' L E- .C.8 G' ,.iG

RETLIURNED T0 RLOiFSDS

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRU TION AND DEVELOPMENT

Not For Public Use

Report No. P-1360a-PE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF PERU

FOR A

SIXTH ROAD PROJECT

April 10, 1974

This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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RATE OF EXCHANGE

Currency Unit Sol (S/.)

US $1 S/. 38.70

s/ .1 = u$0o.0258

s/.1,ooo U$25-.80

S/.1 ,000,000 U $25,800

Peru Fiscal Period - January 1 to December 31of the following year

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN

TO THE REPUBLIC OF PERUFOR A SIXTH ROAD PROJECT

1. I submit the following report and recommendation on a proposedloan to the Republic of Peru for the equivalent of US$26.0 million to help

finance a road project. The loan would have a term of 25 years, including

5 years of grace, with interest at 7-1/4 percent per annum.

PART I - THE ECONOMY

2. A report entitled "Current Economic Position and Prospects of Peru"

(No. 136-PE) was distributed to the Executive Directors on May 25, 1973(R73-115). An updating economic mission is scheduled for April, 1974, and

its report is expected to be ready for distribution by the end of September.

Annex I summarizes the main economic and social indicators.

3. Peru has achieved a respectable rate of economic growth: excludingone year at the height of an economic crisis (1968), GNP growth in real terms

has averaged over 6 percent per annum since 1960. With per capita GNP about

$500 in 1972, Peru is also well removed from the group of poorest countries.

The pattern of development that has brought this about, however, has been

one of very unequal distribution of the fruits of growth. The modern sec-

tors, where incomes are high and rising, comprise little more than one-

fifth of the labor force, with a heavy concentration in the Coast, and in

the Lima area. Twice as many are engaged in an agriculture of very low

productivity where incomes rise slowly if at all and where large groups ofIndian descent until now have hardly been touched by modern development 1/.The rest - somewhat over one-third of the total - are accounted for in handi-

craft production and various service activities outside the modern commercial

establishment. Their incomes also grow at rates well below those in themodern sector. The challenge that has been facing the country is to break

this pattern without sacrificing further growth.

4. Upon its takeover in 1968, the military Government began to pursue

structural reforms. Agrarian reform has been broadened and speeded up. By

the end of 1973 about 5.7 million hectares of farmland had been expropriated,nearly half the area initially estimated to be subject to expropriation

1/ Those working in the larger export oriented farms, and particularly the

members of the coastal sugar cooperatives must be counted in the modern

sector.

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(which in turn is about half the total farm area in the country). Special

emphasis is given to the promotion of cooperatives and other forms of col-

lective management traditional among the Indian population. While still

controversial, the labor communities introduced in the industrial, rrining,

and fisheries sectors to bring about workers' participation in profits and

ownership are now a fact in Peruvian economic life. Marketing of the im-

portant export products is now Government controlled, and the state takeover

of the basic industries - iron and steel, metal refining, cement, paper,

petrochemicals and fertilizers - is virtually complete. The power and

telecommunications sectors have been reorganized to become totally state

managed. Publicly-owned banks have become more active. In parallel, the

Government is carrying out comprehensive reforms of the public administra-tion, which include reorganization of many ministries, strengthening their

planning offices, and setting up of a series of new state enterprises to

implement the new policies.

5. The 1971-75 development plan projected extremely ambitious figures

for public investment; in fact, they were challenges for the executing

agencies rather than realistic targets. The agencies' performance in the

first year, 1971, was rather disappointing, but 1972 was muchi better, with

an increase in investment outlays of over 15 percent in real terms. Indica-tions are that the 1973 expansion will be similar.

6. A new medium-term development plan for the 1975-78 period is being

prepared, built around the same objectives: achievement and consolidation

of the structural reforms, and a further reduction of unemployment and

underemployment. Increased importance is likely to be given to the produc-

tion performance of agriculture, where public support has been relatively

lacking in recent years as attention has been concentrated on the redistrib-

utive aspec:t of agrarian reform. Industry and mining are likely to retain

their investment priorities, with petroleum development a probable new im-

portant field (see paragraph 11). The Government meanwhile is taking steps

to strengthen project preparation and to set up an improved monitoring

system for execution.

7. The 1973-74 budget and investment program contained a significant

unfinanced gap, which would have to be closed by new revenue measure3 un-

less capital expenditures fall much short of the projected levels. Devel-

opments during 1973 have now made evideat the need for strong action in the

near future. The increase in current expenditures over the budgeted amounts

has been larger than that of revenues, leading to a further deterioration of

central government savings. Revenues from income taxes have been buoyant,

reflecting the high profits in the export industries but the yield from the

1972 tax measures has fallen short of expectations. Expenditures were higher

than foreseen, particularly for interest and defense.

8. Adding to the fiscal pressures are the sharp increases in world

prices for some imported commodities where Peruvian Governments have tradi-

tionally sought to maintain low consumer prices: wheat, edible oils, and

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petroleum. The most drastic case is that of wheat, which is almost entirelyimported and where the import price for 1974 is expected to be nearly threetimes the earlier long-term average. This means that despite a price increaseto consumers of over 40 percent, which was approved in January, the cost ofthe subsidy may still be of the order of S/.3.0 billion this year (almost1 percent of GDP). The decision of the Government not to let gasoline pricesrise to reflect the higher cost of imported petroleum may add another SI. 2.0billion to the subsidies and other minor items a further S/.1.0 billion. Interms of new revenues, the Government has so far only introduced a temporaryexport surtax, but the yield for 1974 is estimated at only about S/.l.0 bil-lion. This is clearly insufficient.

9. Heavy imports of capital goods, industrial and food products areneeded. Rapid export growth is thus required to avoid balance of paymentsproblems again becoming a constraint to growth. The Government is aware ofthis and is pursuing a vigorous development program in the mining sector,which is seen as the major provider of additional export earnings for theforeseeable future. Major mining projects underway are Cuajone, where theprivate developer (Southern Peru) had invested some $180 million by the endof 1973, and Cerro Verde, which is the first project undertaken by the statemining corporation, MINEROPERU. Together with some expansion from independ-ent medium and small mines, these projects should almost double annual cop-per output by 1976-77, increasing export receipts by over $250 million.MINEROPERU has several other large projects for which technical work hasbeen initiated and discussions with potential foreign partners are continuing.

10. The decline in the anchovy catch which took place in 1972 continuedthroughout 1973. The catch was only one-fifth that of pre-crisis years. Veryhigh fishmeal prices limited the loss of export earnings to some $100 mil-lion, however, and this was more than offset by price gains on other exports.International reserves had gone up by over $100 million by the end ofNovember. This reflects foreign investment in mining and petroleum explora-tion, and substantial non-project borrowing by the Government (see para-graph 14).

11. Petroleum could provide significant additional exports. The paceof exploration in the Amazon basin has been stepped up, and foreign com-panies are expected to initiate drilling programs this year. Further sub-stantial exploration must be completed before petroleum prospects can befirmly assessed. However, PETROPERU has contracted for detailed engineeringof a trans-Andean pipeline and signed preliminary contracts for the supplyof pipe in the expectation that the positive preliminary indications willbe confirmed. It should not be difficult to arrange the financing of thepipeline once sufficient reserves are proven and the Government hopes thatpetroleum can flow in 1976.

12. About two-thirds of 1973's petroleum needs were covered by domesticproduction. *The declining trend in production was reversed last year, and afurther increase in production is expected this year. This would reduce im-port dependence further. The higher prices expected to prevail for Peru's

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major export commodities would at the same time boost export revenues farabove earlier projections (contained in Annex I). Peru's balance of pay-ments situation should not deteriorate significantly through 1975 despitethe higher prices for food imports, provided that there is a moderaterecovery of fishmeal exports. The fishmeal prospects remain a majoruncertainty in the short term.

13. Since 1967-68, Peru has been able gradually to restore the confidenceof creditors and to obtain a rapidly increasing volume of new loans, total-ling over $500 million in 1973 (see Annex I, page 3). Although over half ofthis amount has been contracted with private financial institutions there hasbeen some improvement in the average terms of new loans contracted in recentyears, but debt service will remain high for the next few years. Taking intoaccount also the uncertainties introduced by t:he anchovy crisis, the Govern-ment has preferred to shift part of this burden forward beyond 1976, whenthe new exports (minerals, petroleum) are expected to ease the pressures on thebalance of payments. To this effect it has contracted in 1972 and 1973 asubstantial volume of commercial bank loans for refinancing purposes, inaddition to the new loans referred to above. This has helped maintain inter-national reserves, which exceeded $400 million at the end of 1973.

14. Actual commitments of project loans during 1973 of $273 millionfell somewhat short of the $295 million which had been projected in themost recent economic report, wlhile total borrowing was much larger thanforeseen owing to the Government's greater recourse to non-projectborrowing. Gross external capital requirements by 1976 are estimated at$550 million, including $470 million of new project loan commitments.Debt service is likely to remain at about 23 percent of export earningsthroughout the 1973-76 period.

15. At a meeting in June 1973 members of the Consultative Grou9 re-cognized the country's serious development ambitions, particularly com-mending the Government's effort to combine eccinomic growth with socialjustice, and indicated their willingness to extend financial assistance,in part on concessional terms, in support of these efforts. Under t'leConsultative Group arrangement the volume of project loans with a term ofseven years or more from governments, banks and international instit!itionsincreased from $113 million in 1972 to $181 million in 1973, consisting of$46.7 million from governments and government agencies (Germany, Japan,the Netherlands and Canada), $18.3 million from the IDB, $49.0 millionfrom the Bank, and $67 million from banks. Further project loans wi-_hshorter maturities were provided by suppliers ($85.9 million). EasternEuropean countries provided additional loans f'or $6.3 million. In additionto growing in volume, external project assistance is increasingly beingconcentrated on the list of projects submitted to donors through the Con-sultative Group. A further meeting of the Group is planned for later thisyear.

16. The Peruvian Government has shown pragmatism in its economicmanagement and genuine concern for a more equitable distribution of thefruits of development. The project preparation and execution capacity ofthe various public sector agencies is improving. While debt service isgoing to be a burden for the country for several years to come, Peru isclearly creditworthy for substantial amounts of additional borrowing,provided the required public revenue measures are taken promptly. Ylhereis a case for extended grace periods, so as not to increase the debt ser-vice problems of the next few years. There is also need for some localcurrency financing, as the resource transfer required to support the devel-opment program is not likely to be fully achieved if all lending is restrict-ed to the foreign exchange component of projects suitable for external fi-nancing.

PART II - BANK GROUP OPERATIONS IN PERU

17. The proposed loan would be the Bank's 27th operation in Peru. Withthe $24 million loan for the education project, signed on December 5, 1973,total Bank lending to Peru has reached $292.3 million net of cancellations.Of this amount, 40 percent has been for transportation (mainly highways andports), 30 percent for agriculture, 23 percent for electric power and 8 per-cent for education. In addition, a small loan was made for industry. IFCcommitments to date have been about $9 million - all in industry - of which$0.4 million is held by the Corporation. Project execution has beengenerally satisfactory. Annex II contains a statement of Bank loans and IFCinvestments as of February 28, 1974, and notes on the execution of ongoingprojects. Bank loans to Peru constitute about 10 percent of total outstand-ing debt, including undisbursed, and are estimated to have absorbed 5.6percent of the country's external debt service obligations in 1973.

18. In my report on the education project (Report No. P-1300a-PE, datecdOctober 30, 1973), I stated that further lending to Peru should await a re-view of progress on settlement of outstanding investment disputes. Sincethen, the USA and Peruvian governments have signed an agreement settling in-vestment disputes with regard to American investors, which constituted thebulk of the claims. In the case of expropriations affecting companies ofother countries, mainly in the fishmeal and fishoil industry, guidelines forvaluation of the properties involved have been established and the valuationprocess is well advanced, after initial auditing delays. In these c::rcumst^-ances I conclude that the Bank should proceed with the proposed loan

19. Besides continuing to review Peru's performance and creditx,orthinessas required for the meetings of the Consultative Group, the Bank also .Iamllsto send a mission in 1975 to prepare a basic report on the economy of Peru.This report will take a more comprehensive view of the Peruvian economy,analyzing prospects for the remainder of the decade. Towards this goal at)agricultural sector study is now being completed, and we are plannin,-; toreview the other productive sectors, notably industry, mining and enemgy Iia part of the basic report.

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20. At present two projects are at the appraisal stage. One is a com-

bination of road and river port development designed to complete the all-weather

road corridor across the Andes assisted by the proposed loan and to facilitate

river traffic in the Peruvian Amazon area. Ttle other is to expand the power

distribution network in the rapidly growing Lima-Callao area. Follcwing up

on the recent agricultural sector mission Bank staff are now assisting the

government in the preparation of projects for rural development in the Sierra

and irrigation rehabilitation in the coastal area to support the Government's

objectives of attaining a more equitable distribution of income and increasing

food production. Bank staff are also assisting in the preparation of a DFC

project designed to strengthen the capacity of COFIDE, the Government-owneddevelopment bank, in financing industrial and tourism development. In addi-

tion, the Bank is planning to participate in the expansion program of

CENTROMIN-PERU, which took over the assets of the Cerro de Pasco operation,

to expand copper production and exports. IFC is presently at an advanced

stage of negotiations for a loan and equity participation in the Cuajone

copper project and is actively exploring other investment possibilities in

the country.

PART III - TRANSPORTATION IN PERU

21. The Andes, the world's second highest mountain range, divile Peru

in three markedly different physical regions: the Coast, where most of the

industrial and modern agricultural development has taken place; the Andeanhighlands, with most of the miining activities of the country; and the sparse-

ly populated but potentially rich Amazon jungle region. The economic develop-

ment of the country has been influenced considerably by this geographicaldivision, and has resulted in a concentration of most of the economir activity

and wealth along the narrow coastal region, in particular the Lima-Callao

metropolitan area. The absence of adequate transportation infrastructure

linking the three geographic areas has largely contributed to this situation,

by limiting specialization and the generation of surpluses for exchange onthe basis of each region's comparative advantage.

22. Transport facilities are constrained by the difficult topography

of Peru. The Panamerican Highway, running the entire length of the countrv

near the coast, provides the backbone of the Peruvian network. Mlajor

secondary roads and two railway lines link the most important coastal cities

and the main ports with large towns and mining centers in the Andean highlands.

A few roads leading into the Amazon jungle have been under construction for

several years, but the topographic, geologic and climatic conditions have

largely contributed to the absence of arn all-year link between the coast

and the interior of the country. Aside from aviation, which provides limited

transport capacity, the only semi-permarnent connection between the three

regions is the Lima-Pucallpa road, which links the Lima-Callao metropolitan

area in the Coast to the Amazon river, and through it to the Atlantic Ocean.

However, some critical sections of this road, as described below, still

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need major investments in drainage, protective structures and other improve-ments to provide for an all-weather road and reduce the presently highmaintenance and transport costs.

23. The transportation system on the whole is in a rudimentarY condi-tion, resulting in high transport costs, long travel times, and considerabledamage to both vehicles and cargo. The road network comprises some 50,000km of roads of which only 5,000 km are paved. There are 35 ports, of which11 handle most of Peru's international trade. The railway system is limitedto two separate lines, which largely specialize in ore transportation. Inview of the unusually difficult topographic condition of the country, therelatively long distances involved and the still low volume of trafficbetween major population centers in the three regions, air transportation isplaying an important role in opening up new areas -- in particular theprospective oil fields in the Amazon jungle -- linking various popuiationcenters in the interior where extensive fixed transport facilities cannotbe justified, and connecting major urban areas along the coast, where surfacetransportation involves substantial travelling time.

24. On the whole, the present transport system satisfies the minimumrequirements of the coastal area, but is inadequate to the development needsof the mountainous and amazonic jungle regions. In view of the high cost ofroad investments in Peru, more careful screening of investment projects thanin the past is required and the Government is appropriately cautious in itsinvestment decisions for new roads. Contrary to the ambitious road develop-ment plans of the past, the Government's strategy is to give relatively lowpriority to new road construction in the short term, unless it is part of abroader development scheme, while emphasizing road maintenance, for whichbudgetary allocations have been increased considerably. As to the longerterm transport requirements, there is no doubt that substantial investmentsin roads will be needed in the coming years.

25. To carry out this strategy, the Government is increasingly focuss-ing on three key aspects that need to be strengthened: the transport plan-ning and coordination mechanisms, the maintanance level on existing roadsand the technical know-how to build roads in the Andean terrain. As to thefirst aspect, improvement has been noted since 1969, when coordination andadministration of the transport sector, which was carried out by variousagencies, was centralized in the Ministry of Transport and Communications.In addition, to strengthen the still limiited planning capacity of the Ministry,the Bank has been entrusted as Executing Agency of a United Nations Jevelop-ment Programme-financed project to assist the Government in reviewin- thepolicies and practices, evaluate the systems of data collection, existingtransport studies, and other related matters, in order to establish improvedplanning and review procedures, assist in the preparation of a five-yearplan, and train the Peruvian technicians needed to set up an effective plan-ning organization. The Bank is also involved, together with the Uniced NationsEconomic Commission for Latin America, in a technical assistance program,which will provide the necessary statistical information on a continuing basisfor transportation planning purposes. These efforts should help the Government

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in screening larger and more complicated investment projects, which will berequired to meet the longer-term transportation requirements of the country.

26. In the past the maintenance level of existing highway infrastructurehas been poor and there has been serious deterioration of roads throughinadequate and insufficient repair and seal coat:ing. This resulted frominsufficient allocations of funds for maintenance, partly because of pastfiscal stringencies. The Government hias near:Ly quadrupled the maintenancebudget since 1967 but, even so, the maintenance budget is still not largeenough. As the financial constraint is removed, other limitations, mainlyorganizational and lack of qualified staff are likely to prove to be morepressing. In order to help remove this constraint, the Bank financed underthe 1970 highway reconstruction loan a study of a maintenance program andthe related training requirements for such a program.

27. Finally, as to the development of technology for road con<;truction,the Andean highland configuration poses serious difficulties in road designand construction methods. The combination of unstable terrain, difficultseismic, geological and soil conditions and torrential rains cause frequentfloodings and landslides with consequent damage to the roads. Althoughsignificant experience has been gained in recent construction work throughthe Andes, particularly in the Bank financed La Oroya-Aguaytia road,extensive geotechnic studies are being carriecd out prior to deciding specificroad investments.

28. The level of road user charges in Peru is considered acceptablebut the structure of such charges needs to be improved. Although there isan element of progressive taxation in the present structure by taxing moreheavily gasoline in the Coast than in the Amazonic jungle, for example, itappears that charges paid by the Lima-Callao area do not cover the socialcosts generated by private vehicles used for urban traffic. Also, indicationsare that a large portion of truckers are not paying their share of roaduse since diesel oil is not specially taxed and these truckers are tie majorcontributors to rapid deterioration of the road network. At a step towardsimproving this situation the Government will, under the proposed project,carry out a study of the marginal costs of the various vehicles using theroad network in Peru, and the conclusions of such a study will he used as <ninput for revising road user charges (Section 4.05 of the Loan Agreement).

PART IV - THIE l'ROJECT

29. The proposed project would be the 12th in Peru's transportationsector receiving Bank financing; it was appraised in March 1973 and, fniicw'ina change in the scope of the project, reappraised in November 1973. loannegotiations took place in Washington, D.C. on March 11-15, 1974. Tli,Peruvian delegation was led by Mir. Franklin Caceres, Executive Direclor ofPublic Credit of the Ministry of Finance, and included representativc; ot t.ie

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Ministry of Transport and Communications. A Loan and Project Summary isattached as Annex III. An Appraisal Report (No. 302a-PE) dated April 11,1974, on the project is being circulated separately to the Executive Directors.

30. While the ports and railway projects have been carried ou. relativelysmoothly, experience with the road proiects has usually been difficult. Twoof the loans, totalling $15 million, were made for road maintenance (127-PEand 300-PE) with mixed results in the first and considerable success in thesecond. The reconstruction project, (706-PE), geared to build up rcads in theearthquake striken area and to provide technical assistance to improve roadmaintenance efforts, is now proceeding satisfactorily after delays _n theengineering work. Two road improvement projects, both for the Lima--Pucallparoad, have been plagued with difficulties from the outset. The first one(271-PE), which helped finance the reconstruction and pavement of about 170 kmof the Aguaytia-Pucallpa road, was only 80 percent completed when loan fundswere exhausted in 1967, mainly because of the unexpectedly difficult soilsand climatic conditions. At that time, because of the stringent fiscal situa-tion, the Government was unable to raise funds to continue the works. Exten-sive failures have since occurred in the work done. In May 1969, the Governmentappointed a Ministerial Commission to investigate the quality and condition ofthe works and the causes of their failure. On the strength of the Commission'sreport, the Government initiated legal proceedings against the consultant andcontractor, claiming that the failures were due to the use of unsatisfactorymaterials and inadequate construction methods. Pending settlement cf the dis-pute the Government suspended major works to complete the unfinished project.With the recent out-of-court settlement of this case, the Government is nowplanning to undertake the necessary works to bring this road up to the standardsoriginally envisaged. The second road improvement loan (425-PE) was made tofinance 60 percent of the construction v7orks on the La Oroya-Aguaytia segmentof the Lima-Pucallpa road. However, after large cost overruns, the Bank agreedin November 1969 to reduce the scope of the project, which was completed byJanuary 1973. The remaining works to complete the La Oroya-Aguaytia segmentare to be carried out in two stages, the first one -- between Huanuco andAguaytia -- would be covered under the proposed project, as explained morefully below, and the second one - between Huanuco and La Oroya - would becovered under the next Bank transport loan for Peru.

Description

31. The proposed project consists of:

(a) Construction and improvement of the road from Huanucoto Aguaytia, totaling about 219 km;

(b) Construction and improvemet of feeder roads, totalingabout 200 km;

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(c) Resealing of a 61 km stretch of t.he road from Neshuyato Pucallpa;

(d) Acquisition and utilization of maintenance equipmentfor the La Oroya-Pucallpa road;

(e) Consulting services for:

(i) Construction supervision of (a) (b) and (c);(ii) Geotechnical studies;

(iii) Preinvestment studies; and(iv) Study of marginal costs of road transport.

32. The main objective of the project is to open up Peru's hinterlandby significantly reducing transport costs along the road from the coast toPucallpa (and from there by river to the Brazilian border) and by eliminatingclosures of this road in extreme climatic conditions. The project would notonly substantially improve the link between the Coast and the Amazon jungle

but also improve access to a number of other economically underdeveloped areas

with rich agricultural potential, such as the fertile valley of the HuallagaRiver, where spontaneous settlements of peasants from the highlands havealready taken place with the road developments thus far in the area and some

Government assistance. Bank involvement in the project is also aimed atassuring appropriate design standard's, execution and ensuing maintenance of

the road. Most highway projects involve a tradeoff between construction costs,

on the one hand, and maintenance and vehicle operating costs, on the other.The minimum cost solution which has been worked out during appraisal of thieproject has resulted in relatively modest engineering standards for a numberof sections of the road, in the most difficult: mountainous stretches, whichwould call for an important maintenance effort. To meet this requirement,

the acquisition and utilization of the necessary maintenance equipment for

the 1luanuco-Aguaytia section and for the rest of the transport corridor upto La Oroya on the one end and to Pucallpa on the other, has been includedin the project. A maintenance program based on consultant's recommendationswould be undertaken to help assure a satisfactory maintenance level on the

entire road (Schedule 2, Part C 1 of the Loan Agreement).

33. The project will be executed by the Ministry of Transport and Communi-cations through its Directorate General for Land Transport with the assistance

of consultants, and is expected to be completed by the end of 1977. The GeneralDirectorate for Land Transport staff is of high technical quality, althoughshort in quantity, and they are expected to carry out the project adequately,with the aid of the consultants services provided under the loan. Also, the

new organizational structure, which combines highway planning, design,

construction and maintenance under one Directorate of the Ministry, willhelp improve performance. Past failures in highway construction in Peruhave been mostly due to the extremely heavy and unexpected magnitude of the

difficulties encountered. It is expected, however, that the experience gained

by all the parties concerned with previous construction works across theAndes -Ministry's officials, foreign and local contractors and consultants,and the Bank-- will bear fruit for the proposed and future projects.

Costs and Financing

34. The total cost of the project is estimated at $40.0 million equiv-alent, of which about $21.1 million are in foreign exchange. This costestimate includes contingency allowances for both increases in quantitiesand price escalation which amount to $3.5 million and $6.5 million, respectively.Price increases have been estimated at rates varying between 5 percent and 10percent per annum for the various components of the project during the threeand a half year construction period; increases in quantities have been estimatedat 15 percent of construction costs. The latter percentage, which is unusuallyhigh, is justified by the uncertainties involved in road construction in theAndes and past experience in earlier Bank loans for road projects ir. thisarea.

35. The proposed $26 million loan would finance the foreign exchangecosts of the project and $4.9 million of local currency costs, in line withour assessment that the resource transfer required to support the country'sdevelopment program is not likely to be achieved if lending is restricted tothe foreign exchange component of projects suitable for external financing.A grace period of five years, i.e., one and a half years beyond the estimateddisbursement period, is proposed for the loan, in view of the balance of pay-ments tightness which Peru is likely to experience until the mining projectsnow under construction, and perhaps petroleum prospecting, bear fruit.

Procurement and Disbursement

36. Construction contracts will be awarded after international competitivebidding except for the construction and improvement of feeder roads, whichbecause of their dispersed locations and small size, the Borrower would havethe option to carry out by force account'under supervision of consultants(para. 2 of Schedule 4 to the Loan Agreement). Bidding procedures azceptableto the Bank for the reconstruction works on the Huanuco-Aguaytia road havebeen already initiated but no expenditures have been incurred in the projectas yet. Procurement of equipment is to be made through international com-petitive bidding, with local suppliers to be granted a margin of preferenceof 15 percent or the customs duties payable by a non-exempt importer, whicheveris less. At present, major maintenance equipment is not produced in Peru.

37. Disbursements will be made on the following basis: (a) 65 percentof total expenditures for civil works contracts and of total expenditurescertified by consultants in the case of works carried out by force account:(b) 60 percent of total expenditures for consulting services; and (c) 100 per-cent of foreign exchange costs of road maintenance equipment. Based on theproject execution schedule, the Loan will be fully disbursed by mid-1978.

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Justification

38. The project is economically justified. Taking into account onlysavings in presently very high maintenance costs and direct users savings invehicle operating costs, the economic rate of resturn is estimated at 24 percent.This does not include other important benefits, such as time savings of driversand passengers, the reduction of traffic accidents, breakage and spoilage ofcargo, reduced inventory requirements for goods in transit and, more import-antly, the multiplying effects on productive activities in the areas to beopened up. As has been observed with the first phase of this project, it islikely that the proposedl project will have a development effect on the agri-culture production areas with widespread benefits to their population. Theimmediate effect of the proposed investment will probably be to lower pricesof agricultural and forestry products from the hinterlands to consumers inthe coast, and to reduce prices of industrial products from the coastalregion to Andean and hinterland consumers sinc-e the Peruvian truck industryis highly competitive.

PART V - LEGAL INSTRUR ENTS AND AtJTHORITY

39. The draft Loan Agreement between the Republic of Peru and the Bank,the Report of the Committee provided for in Article III, Section 4 (iii) ofthe Articles of the Agreement and the text of a Resolution approving theproposed loan are being distributed to the Executive Directors separately.

40. The draft Loan Agreement conforms to the normal pattern for loansfor road projects.

41. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOP4E*NDATION

42. In formulating this proposal, if has not been possible to take fullaccount of the consequences of recent increases in petroleum prices. However,available information indicates that the proposed loan remains fully justified.

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

Robert S. McNamaraPresident

AttachmentsWashington, D.C.

ANNEX 1Iage 1 of j page

COUNTRY DATA - PERU

AREA POPULATION DENSITY1,285,215 kes 14.5 millios (mid-197d) W Pe k.2of rable land

SOCIAL INDICATORS

Reference CountriesPeru Coloabia A n n

___ 20 1970 197 0 1970

ON? PER CAPITA 83$ (ATLAS BASIS) / .. 450 340

1,260 1,020

DEMOGRPAPHICCrudeibirth rate (per thousand) 39 /a 42 /b i 55 /e 21 20Crude death rate (per thousand) 12 7 11t 11 8 8Infant mortality rate (per thousand live births) 92 75 /b 70 58 28Life expectancy at birth (years) 52 75 58 7E61 68 71

Oross reproduction rate £ 3.1 /f 2.9 /o 3.1 1.5 1.4Population growth rate /1 2. 97, 2.8 7r 3.2 ].5 i.lPopulation growth rate - urben 3.6 7i;,i5 2 ..

Age etructura (percent)0-4l 44 /d 45 I5 46 29 28

15-6o 52 7d 52 /3 51 64 6365 and over 47- 3 7 3 7 9Denendency ratio / 1.5 7-,k 1.5 , 1.7 1.2 /k 1.0 /k

Urban population as percent of total 47 /d.h 52 /h,l 59 80Family planning: No. of accoptors cumulative (thoas.) , 316No. of users (% of married woen) .. ..

EMPLOYMENTTotal lbor force (thousands) 3,200 /d 4,300 b,500 9,0OO 12,600

Percentage emplyed in agriculture 5o 7a 45 55 15 30Percentage nemsployed 3 7T 5 9 5 1.5

INCOME DISTRIBUTIONPercent of national income received by highest 5% 50 /d 35 /m 40 29 20 /nPercent of national income received by highest 20% 69 7 60 7; .. .. 55 7;Percant of national incoee received hy lowest 20% 3 72 2 7i; 2 7 6 7;;Percant of national income reoeivsd by loweot 40% 97 _ 7 7ii .. .. 17 7Wn

DISTRIBUTION OF LAND OWNERSHIP5 owned by top 10% ofowners . 93% ownad by smallest 10% of owners 0.1

HEALTH AND NUTRITIONPopulation per physician 2,200 /o 1,920 /1 2,220 5oo 760Population per nursing person . 709 75 o 2,690 /p 940 1,530Population par hospital bed 590 /t 420 4 520 180 220

Per capite calorie supply as % Of requirements /5 88 /r 8o /s 89 117 iPer capita protein smpply, total (grams per dayY6 54 7T 55 7; 55 103 80Of which, animal and pulse 25 7T 24 7; 29 62 40

Death rats 1-5 yearn /7 10 7E,g .. 10 2

EDUCATIONAdjusted /8 primary school enrolln.ent ratio 89 Ic 72 /u 95 101 91Adjusted 7L secondary school enrollment ratio id 7 i1 7 22 41 45Tears of schooling provided, first and second level 12 12 11 12 15Vocational enrolloent as % of sec. school enrollment 20 /0 17 /u 25 55 22Adult literacy rate % ol 72 v .. ,. .. 94

HOUSINGAverage No. of persons per room (urban) .° /d .. .. .. 0.9Percent Of occupied unite without piped water 85 76 .. .. .. 52/wXAccess to electricity (as % Of total population) .. ..Percent of rural population connected to elactricity .. ..

CONSUMPTIONRadio receivers per 1000 population 101 135 105 370 214Passenger cars per 1000 population 8 17 7 55 70Electric power consumption (kwh p.c.) 297 /d 392 378 828 1,502Newsprint consumption p.c. kg per year 1.6 3.3 2.5 10.8 5.8

Notes: Figures refer either to the latest period. or to account of environmental temperature, body weight, andthe letest years. Latest periods refer in principle to distribution by age and sex of national popalatione.the years 1956-60 or 1966-70; the latest years in prin- /6 Protein standards (requiremente) for all countries as estab-ciplo to 1960 and 1970. lished by USDA Economie Research Service provide for a minieum/1 The Per Capita G0P estimate is at markct prices for allowance of 60 grama of total protein per day, and 20 gramse of

years other then 1960,celculeted by the sane conversion animal and pulee protein, of which 10 grame should be animal

technique as the 1972 World bank Atls. protein. These standards are somewhat lower than those of 751 Average number Of daughters per woran of reproductive grams Of total protein and 23 grams of animal protein as anoge. average for the world, proposed by FAO in the Third Wo-ld Fooda Population growth rates are for the decades ending in Survey.

1960 and 1970. /7 Some studies have suggested that crude death rates Of ^hildren/5 Ratio Of under 15 and 65 and over age brhckets to ages 1 through 4 may be used as a first approximation index ofthose in labor force bracket of ages 15 through 64. malnutrition.

a FAO reference stiadardo represent physiological re- /8 Peroentage enrolled Of corresponding population of school agequirenents for normal activity and heelth, taking as defined far each country.

/e ENcluding Indisn Inngle population, estimated at 445,000 in 1960; /b Excluding Indien jungle popoletlen estimeted nt100,830 in 1901, data included an upward adjustmeot for under-regis.ration; /c 1955-61; /d 1961;

/e 1905-70; /f 1960-65;I /j 1961-72, include estimate Of migralnts of ungle tribes, 1972 census result' It apitale ofdistricts and those populated centers with such urban characteristics as streets, plazas, water supply systems,sewerage systems, elactric lignts, etc., excluding indien jungl population and includes adjustment for under-enuveration

/i 19n)1-67; /5 iN estimate; /k Ratio Of population under 15 sad 65 snd over to total labor force; /1 1969; Is 1970-71,economically active population only; In 1964-oS, houseolds snly; /o Include midwives; /p EaclAdlng midwive-;

I 19o4; or 1960-62; Is 1968; /t 1962; 7u Including evening connols; /v 17 years and over; /w Urban and rural;

R2 March 26, 1974

ANNEX I

1Page 2 of '3 pages

PERIl

ECONOMIC DEVELO1PM1ENT DAV1A*

Attic,, 1 Pro j tted 1901 I965- 1970 1973-

I% lOrS1 1 9711 1973 1 97 5 1978 1 986 1970 1 9 75 i978 1716] 1 9711 97 8

NAT 1011A1 AttItUlI A- Antrc 0 I0's1967-b9 Prices I EehncRates Areg Ana Growth Rest- As- ~- Et tee of CRY

Gron, toes-stie p,odi 7 665 4,64 3 5 554 0677'2 7,449 9,661 3 .7 3. 7 6.0 6.9o 1 05 .9 90.0o 97.5

CGjo- from Tones c t i (.1 h tli20 -114 1 13 124 17 1 731 I 5. 9 7.0 75

Cros . o.s-st ii I--twos7 4,5239 5,6688 6.74 7 7 ,6161 9.1i92 6.5 4 .6 6.1 6. 1 GP0 1110. I no.2

o~p-tics (joe INc71 1 079) 165 12 14 [,411I 1,600 12 .5 311 7.7 5 .7 14 .8 17.0 17 .t

lt\ P IrtlI "ll tlrlLai, Inoi - _ Si - 7 74 I1I114 -1 1_25 I-l 160 -0 0 50 7.6 7.6 -,5 66 -6 6.1 - 19 .7 -17 Rtsetioe tip 15~~~~~~~~~~~~~~~~i - 144 90) 14 5 0 I 1. .6 1T

Cee-ettpti1oo 'oend i t 37 :, 7 16 4 ,ii7 5,18 6.,659 7,08732 7 .3 5 .3 6l.7 5.9 79 .9 84 .1 0.'.

losmil"(lot! "ors) s9 648 7i 17 9 19 1,094 E,7.70 7 .3 -3. 4 9.~0 6. 7 1 8. 9 17~. 6 1'.

Joniestit Ste s, ItO~~~~~~~~7W 01 3 06 1 8729 9572 1 ,-270 3 .1 1 .22 760 6.7t 717. .2 I5 . 13.4

N;n etai "I. I 045 6 ", 7 7316 7 71 7329 8311 1 ,(5 0 2 .2 0.9 1. 5 7 .6 108. 6 1 3 .6 11I.6

MIERC1499DISO I MOE00 A--nl imte at Ctirrens Price As P-eren of Totl1

-- t:'Ilt1

' g,st y 151 2733 187 318 406 516 13.9 -4.3 16.8 I0.3 35.5 36.7 36.1,

f-r I I. t -,u.. .. l 1 65 740l 257 460 564 776 9.4 1.4 17.0 9.5 30.0 36.7 4 7 .9lee-.ot.r,ltes good- 2~~~~~~~7 1 2 >z 7 90 98 197 17.2 -9.6 5.9 .1. 17.7 10.6 ,.l

I_____ 36 5 6 182- 1 4o 153 165 2-2.1 '166 -3.4 2.5 0.5 lt.I1

11.9s.c oh ..epcrts.oSl 425~~-T 653 7110 I 014 1,37 1 1 ,514 17.9 1.T1. TOO100. 108I.0 c 10.1n

M11-'A iipout 11 287 445 4 67 5371 916 11.6 10.! 3.6 04.8 42.5 45.3 5 5

F -hp i dcc lit 186 374 267' 347 377 74.0 131.3 - 7.1 14.1 3335 -7. 11

A,tIer -(Ies t,'ccdit- I1 71 1 672 160 174 171 177 -9.3 -0.7 1.3 -0.3 34.9 15.5 19).5

CsO.r47 50) 62 05 112 173 7.7 4.4 12.5 1-5 ' 65 8.17 IO.o

ltIn--, cl. toyed -:,o 496 607 1,0134 9197 1, 1894 1,639 9 .7 0.6 2.7 19.7 190.7 1171. l o.ot

M-rsh-dise Trade It-1llcsAerg 1967-69 = 10(1

RoErs,. P,icc- odes 70 86 172 173 129 143 7.4, 7.2 1.1 3.0

eI~p-c Pri.e leden I0 I106 140o 108 113 172" 7.1 -I.-, 215 .

Teso Tcod, loden 7o 01 "I7 114 114 117 5.1 s.S -1.1 0.5

Esperi Veli-n ledo- 70 91 102 102 Ill 135 3. 2.3 1.7 5.

V34LPE ADDE0 BY SF4201 AnsaI Data as 1967-69 Pricee 4 Eechenge EaLse

Aercolir C (Islic59 1 4 . Oi45 1 ,056 9 ,137 4 1.9 0 7 I7 3.4 233 1t ~ 14.1I

1 .destcs . it iitei e. C..i s.: resL' 1I197 1,5 19 IlOlt1 2 401 100 3 ,6 11 6.7 6..7 5 3 26 3,.J 40. 8

--cc-. cc fl3.Q~~~~~~~~~61 2J j 8 2 6I 319 5 1 515 1993 2.3( 4.9 14 4 ____ 1

icril ~~~~~~ ~~~~~~ ~~3,673 4616 5,4589 6 ,6 14 7 3l 9 851 6.2 3 5. 6 .0 100.0 100 0 100.0

P10418H fINANCElCorjsr>7 Govcrinoot.) 7, Prcent ei' (:Di)

ihicree..t Rnc.'ipts ft "]7 C1 7ij 7 2t~ 1jl , r- (' 59 .1.

Oilier Peblis S~~oce ., .. I 710 . 6. 7 i .1

Bodgilc y Sector Oososttooi8.. .. 779 5111 191 I. 7.s 4

DETAIl. 08M Ai 1967-69 POOR A, Eneet- eE 3ectal

CUR18891 9ErENITIURE DIIEAIL,8 Ac-1lP-i ig' PURLEC SECTOR Last Plan Ee., Plain Lass PIien New P1-t

cAn 7~. Total Current Epncl) 195 970 49 1 1972 197l73 7 INVRSTMENT PROCRAML1/ (119 1 771 1973-7(. 1 19312-() 1721 71i

iidii,-ati i-s.n 2 8.1 97.4 29.9 90 coTSotr1 T),1

l3thnr jo,3 1--ic-s. 17.1, 10 1 11 4 Agreulttire a,cd 71 ic 9,n 06 TS)e I. 44

Agricclli4e.. .C 3 5 3 I 9 TsoLr n ore 9751(tl-tr Eer-ess.,c :bitt-ri3o:; . 2 3.9 5 2 9 Mi'Eing and Pctmletra. 56 133 9 11

Deln655e -s> 1's line .. 38. 1 39.1 179 . 32 t Tr-insprt, I, Oomuni-a 37 133 73 1

Aceein3crcitr~i-- attl CElir I j .5 15- 9 33 J, -> 3 Unoll cct,laed 1 7

515i 2 9 2

(Ytl Sirens .pc.1t-c 0. 11113 1 16013 1003 1 Tetal Nx~eintiiueoc -907e 113310

SELECTEDi IND1ICATORS 1961- 1965 1970- 1973-

(colceleteil from 3-soar overopad data) ~~~~1966 1970c 1 975 -1976 Pluelis Sector Sano'gS 371 503 611 5

Eomstics Berroteinm (0e4) gt1 273 71I Av-r;tg 1C08 3.2i( 2i 5 Porsige Becrreing (set) 152 346781

lepocs .P ioti' ly 7.4 395 4 > 0 1,O-- (lOtto is, turrent UY-~) 0(6) (238)

M.-rEinol DI-coiol 7:S! Rg ase 4.13r9 1.,)1. 00 2 13 42 Rtol Fiinancing to92O 13 103MMirgee INSoti-et S.vio5e Rs ase 0,116 0.113 11.03 0141

LABOiR FOIRCE ANli Tetal l,abor P,cr.. Vale AddIrd Pec Weekee (1987-69 Pci cCs4Eoi.Rts

OUTPUTr PER WORKFR InMillions 4. of Tosa t 8 961-71 In U.S. Dollars Portentjo AvoreR 1963-71

1963 0971 1-96 1 1-9 71 Crowtli Rats 1-961 1971 19 6:, 1971- Ceew.li, Raso

Ar:ut'-oid Fishing TYOP1 T75B r4q7Th LuS jItdaso.ry. MdsSng 4 osr. s6 7.67C) iO017 3553 533 47 c-

Irs's> 3~~~~~~~~~ ~~~~~~.90 1.94 '73.7 3,2.7 4.0 1,962 2,355 1394 176 .

I noll,ocatsd 1.2 O.11, 3.7 3.3 1,756~ 1,957 199 j1,6 0.0

Tcoln on olninage 3.25 1.1,1 1iX3.0 3130.1 3.2 - -

ems applis;ihIo e staff esmsout osaileblo - il or megiblo

-,e t oval lblc ssperat,in- lens than half shebie i-csithd ie ea oteLlot noE show

a! Pore's mole Sop-ict of leodstffo, hesat end meat. ace Occludied nosng let:oi'-dilto good -

j iyse,ptistIolly high on accoeunt of earthqu.ake asesistance.

j c1rth ie 1572'-33 fitlhimg ocisis.-

7/ The diistcibstio:i iti tho budges is prel-isiinary; "AdmfniErtraien aid ltlter ,cill lie beer, tdie ts1 O-ene high-r

j -clueimsc of capitol Lrcnsfers te sLate banke, but isicfuding ether fioencie1 investrent.

oThi -reotie-s fec 19.1-70 -cre made in Map 1973 8-or the e--eic repoorr 1134-PER) S-i lOgO 3 fcr col osssi the impart .i sli, prie, iene_(1c I

PERU ANNEX I

Pa',tg 3 IIAABIE IP PSNETS,EXTRNA ASISTNCEAND DEBT

(amuns i mllinsof U.S. do1llas- t curen prices)Avg.Asclmoutrh Ratc

Actual Entineted Pr ce0

1973-

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1918

SUMMIZYt ISAANIASL El PAYtNSI'S

Euperti (i.-l. IFS) 999 1,050 1,224 1,ti68 1,1)4 1,294 1,329 1,403 1,5)1 1,709 1,832 7.2

loer i-trl. Sf53l 909 895 972 1,3 i :50 j_j87 1,7 1.58 1,308 1. 23 t_951 8.7

0c---,lr ctlacc- 14-5) 90 155 252 30 4 7 -142 -181 -157 -Ill: -1 I>~

mI , r-ur (e,, t) -73 -72 -67 -69 -74 -90 - 5f -61 -76 698 -100 2E.0

Si-rt leI,11.tes1 Iscn - 76 -113 - 6 3 8 - so - 97 -105 -110 -120 -130 -542 7.3

0-ricti r:,fr (ct 37 32 82 3_9 40 35 35 35 35 35 35 -

lal-su ott lucre usAccastis - 2 2 201 - 38 -- 0A -13 5 -262 -317 -318 -297 _n3

Pricier Di-iLŽ I2eetuu0 6 -70 21 48 140 ill 116 116 120 120 10.2

Offi-in .tal lCr,,i 7 4 12 15 22 2) 16 10 2 -

Itisttscuomc ',tu ~~~~ ~~215 195 167 193 294 373 310 335 395 4i3 445 6.2

-103 - 9 -122 -154 -163 -222/u -182 -202 -2,7 -234 ~ 232 6.5

N,~~ Di~!,---Ll ~ 112 116 45 39 131 - i5 128 133 178 1.79 213 5.9

C'~~Pit"l T-'--!".. -- i. 66 -80 69 -99 -79 LcblI,.-iopitzil Troonicrioss ,,.c.i. - -~~~~~-257 6J 421968 1969 1970 1921 1,721

DIRT AND 2D8BTSERhICi

GROTAND 2 LOAN iO0I1TMPNTS Public Debt Out. 4 Dinburud 744 853 895 1,016 1155 I.

Official1 Pr-iits 6 1-,-t-like 4 I1 23 22 12 -Interes u- Public Debt 43 47 46 60 52

Rspay-etu ou Public DOhr 103 79 '22 1 51, lSI

Id blie M&l4t L--t TatlOOi Sb cvc 1P 46 .122 166 214 ,t '

SIBR - 30 - - 49 lie otSrie(o) 30 25 21 9 17

I DA - - - -- - Tocal lobt Soreje (net) 176 142 t89 22:3 212 i

0,-her SulLiIlat-ral 6 - 15 - - 18

io-c--eei 71 16 51 71 194 80 Bord- on fuport E-roings 7

Suppllc-e 15 9 1) 69 67 86

Foascia1 loni.uta~tinsn 77 15 2 79 196 275 Public Debt Service 14,6 1 1.6 3.2 20.5 1?'.

B-cdu - - - - - - Total ebt Sereice 17.6 14.0 13.4 20.9 2i ,5

Pu,blic Loas- .e1 4 52 65 30 20 .. TDS+Si-tslvect I ncutn1- 25 .2 74.0 :0.9 24.4 24.5-

Total Pohil- 54LT L-a- 163 122 178 249 438 SlD/.A-orge Te-s of Public IcOt

Actual Dci Ontutoeing on Ic. 31, 192

EXTERNAL DEBT Dinbu-ud Ouly Porceet let. uu 7. 'lo Yoo De4D 6.8 6.2 5.4 6.2 7 .6

Wadi Dank 13) 11.4 A.-ot. as %I Prior Yea DO4D 16.2 10.6 :4.3 17.1 14.2 K'

10A4 Other WlaLillocere1 25 2.2 111RD Debt 0et.k D-ubu--d 417 122 1:4 129 131 itt,

Gevrrveieccu ~~~~ ~~~~~206 25.7 ' u I Public lDebt 4433 15.8 14.3 13.8 13.2 11.5. lv.I.,

Suppliers 272 25.6 a 7. Pblic Debt scrvic 1.6 11.6 8.9 6.9 7.1 5 .'

Pi-on-1a I -ot telLicn 290 25.2

loom 14 1.2 IDA Debt Ou~t. 4 Diuhars-d - - - - -

Publ-e r,loUsuei 124 10.7 " a 7PoIbli, Debt 56 - - -

Totl. PebILc M11T DebtL 1,152 110.1 ' n7 Public Debt Serice--

Other M44T Debis

ShortL-toe lobe (dinb. oclIy)

-c uppli-ablovet available

nil c negligible

fi -1ed-a 1-...-eo,sn ipr -in, e r-pl-acm-t oP cente loan uitkhesuse b-te- tens.

b/ Catprin- ibe item Capitol T-snaceoi ...c...i. (inI. e-ror 8 oi-nion) and th.nge in Net Res- v a n iasma-ti-n in yet ava ilable t -p-taer Lbe

r'CIt prjoicec - included Is pogn 2 and 3 of thEn cones or the coos made fone th most recent ec..e.mic report (136-PE) In eary 1973, and they ar here -op-,d-nd

a-ei-gad with ee- c-rptien- the e-igi-al proJected balance of py.m-tn values for 1973 hove been replaced . ethe o1bos table by tHe jest eurioete caren

avilable. All pr,oje-td value rUns reflect the .s....pties made at the tine, aud neither cake iutoan--ntsohb-quemttbonRen iv cm-dity pri-e ne Lli.',n

recet develpments ultb renper tc Eke fiu--el en,tlok. While material for o fell recud proj-etio oilS only be a-ilabe tee Lthe acne e n i -innio

(sebedeled far April) , preliminary balance of pyeycoi studies iudicate that the higher p,,iuc- thac ar enpe,ted So prevai for- Pets's en.j- enp-cts Ir l-7ly

ompenuate ic 1.974 ned 1975 for tbe higber import prices of pet-1-eo and food prodects, provided that there is ait lest a modes,t tenc-ey of vhe -nlny catch nod

fisbh-,o1 opooe Pro rte cery lo- 1973 leve. Whule ...ouiderable asertainty sEllS surrounds the latter --sio,reet studies appear to lIne genus' Pe o

epics in ibi respect.

ANNEX IIPage 1 of 3

THE STATUS OF BANK GROUP OPERATIONS TN PERU

A. STATEMENT OF BANK LOANS (as at February 28, 1974)

Loan or US$ millionCredit Amount (less cancellations)Number Year Borrower Purpose Bank Undisbursed

22 loans fully disbursed 206.8

410 1965 Republic of Peru Irrigation 6.5 O.d(06 1970 Republic of Peru Roads 30.0 25.6933 1973 Banco de Fomento

Agropecuario Agricu,llture 25.0 25.0949 1973 Republic of Peru Education 24.0 24.0

Total 292.3of which has been repaid 05.5

Total now outstanding 206.8

Amount sold 10.3of which has been repaid 17.6 0.7

Total now held by Bank !/ 206.1

Total undisbursed 75.4 75.4

Note: No IDA credit has been made to Peru

1/ Prior to exchange adjustments.

ANNEX IIPage 2 of 3

B. STATEMENT OF IFC INVESTMENTS (as at February 28, 1974)

Type of Amount in U$ million

Year Obligor Business Loan Equity lotal

1960 Industrias Reunidas, S. A. Home 0.3 0.3

Appliances1960 Luren S. A. and

Ladrillos Calcareos, S. A. Bricks 0.3 0.3

196O Durisol del Peru, S. A. Building 0.3 0.3material.s

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

1962; 1968 Cemento Andino, S. A. Cement 2.2 0.2 2.4

1964; 1967 Cia. de Cemento Pacasmayo Cement 1.1 0.5 1.6

Total gross commitmentsless cancellations,tenIinations, repay-ments and sales 8.2 0.4 8.6

Total commitments now heldby IFC 0.1 0.3 0.4

Total undisbursed

ANNEX IIPage 3 oDf 3

C. PROJECTS IN EXECUTION 1/

Loan No. 418-PE: San Lorenzo Irrigation Project; US$11 million Loan of June18, 1965. Closing Date: December 31, 1974

Due to inadequacy of water supply, the Bank agreed to reduce theproject area; consequently, the project was redefined and the original loanamount of US$11.0 million was reduced to US$6.5 million. (See Memorandum tothe Executive Directors "Peru; Proposed Change in Loan 418-PE", February 28,1968 R68-33). The closing date, originally June 20, 1967, was three timespostponed, first to June 30, 1969, then to December 31, 1973, and then toDecember 31, 1974. The project has encountered a number of difficulties,both administrative and technical but these problems are being overcome.Project management has recently been strengthened and the last part of theproject related to the drainage scheme is now progressing satisfactorily;disbursements have also picked up. Undisbursed funds amount to US$0.8 andthe loan is expected to be fully disbursed by the revised Closing Date ofDecember 31, 1974.

Loan 706-PE: Road Reconstruction Project; US$30 millionLoan of September 14, 1970; Closing Date: September 30, 1975

This loan was signed only three and a half months after the earth-quake in the Callejon de Huaylas. However, the identification, fea;ibilitystudy and final engineering of the roads to be improved have taken rmuch longerthan expected because of a too optimistic assessment at the time of appraisal,because of administrative and coordination difficulties in connection withthe on-going decentralization of the Central Government, and because of prob-lems with the consultants engaged to study and supervise the project. Con-struction of a short section of road near Huaraz, the capital of the region,is well advanced. W4ork has started on the two remaining sections along theCallejon: bidding for the access road was already carried out and constructionof this last section should start soon. The road reconstruction element ofthe project is expected to be completed by the end of 1976, 15 months laterthan the Closing Date of the Loan.

Loan 933-PE: Agricultural Credit Project; US$25.0 million Loan of September12, 1973; Closing Date: December 31, 1977.

The Loan was signed in September 1973 and became effective on December12, 1973. BFA has commenced field work, such as sub-loan appraisal, and pro-gress is satisfactory.

Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973;Closing Date: June 30, 1979.

This loan became effective on March 5, 1974.

1_ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any problemswhich are being encountered, and the action being taken to remedy them.They should be read in this sense, and with the understanding that they donot purport to present a balanced evaluation of strengths and weaknesses inproject execution.

ANNEX IIIPage 1 of 2

PERU - SIXTH ROAD PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Peru

Amount: $26 million equivalent

Terms: Interest rate: 7-1/4 percent per annum.

Amortization: In 25 years including a five-year periodof grace.

Projectdescription: The project will consist of: (1) Construction

works in the Huanuco-Aguaytia road; (2)construction of about 200 Km of feeder roads; (3) amaintenance program for the La Oroya-Pucallpa road(including the Iluanuco-Aguaytia section); and (4) con-sultant services to assist in supervision of thE aboveitems and carrying out technical and preinvestmentstudies.

Estimated cost: US$ millionTotal Foreign Local

Civil worksHuanuco-Aguyatia 20.5 10.3 10.2Feeder roads 2.5 1.0 1.5

Consultant services 4.1 2.5 1.6

Maintenance 2.9 2.5 0.4

Contingencies 10.0 4.8 5.2Total 40.0 21.1 18.9

Estimateddisbursements: Amounts to be

disbursed (in US$)Fiscal Years Annual Cumulative

1975 4.1 4.11976 8.2 12.31977 8.0 20.31978 5.7 26.0

ANNEX IIIPage 2 of 2

Procurementarrangements: Civil works. - International competitive bidding except

for feeder roads which may be locally advertised or, atthe Borrower's option, carried out by force account.

Maintenance equipment. - International competitivebidding, with local manufactures having a margin ofpreference of 15 percent or the level of customs duties,whichever is less.

Technical Assistance(Consultants): Consultants will be employed to assist in (1) supervision

of civil works, procurement and utilization of maintenanceequipment, and (2) carrying out geotechnical studies ofthe Huanuco-Aguaytia section, detailed engineering of theTarma-Oxapampa road, a study of marginal costs of roadtransport in Peru and other pre-investment studies.

Rate of return: 24 percent.

Appraisal report: Report No. 302a-PE, dated April 11, 1974.

, o;-'- 77' > 7i' 73- 71'

A., '*' --- 0\ I -O' 0So O'

aR SN Si v~~~~~~~~~~~~~~~~~~~~~~

jA ,M E n I c 4 tT C O L O /

E C .AU A D 0 R i

La K,' s\' 2' -<, /,'> ,, < s,*

Aa~~~~~~~~~~~~~~~~~~~I

a-El Ca.aI,dEl All-t T- p_, , , 1 4 ,/

la Ta-Ng. A 0 f

S ~ I

D' ~ ~ ~ a Oln, ~ a'. D /> ,. ' o

S) '_ a| . .. OinaI i )

,aa 1°-R Ia' - ii<m

§ NPORMT EIPOE -Chal <lt,, ,po} ,, 'a-*I,

6' NOT 94 ' I THE PN

C' Cw,; . <$'~

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

C, . 00-4D0, ,At <tr

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