maintenance program would require54 man-months of consulting services. It would account for about 13 percentof total project costs.

63. Development and Implementation 6f Training Program. PETROPERU'sindustrial operations employ over 3,000 people. Development and implementa-tion of an effective training program is needed to improve the operation,maintenance and management of its industrial plants. Under the project,training needs--including necessary training equipment--would be identifiedand a comprehensive program would be prepared to meet those needs. Theproject would also include implementation of the training program over a12-month period following its development. Experts in different fields wouldbe hired to train PETROPERU staff and about 40 selected staff members wouldbe sent abroad for specialized training. This project component calls for 75man-months of consultants' services and it represents about 26 percent of thetotal project cost.

64. Other Studies. PETROPERIU's Project Division in the TechnicalDepartment would receive technical assistance to improve its capability toconduct feasibility studies and carry out industrial planning. This assis-tance would emphasize the use of modern planning tools such as cost benefitanalysis and linear programming. In addition, techno-economic reviews ofPETROPERU's carbon black, isopropyl alcohol and acetone plants would becarried out to find out what modif:ications are required to improve their

- 17 -

efficiency and capacity utilization, how much the modifications would costand whether it is economical to make the additional investments. Finally,PETROPERU has grease and lubricating oil plants, but the specifications andquality of the products they manufacture are not satisfactory. Studies todetermine the measures necessary to improve their quality are included in theproject. The planning, industrial techno-economic reviews and grease/oilstudies would require 34 man-months of consultants' services and wouldrepresent about 15 percent of the total project cost.

Project Execution

65. The project would be executed over a period of about 30 months. Itwould be carried out by the Technical Department of PETROPERU with the helpof foreign experts. Consultants provided under the project would havequalifications satisfactory to the Bank and would be selected and hired underconditions and terms acceptable to the Bank (Section 3.02(a) of the draftLoan Agreement). The Department currently has 11 competent professionals butneeds strengthening to handle the increased responsibilities envisaged underthis project. PETROPERU has agreed to assign seven additional local profes-sionals to this Division (one maintenance specialist, three energy savingspecialists, one training specialist, one financial/economic analyst and onelinear programming specialist) to provide adequate counterpart support forthe foreign specialists to be financed under the proposed loan. These addi-tional staff, who would be satisfactory to the Bank, would be provided partlyby reassignment from within PETROPERU and partly by hiring from outside byJuly 1, 1982. (Section 3.02 (b) of the draft Loan Agreement).

Project Cost and Financing Plan

66. Total project costs, exclusive of taxes and duties, are estimatedat US$7.3 million, of which US$5.3 million, or 72 percent, represents foreignexchange. The US$5.3 million loan recommended in this report would cover theproject's estimated foreign exchange component, including contingencies and acapitalized front-end fee of US$78,000. Local costs of US$2.0 million equiv-alent would be covered by PETROPERU. The project's principal foreignexchange cost component would consist of 275 staff months of consulting andtechnical services, whose cost is estimated at about US$13,000 per. staff/month, which is reasonable for this sector for this kind of work. Consultantand technical services, including contingencies, represent about three-quarters of total foreign exchange costs. The balance of the foreignexchange cost would be for equipment..

67. Retroactive financing of up to US$200,000 is proposed for downpay-ments made after October 1, 1981 on services and instrumentation equipmentneeded to facilitate the studies on energy saving, process optimization,efficiency improvement and pollution control.

Procurement and Disbursement

68. On the basis of need for early delivery of instrumentation equip-ment, the equipment's specialized nature and limited availability, andbecause of the small estimated cost of the individual items, as well as theimpossibility of their useful grouping, limited competitive tendering proced-ures would be used for procurement of all goods. Their estimated total cost,including contingencies, is expected to come to about US$1.3 million. Underthese limited procedures, the equipment would be procured through the solici-tation of price quotations from suppliers from not less than three different

- 18 -

eligible countries. These procedures are acceptable to the Bank. Loandisbursement is expected to take about two and a half years running from mid1982 through end-1984. The Bank loan would be disbursed against 100 percentof the foreign expenditures for services and training, and 100 percent offoreign expenditures and 100 percent of local expenditures (ex-factory) onequipment and materials.

Economic Benefits

69. The studies to be carried out under the project represent the firstconcerted effort by Peru to reduce energy consumption in a major energy-intensive industry. One of the important benefits from the project is thatit would help prevent deterioration in the performance of the existing indus-trial facilities at Talara and La Pampilla by improving maintenance prac-tices. The project would also have a strong impact on institution buildingthrough improvements in the organLzation, management and planning of theindustrial operations of PETROPERIJ.

70. The studies and programs to be carried out under the project areexpected to result in projects for energy saving and efficiency improvementthat are expected to yield high economic rates of return. Taking into con-sideration the deterioration in capacity utilization that is likely to takeplace if the current maintenance system is not overhauled, the incrementalproduction that is likely to take place in 1985 is substantial. Expectedincremental production would be of the order of 10-20 percent in the refin-eries and 30 percent in the fertilizer plant. In the case of the carbonblack, isopropyl alcohol and acetone plants, the expected incrementalproduction would be of the order o, 70 to 75 percent, if their continuedoperation is found to be viable.

71. The project does not face any major risk, as the Technical Depart-ment of PETROPERU consists of capable professionals and would be strengthenedwith foreign technical assistance. The risk of PETROPERU's losing expe-rienced professionals has been greatly reduced since 1980 with the flexibil-ity granted to the company by the Government to hire qualified professionalsat salaries competitive with the private sector (paras 20 and 43).

72. The project poses no environmental risks. Studies of the indus-trial plants of PETROPERU would examine environmental aspects and recommendmeasures to control pollution.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

73. The (i) draft Loan Agreement between PETROPERU, COFIDE (which underPeruvian law must be a party to all agreements providing for external loansfor public enterprises) and the Bank; (ii) draft Guarantee Agreement betweenthe Republic of Peru and the Bank; and (iii) Report and Recommendations ofthe Committee provided for in Article III, Section 4 (iii) of the Bank'sArticles of Agreement are being distributed to the Executive Directors sepa-rately.

74. These draft agreements conform to the normal pattern for loans forengineering projects. The main features of the draft Loan and GuaranteeAgreements are referred to in the text of this report and are listed in AnnexIII.

- 19 -

75. 1 am satisfied that the proposed loan would comply with the

Articles of Agreement of the Bank.

PART VI - RECOMMENDATION

76. I recommend that the Executive Directors approve the proposed loan.

A. W. ClausenPresident

by M.A. Qureshi

AttachmentsMarch 3, 1982Washington, D.C.

-20- ANNEX IPage 1 of 5

Page ITABLE 3A

PERU - SOCIAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (WEIGHTED AVEMGESLAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)-

TOTAL 1285.2 MOST RECENT MIDDLE INCOME MIDDLE INCOME

AGRICULTURAL 303.5 1960 /b 191O /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE

GNP PER CAPITA (US5) 230.0 410.0 730.0 1616.2 2609.1

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 436.3 691.8 736.9 1324.1 2368.4

POPULATION AND VITAL STATISTICSTOPULATIUN, MID-YEAR (THOUSANDS) 10181.0 13461.0 17149.0

URBAN POPULATION (PERCENT OF TOTAL) 46.3 57.4 66.5 64.2 53.2

POPULATION PROJECTIONS

POPULATION IN YEAR 2000 (MILLIONS) 28.5STATIONARY POPULATION (MILLIUNS) 55.0YUAR STATIONARY POPULATION IS REACHED 2085

POPULATION DENSlTY

PEE SQ. KM. 7.9 10.5 13.3 34.3 80.6PEE SQ. KM. AGRICULTURAL LAND 33.0 44.1 54.6 94.5 133.9

POPULATION AGE STRUCTURE (PERCENT)0-14 YKS. 43.6 44.3 42.8 40.7 30.1

15-64 YRS. 52.0 51.93 53.6 55.3 61.565 YRS. AND ABOVE 4.4 3.9 3.6 4.0 8.3

POPULATION GROWTH RATE (PERCENT)TOTAL 2.4 2.,3 2.7 2.4 1.5

URBAN 5.1 5.0 4.3 3.7 3.1

CRUDE BlRTh RATE (PER THOUSAND) 46.4 41.8 37.8 31.4 22.9CKUDE DEATH KATE (PER THOUSAND) 19.7 14.3 11.1 8.4 9.1GROSS REPRODUCTION RATE 3.4 3.0 2.6 2.3 1.6FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) ..

USERS (PERCENT OF MARRIED WOMEN) .. ..

FPOD AND NUTRITION

INDEX OP FOOD PRODUCTIONPER CAPITA (1969-71=100) 96.0 102.0 86.0 108.3 119.8

PER CAPITA SUPPLY OPCALORIES (PERCENT OP

REQUIREMENTS) 95.0 99.C 97.0 107.6 125.7PROTEINS (GRAMS PER DAY) 62.0 61.C 59.0 65.8 92.5

OF WH1lH ANIMAL AND PULSE 27.0 25.C 24.0 34.0 39.7

IHILD (AGES 1-4) MORTALITY RATE 28.5 19.6 13.7 7.6 3.4

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 47.7 53.5 58.0 64.1 68.9INPANT MORTALITY RATE (PERIHOUSAND) .. 122.0/c 86.0 70.9 25.2

ACCESS TO SANE WATEk (PERCENT OF

POPULATION)TOTAL 14.6 35.0 48.3 65.7URBAN 30.2 58.0 60.0 79.7RURAL 0.8 8.0 25.0 43.9

ACCESS TO EXCKETA DISPOSAL (PERCENTOF PUPULATION)

TOTAL .. 36.0 34.0 59.9URBAN .. 52.0 51.0 75.7RURAL .. 16.0 .. 30.4

POPULATION PER PHYSICIAN 2011.7 1904.9 1545.1 1728.2 973.3POPULATION PER NURSING PERSON 2205.0/d 738.0 745.0 1288.2 896.6PUPULATION PER HOSPITAL BED

TOTAL 4

25.1/e 469.6 542.7 471.2 262.3URBAN .. 524.8 430.1 558.0 191.8RURAL .. 3055.3 5747.6

ADMISSIONS PER HOSPITAL BED .. 19.0 23.0 .. 18.2

hOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.9 4.8/fURBAN 4.8 4.9T ...RURAL 4.9 4.6/f .

AVERAGE NUMBER oP PERSONS PER ROOM

TOTAL 2.3 1.9/f

URBAN 2.0 1 . f, fRURAL 2.7 2. 4 ...

ACCESS TU ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL 26.0 32.1/f

URBAN 50.7 54.3/fKUKAL 4.2 2.7/f

-21- ANNEX IPage 2 of 5

TABLE 3A

PER SAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (WEIGHTED AVERA9 ES- MOST, RECENT ESTIMATE) -

MOST RECENT HUDDLE INCOME MIDDLE INCOME1960 /b 1970 lb ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE

EDUCATION

ADJUSTED ENROLLMENT RATIOSPRIMARY: TOTAL 83.0 103.0 112.0 101.7 105.9

MALE 95.0 111.0 116.0 103.0 109.6FEMALE 71.0 96.0 106.0 101.5 102.2

SECONDARY: TOTAL 15.0 30.0 50.0 35.3 66.3MALE 18.0 34.0 53.0 34.9 73.2FEMALE 13.0 26.0 46.0 35.6 59.5

VOCATIONAL ENROL. (Z OF SECONDARY) 20.0 17.0 16.0 30.1 28.4

PUPIL-TEACHER RATIOPRIMARY 34.0 35.0 40.0 29.6 26.8SECONDARY 12.0 17.0 29.0 15.7 23.6

ADULT LITERACY RATE (PERCENT) 61.0 72.5/f 79.7 80.0 75.4

CONSUMPTIONPASSENGER LARS PER THOUSAND

POPULATION 8.0 17.1 18.5 42.6 83.9RADIO RECEIVERS PER THOUSAND

POPULATION 108.0 135.1 135.4 215.0 181.6

TV RECEIVERS PER THOUSANDPOPULATION 3.2 29.3 50.8 89.0 131.1

NEWSPAPER ("DAILY GENERAL

INTEREST") CIRCULATION PERTHOUSAND POPULATION .. 123.3 51.0 62.8 123.8CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.2 5.7

LANOR FORCETOTAL LABOR FORCE (THOUSANDS) 3193.9 3896.8 5079.7

FEMALE (PERCENT) 21.1 20.7 22.8 22.6 32.9AGRICULTURE (PERCENT) 53.0 44.8 37.8 35.0 34.0INDUSTRY (PERCENT) 19.0 20.1 20.0 23.2 28.7

PARTICIPATION RATE (PERCENT)TOTAL 31.4 28.9 29.6 31.8 42.3MALE 49.6 45.8 45.6 49.0 56.5FEMALE 13.2 12.0 13.6 14.6 28.5

ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.6 1.4 0.9

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 39 .O/HIGHEST 20 PERCENT OF HOUSEHOLDS 64.4/S 61.0/f

LOWEST 20 PERCENT OF ROUSEHOLDS 2.5/7 1.9/fLOWEST 40 PERCENT OF HOUSEHOLDS 8.0/g 7.07 .

POVERTY TARGET GROUPS

ESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 235.0RURAL .. .. 180.0 187.6

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US5 PER CAPITA)

URBAN .. .. 293.0 513.9RURAL .. .. 200.0 362.2 385.1

ESTIMATED POPULATION BELOW POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 49.0RURAL ..

.ot availableNot applicable.

NDTES

Is The group averages for each indicator are population-weighted arithmetic means. Coverage of countriesamong the indicators depends on availability of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 snd 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1.976 and 1979.

/c 1970-75; /d 1964; /e 1962; /f 1972; j Personal income within labor force.

* The updated 1980 GNP per capita to be shovwn in the 1981 Bank Atlasis $930 (at 1978-80 prices).

May 1981

ANNEX I-22- Page 3 of 5

DEOOIAlTlllt 01 SocIa1. ItOICAhlln

th e . usful to de..cibe order of magnitude, udbo-ne trends, and -oeurloetlr. color difference bo-nta..c..oo--

Therefeonce gropazeedldtbesmtnoootygroacfnhen -ocncooryoo-dtcar2goceibamabothifben-o--gtcnco-enbamnbhna--yrg-opnfnetb ga ntn (eestebpsllni-a Oliipotnt t-pr wher 'Middle locat onc,h frica and Middle hE-n' On chose bocacafs lb

LAlId ~ ~ ~ ~ ~ h drt (cc1n nk.Ppooor a oocolnl-no rbr o-rd tolh - dp-oooOorl

ccnti -foaT. nar ananersOgadar-oaodfnfoloonrn orn,n-rna.. Ordaidlbnoceconey... cc. tn.ne......pI calhbodlanrctrcal labu nen grrbriarea usod teap-an,Ify or ....o.e. ly octef r r10dd ont-enrlcnuycoco bopia adr-

tot.. crps. poandres earbo nod kOnch- fards- or solobalc; 98 an.thOfoIo onor ntlof-orcblnoenoemony ar-ffod

SOP ftp cPITA sup- It? co caylna nolnuotano Oconeo eaocon rbcos, cl- fOul oon ace 20 -c fced dnoulfoo_yintt , bdaner,RO-olda healtrolacd byaaeaconoetionothd as nnd cook oonu d1977-79 hotbed; i96f, nod neduculrntr co oraonf snaTfo cpya to(o

1971. and 197£ d-nn. cudicoonucn,uoo ilnc r. uhoob ifonl-un- noov

netGIn CcNlIffTIlN PIR caPITA - nulcneooo f nal roa -oeny i-ol -l psye rrhar I" IItrncuOc-de -ODOs ororcpoognero h-upitala,

otuitylI knanaao col.eooln co -olo 1961, 1077 ao 971 ecn pcaoa oyoc o nfddclndnntldana. OOniosiouucnt hoan-pi p inuf td -V. nn nR ab d nf _dlafn c t_dooo

den honoiltl di-nIdo by ob nso f teda.PPUFiLATIcON 01 VIALd, STATISICS

Tona PoRnla-1-n Mid-cYn tbcunad-Au of joby 1961019170, aol fLl7 cIflInG

aman roshois; 967,fil, nod 191 dune, cOnhnc l OnP-atnnu ,-tysm

Pooclenan rnionon nooaadoboofeoscc cenna-o.a...p IorrlA -oogon-Innato iootn- lblfrecooocoyntuntr aeanlfbo Iac coornlnbotlnofccOdocn.o

nna noocnb g r oo o bl oulo n ori c ao.nalns eoeocny.bl cnm o onoproetaroos oPr-leconoooaoI.enan foocnlonttopletbo folaao ocnllrru

Each oonntrd ot char asuignod one nt nntee cOoo oceotnoocoot of~~~ nb-tIfinc-fljflfffar.ctennhbnnynoenlttnsono)ecolooc,crpntet. blfnunIdtdsnnn N. -lh OIi... it,yj, ,,j,stainornfaIn-onsnceyouolnhoalnncIhinaPleoooo-cu,s_nnfmf-raoto,aanfef

niouoonnecfobnohon,cdloftlarcosa nrlennafgosh orolrro ecneo foseucmain ... Ioen .1 Thus -on uiod n ...aoe .e..... e dc o opinoa o-g otltoa oeef rae nido udtl

tbtrelaceent fntlonncsauropodaninnoau,oh .e.. gIf tOc ertuaoso.....rootgnrfrreydcoO nofonnopeastel eenf, TeOa-terrrfacnteaa o -trtnlh soat-enntonnofsooa ecodllpnou

tnao fe besooacbo . __al_yIflclb eas ffeocrsr_dc_accrtaregotefl

ttlae;107, flO tnd f9.71 data. I inbrttcbinl, bnnnl- r ne-pogee -noh. IpaSo u... pond-

feton icbh.. 7, t 1901 dena. Iduit_ riteau rt Yracan I dpestel lta -dae toned mdnose

P.,nletio Anee dat- P tocno -ohn,- coolgrsd...e.ofcnog_on- l_tlfjI

19cenct fOl, 191. ul179 dn,nlnn obh

ppltt;196.170,-d17 sd 17 ee ranseoentllbi e-haeln£lpltn;ecue n

n64m oara aena_l ios-ot5 nrssrddc-it96, 97,en-91. et eunis hoiddllieebg

P7oltPioto -far drncn ofmdiedsms -rnoteeoiadidtcoreacdi easee bYgetonin o If eane -net loe heisome nf hildhanroteg (13Au f Are lo e lu rsr aiar esae ioa o (tarItooseLied roalnon Soe h eneag ri--

PIll dT oPhII fIlIto9he aI0y f l .taroeers tlastfo_ inssek

`96oaarog rdcr rc egts 910.191 e iO aa ne laborI Ponc- dh,,,eandi-ne icleunayrs inedg

pee dy doaet AIpltcroe onncpouto,Oaneln not .onpnbt; .ic 17 ....190 ldmn

.eoly sae -1snne y u hte nryllols ed o otlct-dss ie ronen60eof1thu70ebt font;1967.191 anl 191 ldat-e n Aolbnrfeogeoiocrultmeeoce oyauba It Iier one. taboo.force in nhnng -omaocbo ion,pmaafblteiog

andee laoihrtn f npiaio. adflorng10yeoen ornate00andelonucti',neenno gse prcntgeofruallaorPont-161houehld an ; 90I.acl n Of dare,. 1971 emd 1979 data,- f- b..d

Pe aiaennyo roandrseordy Poenrsrn fyn wpr etitainRoa(esnid ae,mae mIeoeePrioieisone htlpiydtodote, tc-upbofad-edeeoatn. Ge rinrrtceeaeueesoa_'eeetfsleenf _c

sP beIll prtInlsaneel g o the meld,-reoadI byra In h hr nnmsPn ec A lIleno- ai ofppesiuede IS erd StI emIfelo _ foldana;iic-- 17 ad 99-ae,s thek tons6 leho bone, i1,i

-eocniuann hioe,lytn animal al ele yogd -- upp,y of md- enefemniaead_pieeO Igreat e dy 19t61-0 90ed' 191Adoe. R FORCEMTIO

at bdeth lAt,ilbl, appl 97 dai,- end c-iboal be1i isfeptell aIn- osesilera ... oaIIan.lotat mrseltrlat ler ooesed) anualleohe f itoni noen ne ear Eetsaed AeeP,e PIl Imoes eve.P. blnpomir19- eho eeJeaa_ of ge ee tocsan lie brth. osolno ovety nnae lvelvs hartnnme ene bosLtibbbFa.-I.o

hen cips fpl p_-el ietem,an octal)d myth ~ ooemnablnenoamhemtseggop le

t _reno eado loee o mate sian - l eaer fromy -lohte may bebilanba) -eem for _highe sseo a olng it re ra

rhane.... cesmoldimlythtdh hnaaIo196on65esber0 of the7boetel1o7l end repel - dPnnet aP oaaocdra.o ualosaeat

-member I of Ipeopl (toal,urbN, end 1 rura f.sid byeceh bpaiepraegsotIeprspnIne popbleiohdsa-~1 Esneede dt e- s Inoln_drtyP:

bh alotnedIhapee abt-i or -ebhut re 'son of tame eacai 1960nmmu70and looSeS IstelTh.hoino

Pat re -inno huet Morss-,!epolrnilb. b-ldc by. cbesA.i of Tono indingpmalealfemlegp 1u96earee, 19racoto9e dlses.ecl esetatsod-enaree5a.. I--

I olo. NON -1.4000

2

tO NII 0 -20 -l NC:: -o'OC .o 0

IN

2 4&2o� -c-� .- ouo 00000, 0100' 0 00 -t00. 0 lOON

1C 0000 0 I No2 NOfl N -N 004

O 000.40000-NON N N2 0 0000

* . . . 0N 0OO� 0.0010 4140...-. N N

0 �N ON NON-N N0 N ON 0 NON

o 0 N N NO 00NNON NO ONI N .00 - 0 NON0

ON ONOONOOOO NO j . - NOON ON NON

N .-.[ .4 -

NOON dolifN...ONNNOOHO 0N�N N NOIN 000 *40NON 000000 N -- 2 ��2NO0O ON 00

-N N 000 0 NO 0

0000000000 ONON N -00000 00 0 00N 000000000 -N Ni * ON CI 000 0,NNONN N NNON NOON N--- �ON NJ NON S 0N� NO 00 N ONNO 0

000 ONOONON 00 -N NI ONONO 002 NOON. . 0' . ON'- <NON0- I ONO NNOONONO N -- NO N 00

00 000 N 0000 000001 NON

N N 00

2ONNOO000.NO NO 00000 N

0 �N

0 0-00 - NOONNoNOON N 0010 I 0000' N 0NO1�lI

-I

�"o0N0 N NONNOoN

OONNOOONON NOoN 0N 0 � . . . . 000000 000002Oi 0 NOON NON0 0 NOONOON000 0000 -l ONI 0 2 21 oo 00020 20040001400 0000 2!

0 0 N N N 000 0--N 000000000 NO ON-ON OjONI 0 0-0 0 00000

O N 0000000 N N 0000 0000 � NOONN oNO 0 0-- - 00010

0 00000 0 N 0 N 0 0 N 0 000000.NOOO ON '-000 NJ 4.40000 000

0 0000000000 ONON 0004000- 0O..NNO00.N 0 1 -

2400000000000-000000 oo IN 0 0021 2' 0O� 00o . 0 � oo 0).-

NOON 0 00000 IN 0000000 0 21- . . 0 .. N' NI 0000 Ni�- 00010000 0 �oONN 2120002NH - .-p 000000 000000 olooN 0

2

N N NONo 44< - o

ON 0 00 ON, 00 040 - 000 00 01. 0 00 00 N NO NO 4 40N 04 000 -NO� o 04 N N N 040- N N 0 NNO 00 0004- 000 0 040000 22 44 00 0040No 0 22 2 04 NOON NOON A 0000 0 N ON 04 4400 NON 4000000000 00 ON NON 100040 0044N- 0 0 4 0.-ON.- - ON 0440400o .. oo.o 0000 0 2 2 NON-NO 00 NN4 0N�0 N 0�0 NO 00 00 NOON.- 010 -- 0 NON 400400004004000 00 40000 0. 0 40.04 0 0 004 00 0 4 O�0 00.0 NOO o0� NOooOo 0000 NOO 0 0 00 0000 00 000 0 0044- N N N N oN 'o 00000 40000 ,40 000 00000 NO 440 oN 4O 004 0 0 44000 00 NON 00 000 0o000O 0-00400400 N 04oN0 00 004 oo 4400

-- oooNOoNooONO � 00) o oo.oooo 0 04 40400.- oN ONNNO 0 0 NI 400 - 0004004 0000 000 040400 NON2 2 2222Ž2 2 0222 2 2

I I

I -11 .1 41 ~~~~~~1 -1 I 4 -Z ~~~~~~4 ~~4I -i I'4444

_4 1~ ~ 9 644A 9 .,44 6 4 4

....... 4..44A444. 44 4,-A4. 344 A3 4.43.44. -44. ....444A44 44.. ....-. 44 -A.4444 . -444. 44, 444 4.4

4A 4 44.4 44.4 49,4 33.A 6.9 3A~~~~~~~~~~~~~11.4 A4-4 43.II. 4.

44444 444434 -4., 44.6 64.4 33,444.433,4 I I , 34. '4 .4444 *

444444444 444444 44,4 ~~~~~~~44,4 434.4 -33 .4 -44, -43.3 444.4 4,44,4 444.4 444,471 11 4.~

44 ,g~~~4 6444444 '44444-44 -4.4 4.4 44. 44,4 49,4 9.44344,4 444,~~~~~~~~~~~~~~I' 444.4 64.4 4

'..4444 434444444444944444444444444 44.4444.4~~~~~1- 444.4 - 4-44.4 44. 43 4. 34.44.

411:~ ~ ~ ~ ~ 6 444 44494 4444 44 -444 4444 4444444444444444444 444, 944 4 6 444 4944 4444 4.4 4434 4444 4494 4634 44 444A 444364-4444344463l l

.444 44.4 44.4 444,4 44,4 444,4 494,4 444,4 444, 434.4 444.4 944. 44.4 44.4 4.4 4.3 3.4W --- 117

444444444.. .444444444444444444 44.4~~11- 44,4 .44 4244,,4 "-I 44, 44 4.4 4, 44 9, 44 -47 34 44 .

4444 444,.-4,,~~~4~ 444 444 49444444944 4, .4 444,9 444. 44,1-4 244l.4 3. 4. 444. 494I4344 4I,4 44 . 441 9 -,44-4,-444444444 I44.. I4,44, 44, '. 4444, 44.3444 44I4 44. 44,4 .I4. 34 3.

4'44444444 4444444 44,934.4 -44, 44. 4, 3. 444 344 643 4444 44. 44 , , 4 4.

44444444 .9 43.4 44.4 43.4 43,4433,4 444,4 444,4 444.4 4,4.4 444.4 -3,4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4,44,4-4 - 9,44,44.

44444444444444 44..44 444,4 444.3~~~~~~~~2 7 5, 4, 4, 4. 4, 4, 6. 4. 9, 4.4 - 4 464 4. .444444 44.4 '6.4 444.4 4 4.4 444.4 434.4 449.4 663.3 444.4 344. 44 Q 44,9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,444,34.444.4I44 4.4 ~ l 11

3444 3444444 44,4 444.4 46.- 4 444.4 449.4 444.4 144.A 444.4 464.4 449.4 '44,4 43.6 4.4 44,4 44,4 44.4~~~~~~~~~~~~~~~~~~~~~~-2 "1 4- :1 - -3

- 43444,44444444 44~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~:6 14 :

444444444 494,4 444.3 44 .4 444.4 444,4 364. 4 443,4 3,3444446444444444444446444 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~19~

-25-

ANNEX IIPage 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN PERU

A. STATEMENT OF BANK LOANS (as at September 30, 1981) 1/

---US$ million ---Amount

Loan (less cancellations)Number Year Borrower Purpose Bank Undisbursed

27 loans fully disbursed 409.2

949 1973 Republic of Peru Education 24.0 2.71196 1976 Republic of Peru Transport 76.5 39.01215 1976 Republic of Peru Power 35.6 7.41281 1976 CENTROMIN Mining 39.7 13.51283 1976 Banco Vivienda Urban Dev. 21.6 11.21358 1977 COFIDE Industry 35.0 8.61403 1977 Republic of Peru Agriculture 25.0 22.3S-11 1978 Republic of Peru Preinvestment 8.8 3.11771 1980 Republic of Peru Irrigation 56.0 54.01806 1980 Petroleos del Peru Petroleum Prod. 32.5 30.51812 1980 Republic of Peru Rural Dev. 15.0 14.61888 1980 Republic of Peru Prelnvestment 7.5 6.0S-19 1980 SIDERPERU Technical Asst. 5.0 5.01963 1981 CORPAC Aviation 58.0 58.01968 1981 COFIDE Industry 60.0 60.02018 1981 ELECTROPERU Power 25.0 25.0

Total 934.4of which has been repaid 174.5

Total now outstanding 759.9

Amount sold 18.3r of which has been repaid 18.3

Total now held by Bank 759.9

Total undisbursed 360.9

1/ Since September the Bank has approved two further loans: (i) US$26.0 millionto COFIDE for a Small Scale Enterprise Project. This loan was presented tothe Board on December 8, 1981; and (ii) US$93 million to the Republic of Perufor an Eighth Highway Project. This operation was approved on February 16,1982. Signing of both loans is expected shortly.

-26-

ANNEX IIPage 2 of 6

B. STATEMENT OF IFC INVESTMENTS (as at September 30, 1981) 1/

Type ofYear Obligor Business Loan Equity Total

1960 Industrias Reunidas, S.A. Home Appliances 0.3 - 0.3

1960 Luren S.A. andLadrillos Calcareos, S.A. Bricks 0.3 - 0.3

1960 Durisol del Peru, S.A. BuildingMaterials 0.3 - 0.3

1960; 1962 Fertilizantes Sinteticos, S.A. Fertilizers 4.1 - 4.1

1962; 1968 Cemeato Andino, S.A. Cement 2.3 0.2 2.5

1964; 1967 Cia. de Cemento Pacasmayci Cement 1.4 0.2 1.6

1975 Southern Reru Copper Corp. Mining 15.0 - 15.0

1978 Cia. de Minas Buenaventura Mining 2.0 0.5 2.5

1980 Cia. Minera San Ignaciode Morococha, S.A. Mining 2.7 0.5 3.2

1981 Consorcio Energetico de PowerHuancavelica Transmission 8.5 - 8.5

Total gross commitments 36.9 1.4 38.3less cancellations, terminations,repayments and sales 18.2 0.2 18.4

Total net commitments lessparticipants' portion 4.0 - 4.0

Total held by IFC 14.7 1.2 15.9

Total undisbursed incl.participants' portion 9.2 - 9.2

1/ Since September IFC's board has approved one further investment of US$3.0million in SOGEWIESE S.A. for a Leasing Project.

-27-

ANNEX IIPage 3 of 6

C. STATUS OF PROJECTS IN EXECUTION I/(As of September 30, 1981)

Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973;*~ Effective Date: March 5, 1974; Closing Date: June 30, 1982.

The project has experienced serious difficulties and is now about 40months behind schedule owing to start-up problems including weaknesses in theproject unit and cumbersome bureaucratic procedures. In order to resolve theseproblems, the project has been modified to reduce its scope, increase the Bankdisbursement percentage, create a revolving fund and improve administrativeprocedures (see President's Memorandum R79-59 of March 27, 1979). As a result,the pace of project execution has improved substantially over the past year, anddisbursements now stand at about US$21.3 million.

Loan 1196-PE: Lima-Amazon Transport Corridor Project; US$76.5 million Loan ofMay_27, 1976; Effective Date: August 18, 1976; Closing Date:December 31, 1982.

Construction of the project's river ports component is almostcompleted, although with some cost increases because of start-up difficulties.There were serious delays in contracting for civil works under the road componentbecause of slow procedures and limited Government implementation capacity. Theseproblems have been largely overcome and construction is now underway on allproject components. The project has been modified so as to reallocate funds forthe purchase of road maintenance equipment and eliminate improvement of those roadsections which cannot be completed within a reasonable time (see President'sMemorandum R79-88 of April 27, 1979).

Loan 1215-PE: Fifth Power Project; US$36.0 million Loan of September 20, 1976;Effective Date: November 18, 1976; Closing Date: December 31,1982.

The slowdown of demand in ELECTROLIMA's market in the wake of economicdifficulties as well as procurement problems, have delayed the project's powerdistribution component and completion is expected about a year behind schedule.Serious delays were also experienced in getting the technical assistance programof the loan underway; however, all consultants have now been retained, and withstrong support from the current staff in the Ministry of Energy and Mines theprogram is now well advanced. Because of the delays, the Closing Date has beenextended to end-1982.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular-to report anyproblems which are being encountered, and the action being taken toremedy them. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengths andweaknesses in project execution.

-28-ANNEX IIP-ge S o 6

Loan 1281-BE: CENTROMIN Mining Projectz US$40.0 million Loan of December 6,1976; Effective Date: May 24, 1977; Closing Date: December 31,1982.

Initiation of the copper inining component was delayed by about twoyears because of the lack of local counterpart funds owing to the recession of thelate 1970s. CENTROMIN is now proceedling with the project with support fromadditional Government counterpart: funds, as well as a supplementary IDB loan andcommercial bank borrowing to cover inflationary cost increases. Engineering,procurement and mine development activities on this part of the project arewell-advanced. The mine-water treatment plant has now been completed.

Loan 1283-PE: Urban Sites and Services Development Project; US$21.6 millionLoan of October 12, 1976; Effective Date: January 10, 1977;Closing Date: Deceriber 31, 1982.

Administrative difficulties, particularly the need to reconcilePeruvian procedures with Bank guidelines for procurement, delayed the project byabout one year. All components are now moving ahead well and disbursements standat US$10.4 million0 Because of past delays, however, the Closing Date has beenextended to end-1982¢

Loan 1358-PE: Industrial Credit Project; US$35.0 million Loan of January 28,1977; Effective Date: March 30, 1977; Closing Date: June 30,1983.

Peru's economic recession led to a contraction of investment and tolower than anticipated demand for the loan in the late 1970s. In view of this,the Borrower - the National Development Bank (COFIDE) - agreed to financeprojects identified by commercial banks and other financial institutions, whichwould also guarantee these loans and provide some loan servicing. With thisaction and improving economic conditions over the past two years, demand for thecredit line has increased, and it is now almost fully committed.

Loan 1403-PE: Irrigation Rehabilitation Project; US$25.0 million Loan of May20, 1977; Effective Date: August 2, 1977; Closing Date: June30, 1983.

Because of the weaknesis of the project unit, there was a long delay incompleting the designs for civil wiorks in the six valleys where irrigation systemsare to be improved. The unit has been substantially strengthened over the pastfew years, the design phase is nowi comnplete and construction has started. Theproject, however, is now several years behind schedule.

Loan S-1l: Water Supply and Power Engineering Project; US$8.8 million Loanof December 22, 1978; Effective Date: June 27, 1979; ClosingDate: December 31, 1L982.

The main components of this project consisted of the feasibility studyfor the Mantaro water transfer scheme and a master plan for Lima's water system.The Mantaro study has been completed, and engineering for the Lima water system isnow underway in preparation for a project to be considered for Bank financing.

-29-

ANNEX IIPage 5 of 6

Loan 1771-PE: Lower Piura Irrigation Rehabilitation Project; US$56 million Loanof February 4, 1980; Effective Date: May 28, 1980; Closing Date:December 31, 1983.

Project execution is gaining momentum. The implementation of most ofthe Bank-financed components of the project has begun or is in the process ofbeing started.

Loan 1806-PE: Petroleum Rehabilitation Project; US$32.5 million Loan of April28, 1980; Effective Date: September 30, 1980; Closing Date:January 31, 1983.

The project got underway more slowly than expected because of the weakimplementation capacity of PETROPERU. All project components, however, have nowbegun and execution should improve in the coming months.

Loan 1812-PE: Puno Rural Development; US$15 million Loan of April 28, 1980;Effective Date: July 9, 1981; Closing Date: June 30, 1985.

Although there was a delay in making this loan effective, projectactivities are now underway. Consultants for the extension program have beenhired and irrigation system designs are being prepared.

Loan 1888-PE: Bayovar Engineering and Technical Assistance Project; US$7.5million Loan of August 21, 1980; Effective Date: December 22,1980; Closing Date: June 30, 1983.

Consultants have been contracted and the final feasibility report forthe phosphate fertilizer project is being reviewed.

Loan S-19: SIDERPERU Technical Assistance Project; US$5.0 million Loan ofDecember 15, 1980; Effective Date: April 16, 1981; Closing Date:June 30, 1985.

A consultant's report evaluating SIDERPERU's expansion plans is nowbeing reviewed.

Loan 1963-PE: Aviation Development Project; US$58.0 million Loan of August 19,1981; Effective Date: January 21, 1982; Closing Date:December 31, 1985.

Procurement activities for equipment have begun.

Loan 1968-PE: Second Industrial Credit Project; US$60.0 million Loan of August19, 1981; Effective Date: February 25, 1982; Closing Date:June 30, 1985.

-30-

ANNEX IIPage 6 of 6

Loan 2018-PE: Power Engineering Project; US$25 million Loan of August 19, 1981;Effective Date: February 25, 1982; Closing Date: June 30, 1985.

The Yuncan hydroelectric project, whose final design is being financedretroactively by this loan, is now underway.

-31-

ANNEX IIIPage 1 of 1

PERU

PETROLEUM REFINERIES ENGINEERING PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I: Timetable of Key Events

(a) Time taken by countryto prepare project: Three,months

(b) Project prepared by: PETROPERU with Bank assistance

(c) First presentation to the Bank: May 1981

(d) Preappraisal of project: June 1981

(e) Departure of appraisal mission: September 1981

(f) Planned date of effectiveness: June 1982

Section II: Special Bank Implementation Action

None.

Section III: Special Conditions

(i) PETROPERU to carry out a review of industrial plant and regional levelmanagement and organization with a special emphasis on introducingimproved budgetary systems and cost and inventory control. The companywould also furnish to the Bank the findings and conclusions of saidstudies no later than December 31, 1984 (para. 45).

(ii) PETROPERU to add seven professionals to its Technical Department by July1, 1982 (para. 65).

--32-

ANNEX IVPage I of 2

PERU

PETROLEUM REFINERIES ENGINEERING PROJECT

PETROPERU INCOME STATEMENTS

(in billions of soles)

1980 1981 1981(Audited) (Budget) (Estimate) 1/

Net Sales 342.75 645.28 538.93Operating and General Expenses 338.12 553.33 529.60Income from Operations 4.63 91.95 9.33

Financial Charges 22.80 21.35 27.27Extraordinary Gains 2/ 25.39 2.16 7.04

Profit before Taxes 7.22 72.76 (10.90)Taxes 0.37 39.91Met Profit 6.85 32.85 (10.90)

1/ Estimated by PETROPERU on December 17, 1981.

2/ From exchange rate changes, etc.

INNEX IV-33- Page 2 of 2

PERU: PETROLEUM REFINERIES ENGINEERING PROJECT

PETROPERU BALANCE SHEETS

(in billions of soles)

1980 1981 1981 est.ASSETS (Audited) (Budget) (up to June 30)Current Assets

Cash and Bank Deposits 19.71 5.82 14.24Accounts Receivables 70.32 98.81 94.16Inventories 60.48 57.35 110.91Pre-paid Expenses 3.82 3.16 1.81

Sub-total 154.33 165.14 221.12

Fixed AssetsL/T Receivables 1/ 76.14 44.62 68.45Land, Plant & Equipment(net of depreciation) 318.44 485.24 323.09

Other 16.94 9.70 34.36Sub-total 334.38 539.56 357.45

Total Assets 565.85 704.10 647.02

LIABILITIESCurrent Liabilities

Bank Payables 17.53 39.07 25.40Current Portion of L/T Debt 55.55 66.71 60.50Other Payables 88.42 86.27 133.50

Sub-total 16-1.50 192.05 219.40

L/T LiabilitiesL/T Debt 277.67 300.26 238.22Other 2/ 10.34 22.43 11.49

Sub-total 288.01 322.69 294.71

EquityPaid-up Capital 109.14 157.08 138.16Reserves 0.35 0.03 0.35Retained Earnings 3/ 6.85 32.85 (5.60)

-Sub-total 116.34 189.96 132.91

Total Liabilities 565.85 704.70 647.02

RatiosCurrent Ratio 0.96:1 0.86:1 1.01:1Quick Ratio 0.58:1 0.56:1 0.50:1Debt/Equity Ratio 72/29 63/37 69/31

1/ From the Government.2/ Including provisions for indemnities, pension, etc.3/ After remittances to the Government.

~~34~~~ ANNEX VPage 1 of 4

PERU: PETROLEUM REFINERIES ENGINEERING PROJECT

TERMS OF REFERENCE FOR CONSULTANCY SERVICES

OBJECTIVES

PETROPERU wishes to contract the services of specialized consultants or consultinifirms to carry out studies or devielop programs with the participation ofPETROPERU and taking into account technical and economic feasibility, whose mainobjectives are to:

(i) improve PETROPERU's plarnt operations by streamlining its maintenancesystem, expanding the training system, debottlenecking existing plants,adopting better operating practices, optimizing current operations,improving yields of higher value petroleum products; and

(ii) reduce operating costs by energy conservation through retrofitting;increase power generation by using waste heat from gas turbines andboilers and by co-generation of power and steam; recover hydrogen frompurge gases from the ammonia plant at Talara.

SCOPE OF WORK

I. Energy Saving, Pollution and Corrosion Control, and Process Optimization

A. Undertake an energy audit to review energy balance in all industrialfacilities of PETROPERU, particularly the refineries at La Pampilla andTalara as well as the fertilizer, carbon black and solvents plantfacilities at Talara; prepare a comprehensive energy conservation andretrofitting program takiLng into account any proposed additional processand utility plants; and carry out basic engineering for the program'simplementation. The program should pay special attention, but not belimited to, the following;

(i) Co-generation of power and steam to reduce the amount ofelectricity purchased from outside;

(ii) utilization of waste heat from heat exchangers and boilers ofrefineries and power plants at La Pampilla and Talara and theTalara fertilizer plant;

(iii) use of waste heat within the process units with necessarymodification in process patterns to improve energy conservation andefficiency;

(iv) recovery of hydrogen gases from the Talara Ammonia Plant;

(v) feasibility of installing pre-flash towers at the La Pampilla andTalara Refineries;

-35-

ANNEX VPage 2 of 4

(vii) modernization of instrumentation and installation of new

instrumentation to detect and help overcome energy and material

losses; and

(viii) the present problem of sea water cooling at Talara Refinery and

its solution.

B. Corrosion Control and Prevention

(i) Review corrosion problems at La Pampilla and Talara facilities

and recommend remedial measures to solve those problems.

C. Process Optimization

(i) Compare the existing units with more recent units elsewhere and

identify differences in capacity utilization, product quality and

yield;

(ii) analyze potential equipment and operating changes necessary to

improve capacity utilization, product quality and yields;

(iii) identify process modifications needed and discuss any problem

area, whether operational, mechanical or environmental, that

would result from those modifications; and

(iv) review the existing facilities for laboratory testing, sampling

and quality control of PETROPERU's products, feedstock, residues

and emission gases and make recommendations for improving these

facilities including identification of additional equipment

needed.

D. Provide advice to PETROPERU for the following:

(i) Examine PETROPERU's design, engineering, construction and

fabrication standards and procedures and propose modifications

necessary in the light of modern practices.

II. Maintenance Program

(i) Examine in detail maintenance problems at La Pampilla and Talara

Refineries, as well as fertilizer, carbon black and solvents plant

facilities at Talara and develop a comprehensive program for maintenance

including preventive maintenance, and the planning and scheduling of

normal maintenance work; and

(ii) examine organization of maintenance operations at industrial production

sites and recommend improvements in the maintenance organization with

special attention to coupling operations and maintenance and also to

plant inspection, routine and preventive maintenance, workshop

facilities, spare parts, personnel training, etc.

-36-ANNEX VPage 3 of 4

III. Training

Provide advice to PETROPERU for the following:

(i) Prepare and implement a comprehensive training program forPETROPERU's industrial production activities at the central, regionaland plant levels with special reference to the following:

(a) Operation and mainLtenance practices;(b) Corrosion control and material selection;(c) Refinery process technology;(d) Budgeting and cost control;(e) Design and engineering of equipment;(f) Management science;(g) Administrative practices.

The training program should be carried out at three levels, i.e., operatorsand technicians, supervisors and managers and division chiefs. The programshould also review the adequacy of the existing training facilities atPETROPERU and in the country, examine the need for establishing new trainingcenters.

The program should include training through the following means:

(a) Visit by selected persornel to foreign refineries andindustrial plants similELr to those of PETROPERU;

(b) Organization of semi-annual and annual courses in specializedareas with the participation of foreign experts;

(c) Procurement of specialized equipment and training aides for localtraining.

IV. Other Studies

A. Techno-Economic Review

(i) Examine the techno-economic aspects of the operation of carbonblack, solvents and fertilizer plants to establish their economicviability and competitiveness.

(ii) improve the existing Refinery Linear Program Mathematical Modelused by PETROPERU; and

(iii) improve the capability of the Technical Department of PETROPERU toconduct feasibility studies and carry out industrial planning andimplementation more effectively.

- 37-

ANNEX VPage 4 of 4

B. Production of Grease and Lubricants

(i) Examine the problems in the production of grease and lubricants,and review the adequacy of the product quality and specifications;and

(ii) provide technical assistance to improve the quality and specifica-tions of grease and lubricants manufactured.

2=r>rz \ $ ~ ~ ~ ~ ~~76 & IquotoSX 7 s, / et.E4

P E R U f &IjPetroleum efineries Engineering Froect

' '- 'Al \ /@Saz

a Etldelyo ~ ~ Mo y -boob

T.1- ~~~~ ~~ ~(

=BV =0=08 U 2 olam=rN -AB R A Z I L

ftc. o.oyr ~ ~ ~ ~ ~ d.P.

?~ ~~~~~Dpomn bou do so 00l0 2

-t=' ccv \16'\,./

'$~~ ~~ 300 BOled Moq === -o,er d qso- , o,

tOesos of o,0= . OOO.4O.(olc ~ rcnonrnouos ,soo Tocc Mece U, )

s12 b , uc nco W B .u \

u16o5=s,>o,=on =08 gOJ5O Of =c * a c tfucrchonssno!srr, /

crcoy,oso0f8=oOO~sccd~ CHILE' ==, ==Xt1-- -,;,. 'if / ;-

f / 0 - PeioFeun rsnenes = 5: =; 0 X \v;(0/ t S (

; ; - Asphatt ro~~~~~~~~~~~~~~~cgd :; 0S*;\)~~X-- --ASs-Jf; 2; ;----------- A,ohett orztxs ndt r ontt;ecien S ng: ;+

1:0 i Alt wetzther-roads ,i $ = ; if 0 ;0; , t > ducnccne(. °~~~~~~~~~~bl

t~~~~~~8, -f -1-4 ; V0i:5!0 / J

0b-d E-E;fV = t e 4 b.0 -If = C0;; V 4 -vc>cZsSgqeX;;: KlLwf ;f 0 ; ~10 ' I ' 3 ~i i 0 0: *3 ;: 0 0:;; V :t 0; lo4ten_4egU, CHILE 6 <