Report No. 549a-PE

Agricultural Sector Survey FILE COPYPeru(In Two Volumes)

Volume 1: General ReportMarch 14, 1975

Latin America and Caribbean Regional Office

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Developrment Association

This report was prepared for official use only by the Bank Group. It may notbf published, quoted or cited without Bank Group authorization. The Bank Group doesnot arcept responsibility for the accuracy or completeness of the report.

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CURRENCY EQUIVALENT*

Current Unit : Sol (SI.)

US$1 = S/.38.70

Soles 1 = US$0.026

Soles 1 million - US$25?840

US$1 million = S/.38.70 million

* Above rate applies to some 85% of total foreign exchange transactions

(largely trade) and is used normally for conversion in this report.

There is also a draft market rate of US$1-S/.43.38 which covers some

15% of foreign exchange transactions.

AGRICULTURAL SECTOR SURVEY

PERU

TABLE OF CONTENTS

Volume I

GENERAL REPORT

Para No.

GLOSSARY

PREFACE . ..................................................... i - vii

SU 4mY ...................................................... i - x

GENERAL REPORT ............................................... 1 118

A. Background .1 - 9

Supply/Demand Situation and Trade .................. 2 - 4Employment and Resource Base ....................... 5 - 7The 1968 Revolution ................................ 8 - 9

B. Objectives .............................................. 10 - 16

C. Recommendations ......................................... 17 - 113

Resource Development ............................... 18 - 60General ....................................... 18- 21The Sierra .................................... 22- 32The Selva ..................................... 33 - 49The Coast ..................................... 50 - 60

Public Administration .............................. 61 - 68Land Reform ....... ............ ..................... 69- 81Marketing and Price Policies ....................... 82 - 92Agro-industry ...................................... 93 - 100Credit ............................................. 101 - 113

D. Projects Identified by the Mission ...................... 114 - 118

Maps: IBRD - 10841IBRD - 10838IBRD - 1u840IBRD - 10837

TABLE OF CONTENTS (Continued)

Volume II

Annex 1 - Agriculture in the EconomyAnnex 2 - Natural Resources and Farming SystemsAnnex 3 - Organization and Administration of the Public SectorAnnex 4 - Agricultural Education and ResearchAnnex 5 - Agrarian ReformAnnex 6 - Agricultural MarketingAnnex 7 - Agro-industryAnnex 8 - Agricultural CreditAnnex 9 - Forestry

Statistical Annex

Mission Contacts

GLOSSARY OF ABBREVIATIONS

BCR - Banco Central de Reserva- Central Reserve Bank

BFA - Banco de Fomento Agropecuaric- Agricultural Development Bank

CECOAAP - Central de Cooperativas Azucareras delPera- Central of Agricultural Sugar Production Cooperatives

CENCIRA - Centro de Capacitacion e Investigacion para la Reforma Agraria- National Training and Research Center for Agrarian Reform

CIDA - Comite Interamericano de Desarrollo Agricola- Interamerican Committee for Agricultural Development

COFIDE - Corporacion Financiera de Desarollo- Development Finance Corporation

MRLAJAR - Direccion General de Reforma Agraria y Asentamiento Fairal- Directorate General for Agrarian Reform and Ruiral Settlement

DGPA - Direccion General de Produccion Agraria- General Directorate for Agricultural Production

DGC - Direccion General de Conmercializacion- Directorate General for Marketing

DGA - Direccion General de Aguas- Directorate General for Wate- Resources

DFC - Direccion General Forestal y Caza- Directorate General for Forestry and Wildlife

DGIA - Direccion General de Investigacion Agraria- Directorate General for Agricultural Research

EMDEPALMA - Empresa para el Desarrollo y Explotacion de la PalmaAceitera, S.A.

- Oil Palm Enterprise

ENCA - Encuesta Nacional de Consumo de Alimentos- National Survey of Food Consuiription

EPSA - Empresa Publica de Servicios Agropecuarios- Public Enterprise for Agricultural Services

IIA - Instituto de Investigaciones Agro-Industriales- Institute for Agro-industrial Investigations

INP - Instituto Nacional de Planificacion

- National Planning Institute

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JURPAL - Junta Reguladora de Precios de Productos Agricolas Alimenticiosde Lima Metropolitana

- Control Board of Food Prices for Lima

OGIP - Oficina General de Ingenieria y Proyectos- General Office of Engineering and Projects

ONEC - Oficina Nacional de Estadisticas y CensosNational Office of Statistics and Census

ONERN - Oficina Nacional de la Evaluacion de Recursos NaturalesNational Office of Evaluation of Natural Resources

ORDEZA - Organizacion de Desarollo de las Zonas Afectadas- Regional Agency for Development of the Earthouake Zone

OSPA - Oficina Sectorial de Planificacion Agraria- Agricultural Sector Planning Office

PIAR - Proyecto Integrado de Asentamiento RuralIntegrated Rural Settlement Project

PID - Proyecto Integrado de Desarrollo- Integrated Regional Development Project

SAF-CAP - Sistema de Asesoria y Fiscalizacioqn para las Cooperativas deProducciAn

- Advisory Services for Sugar Cooperatives

SAIS - Sociedad Agr{cola de Interes Social- Agricultural Society Interest

SENAFER - Servicio Nacional de Fertilizantes- National Fertilizer Service

SIMAP - Servicio de Informacion de Mercadeo Agropecuario- Agricultural Marketing Information

SINAMDS - Sistema Nacional de Apoyo a la Mobilizacion Social- National System of Support for Social Mobilization

UNA - Universidad Nacional Agraria- National Agriculture University

ZA - Zona Agraria- Agrarian Zone

PREFACE

i. This report presents the findings of a mission which visited Peruin the fall of 1973. 1/ It is intended to provide a basis for discussions be-tween the Government, the members of the Consultative Group for Peru, theInter-American Development Bank, and the World Bank concerning foreignassistance for the agricultural sector of the Peruvian economy.

ii. The report is presented in two volumes. The first presents theGeneral Report, 2/ which outlines the central observations leading to policyrecommendations and project proposals. Much of the descriptive and analy-tical background for the General Report will be found in a number of self-contained annexes (Volume two) on such topics as the role of agriculture inthe economy, the sector's resource base, government institutions, agrarianreform, marketing, agro-industries, forestry, and credit. Volume two alsocontains the basic agricultural statistics, and a list of the contacts themission had while in Peru. A greater than usual effort has been put into thestatistical annex, 3/ inasmuch as comments on discrepancies and the strengthof the data have been incorporated.

iii. The mission took place in the context of a recently enacted policyof collaboration between IDB and IBRD in the field of agricultural sectorstudies. IDB officials took part in the mission's briefings and in discussingthe draft report; the IDB marketing specialist participated in the mission.

iv. A first draft of the report was informally discussed in July 1974and a revised version was submitted in October 1974 for official comments.Written comments were received and discussed in February 1975. In most cases,differences in view could be narrowed down and resolved by changes in the text.In a number of cases, it was agreed that it would be preferable to includean explicit statement on the Government's position.

1/ The mission members were

- E.P. Riezebos, Chief of Mission, IBRD- P. Bargholtz, Deputy Chief and General Economics, IBRD- Mrs. M. Sanchez-Gavito, Logistical Support, IBRD- J. Andreu, Agricultural Economics, IBRD- M. N. Alexander, Marketing, IDB- J. Allchin, Agro-Industries, Consultant- J. Beausoleil, Agricultural Credit, Consultant- M. Bueno-Gomez, Agrarian Reform, Consultant- K. Goossens, Irrigation, Consultant- H. Gregersen, Forestry, Consultant- F. Johnson, Crops and Livestock, Consultant- P. Malone, Government Institutions, ConsultantMiss J. Dino made all arrangements before and after the mission,including typing of the report. Miss B. Griesel was the editor.

2/ Prepared by E.P. Riezebos.

3/ Prepared by P. Bargholtz.

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v. During the discussions, the authorities of the Ministry of Agri-culture emphasized that the final text does not necessarily reflect itsposition on all points. They believed that the image the report gives ofthe prospects of the sector is more pessimistic than warranted and does notsufficiently reflect the socio-political principles and objectives of theGovernment.

vi. The report intends to reflect the mission's perception of the sectoras of the end of 1973. In some instances updating was possible. Of thesignificant developments that have occurred since the mission took place,mention should be made of the creation, in early 1975, of two separateministries dealing with the agricultural sector, one called Ministry of Food(responsible for all aspects of food production, marketing and processing),and the other, Ministry of Agriculture (responsible for Agrarian Reform anddevelopment of agricultural resources). It should also be noted that, sincethe time of the mission, preparation has considerably progressed on suchprojects as the first drainage project, a project for rural development andreforestation in Cajamarca, the Huallaga Central Settlement project, theAlexander von Humboldt Forestry Complex.

vii. The mission is grateful for the considerable support and hospitalityit received from all parts and all levels of the Peruvian administrationand farming community, as well as from representatives and field staff ofthe multilateral and bilateral aid agencies. Particular mention should bemade of Ing. Luis Paz Silva and his staff of the Oficina Sectorial dePlanificacion Agraria in the Ministry of Agriculture. The information anddocumentation so generously provided by all contacts was invaluable in draft-ing the report. Of course, the mission accepts the responsibility for thecontents of the report.

SUMMARY

i. Agrarian reform in Peru, possibly the most ambitious effort of its

type ever undertaken in Latin America, has dominated the agricultural scene

since the present Government acceded to power in October 1968. Since that

date, the previous modest process of expropriating some large holdings for

allocation to individual smallholders has been replaced by a massive program

of transferring much broader categories of holdings in the Coast and Sierra

(but not the Selva) into worker-owned production cooperatives and other

associative units. The initial target was that by end 1975, expropriation

(but not adjudication) of 13 million ha (i.e., about two-thirds of total agri-

cultural land) would be completed, benefitting about 0.35 million families

(out of a total of over one million rural families). Because of delays in the

early years the program is behind schedule, but in the last few years the au-

thorities have accelerated the pace. By mid-1974, expectations were to completeexpropriation and adjudication of 10 million ha by end 1976. Even this some-

what lower target and the expected delay represent a considerable achievement.

The program had involved by mid-1974, nearly 5 million ha and 0.2 million

families. It is still too early to make a definite judgment about the program's

impact on output, but so far, it certainly has not had the strong negative

short-term effects that have been observed elsewhere. There are two areas

of concern: uncertainty among small and medium sized farms,which has slowed

down their production effort, and current managerial inadequacies in the newly

created production cooperatives, which are likely to be reflected in future

performance. There are strong attempts to counter both problems -- a rapid

issuance of exemption certificates (35,000 by mid-1974, versus less than 1,000

a year earlier), and a training program for managers of production cooperatives.

ii. The current program, 1/ together with reforms in other sectors, has

already succeeded in achieving its prime objective -- to remove the obstacles

to economic development that resulted from the power of the previous economic

oligarchy. At the same time, it helped to reduce the inequities in land owner-

shiip. Although those who benefitted most from the transfer of assets (the

workers on the coastal sugar estates) were already in a relatively favorable

position, later beneficiaries belong to less (but in many cases not the least)

privileged categories of the rural population.

iii. Miuch effort is going into the current land reform program, and the

expediency of its implementation is remarkable. It should be noted that it

is helping to lay the groundwork for what should, in the mission's opinion,

be considered the two major objectives for the agricultural sector in the

years ahead:

(a) to provide employment and raise incomes for the growing masses ofrural people that now find a marginal existence in the Sierra;

1/ A second phase is to address itself to the minifundia problem.

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(b) to meet growing domestic demand 1/ for agricultural products withoutundue pressure on the trade balance, that is, without resorting tomassive imports or jeopardizing current exports.

The Government underwrites these objectives, which it wants to achievewith full economic and political participation of the rural masses. There isonly limited overlap between these two objectives. Consequently, given theexisting financial and administrative capacity, there are distinct trade-offs.Although the mission views the "output" objective with considerably moreoptimism than the Sierra "unemployment" objective, it would like to endorsethe Government's intention to put greater emphasis on the latter.

iv. In the past, only lip service has been paid to the Sierra. Most ofPeru's rural population subsists there, in some regions under most precariousconditions. During the last two decades, an increasing number has spilledover to the slum areas around the coastal towns. The basic problem is thatthe resource base is too small for the present population. The mining andservice sector employ a small part of the labor force, and the remainder hasto live off the land. Climatic and soil conditions are such that only partof the land is suitable for extensive grazing and the small pockets marginallysuitable for crop production are so crowded that per capita production isinsufficient by any standards. Yet, there are indications that a concentratedeffort in reforestation, pasture improvement, fertilizer use, and small irriga-tion schemes can improve production. If population were to remain constant,this would mean improved per capita incomes. Unfortunately, it must be expect-ed that much of any increase in output will be absorbed by growing numbers.

v. The Government is making efforts to mobilize the social and politicalawareness of the rural population. Concrete programs to raise productivity ofland and labor are in the early stages of design and have not yet receivedthe fullest support in all Government circles. Admittedly, such programsrequire substantial administrative and financial resources and are likely toyield smaller economic returns than in some possible alternative uses. Topromote expediency in implementation as well as access to large numbers ofthe target population, projects designed for the Sierra should be institutionallysimple, rely on local participation and cost hundreds rather than thousands ofdollars per family.

vi. Possibilities to solve the Sierra problem by relocating substantialnumbers of serranos in the sparsely populated Selva have proven to be largelyillusory. First, ecological differences render adaptation problematic, and,second, whatever areas are suitable and still available for agriculture (andthere are some in the high Selva) are likely to be developed by local mini-fundistas. Similarly, any employment generated by further expansion in cul-tivable areas in the Coast is likely to be absorbed by those already on thespot.

1/ Demand being defined as effective demand at present relative prices,and not as a function of nutritional requirements.

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vii. Much more promising are the prospects of meeting the expected risein domestic demand for agricultural products. Of the measures proposed bythe mission, some involve considerable capital outlays and lend themselvesto external financing:

(a) Bringing back into full production of the 150,000 ha of coastalirrigable land affected by salinity. This can make a rapid, sub-stantial and economically attractive contribution to supply, andso would groundwater development in the Southern Coast.

(b) Developing the areas with identified potential for crop and live-stock production in the high Selva. This would also prove aworthwhile venture, at least if public investment per family iskept down to acceptable proportions.

(c) Exploiting the forest potential and developing non-forest activitiesin the low Selva, such as cassava production and processing, exploi-tation of the aguaje (wild palm) reserves, and water buffalo devel-opment. The recent boom in oil explorations has increased thestrategic importance of the Selva, and the ongoing improvements intransport infrastructure are also conducive to the region's devel-opment.

viii. In addition to public investment programs, a number of policymeasures would also help to promote production. Removal of uncertaintiessurrounding the land reform program could restore output performance on smalland medium-sized holdings in the Coast. Efforts to correct managerial andtechnical standards in the newly created worker-owned production cooperativesare already being undertaken. A rapid and definite winding up of the expro-priation/adjudication phase of the land reform program would have the furtheradvantage of freeing Government staff for other pressing tasks.

ix. The decentralization of the Ministry of Agriculture decided in November1972 shows encouraging results that could be enhanced by staff incentives forfield posts. The mission also believes that Government interference in themarketing process - which was meant to be transitory anyway - can now beadvantageously reduced without risking recurrence of past abuses. Ideas foragro-industrial development have been proposed by COFIDE (Peru's DFC), thewell-equipped agro-industrial institute, IIA, and others. Finance is available(including substantial amounts of land reform bonds), but for some time therewas a reluctance on the part of the private sector; it seems, though, thatduring 1974 investments in several types of industry picked up again.

x. Two sets of policies will have a critical effect on agriculturalperformance. First, there is no doubt that agricultural production respondsto financial incentives. The Government has recognized this, as evidencedby its decision to allow substantial increases in farm prices during the last12 to 18 months. These measures have already had a favorable effect on pro-duction. Secondly, however, price policy affects only one of the facets of

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the farmers' economic and social environment. Indeed, market prices foragricultural products are largely irrelevant to the many subsistence farmersof the Sierra. What matters most for these low-income farmers, and what isalso of critical importance in shaping the production plans of commercialfarmers is the array of non-price measures discussed above. Unless thisglobal perspective is maintained, price increases may adversely affect theincomes of poorer consumers of foodstuffs without leading to the desiredincrease in production.

GENERAL REPORT

A. Background

1. The objectives for development of the agricultural sector in theyears ahead and the way in which they can best be accomplished depend on aseries of factors, some of which are given, while others reflect the Govern-emnt's political outlook. Briefly the principal ones are:

(a) the trend in the domestic supply/demand situation for agriculturalproducts;

(b) the ability to cover food deficits through imports;

(c) the role agriculture can be expected to play in providing gainfulemployment to a growing rural population, particularly in theSierra;

(d) the resource base for agriculture and the extent to which theexisting potential is unused; and

(e) the basic principles of the 1968 revolution as they affectagriculture.

Supply/Demand Situation and Trade

2. Domestic demand for foodstuffs will grow at least as fast aspopulation, currently rising at a rate of about 3% p.a.; mortality is likelyto fall as health services are further improved, and, unless there is a drasticdrop in fertility, population growth will accelerate in the decades ahead to,say, 3.3 to 3.5% p.a. How growth in national income will further affect fooddemand depends on the size of this increase and its distribution over thevarious population groups -- large segments of the population in the Sierraand also in the urban slums suffer from undernourishment and protein deficiency,and any rise in their income is likely to lead to at least a proportionalincrease in their caloric intake, combined with an improvement in their diet.Just to maintain nutritional standards would require a growth in food supplyof 3.3 to 3.5%, while a modest improvement would call for a growth of 4.0 to4.5% p.a.

3. Available data and other indications show that domestic supply hasin the past decades fallen short of this growth rate, leading to risingfood imports and declining availability of cotton for export. Although Peruexpects to increase its mineral exports from the Sierra, and oil explorationin the Selva has lately yielded promising results, it is unlikely, even underreasonably optimistic assumptions about the price and volume of the mineralexports and development of the oil resources, that the future balance ofpayments situation will allow more than a modest proportion of food require-ments to be imported on a sustained basis. By the same token, the country

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cannot easily forego the foreign exchange from its agricultural exports(sugar, coffee, and cotton). The temporary disappearance since 1972 of theanchoveta from the Peruvian coast has further aggravated the trade balancesituation. But even if the future foreign exchange position would allowsustained massive food imports, such an eventuality would not per se help tosolve the nutritional and employment problem of the rural poor. To go evenfurther, to the extent that such a situation would reduce the pressure toraise domestic food production, it might well have adverse effects for largesegments of the population, unless a conscious effort be made to counter theseeffects.

4. Several factors have been cited as causes for the unsatisfactoryoutput performance -- declining relative farm prices during the 1960s, anumber of years with unfavorable weather conditions, and the like. Thereare indications that stagnation must currently be seen largely as a by-product, probably an inevitable by-product, of the drastic and in many waysexemplary land reform program that has been going on since 1968. It shouldbe stressed, though, that, so far, the impact on output performance has notbeen as great as could be feared - few countries have carried out a reformprogram of similar proportions, and in the ones that have, the short termeffects on output was much more serious (Chile, Tunisia, Mexico, and EasternEurope). Drops in output have reportedly occurred on the medium-sized farmsin parts of the Coast, not, or not yet, subject to transfer of ownership.The obvious reason is uncertainty about the future; another is that, in orderto speed up the process, Government efforts in the sector had to be concentratedon land reform. Output on the holdings that have already been subject to landreform has reportedly remained stable, while output of the sugar estatesexceeded one million tons in 1974, thereby surpassing the 1966 record.

Employment and Resource Base

5. About half of the population makes a living or at least subsistsin the farm sector (Annex 1). It is estimated that the total labor forcewill continue to grow by at least 3% p.a., and the agricultural labor forceby about half that rate. This means that, each year, some 30,000 new peoplewill be looking to the farm sector for their source of income. Without over-estimating the capacity of coastal agriculture to absorb its "own" people,the problem concerns principally the Sierra population. In the Altiplano,where the resource base is particularly small the situation has been seriousfor a long time and has now assumed dramatic proportions, with high infantmortality and low life expectancy. The situation in other parts of the Sierra(Cajamarca, the Central Sierra and the Cuzco region) is less desperate, butstill considerably worse than in the Coast or in the agricultural areas ofthe Selva. Today's Sierra population is about 6 million (somewhat less thanhalf the country's total population), about one million of which are in theAltiplano, one million in Cajamarca, and one million in the Cuzco area (seeMap IBRD 10841). About a quarter depend on mining and services and theremainder on the land.

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6. Just how scarce the agricultural resources are and how low theaverage farm income is as compared with that of the farm population else-

where in the country can only be approximated. One indication is the ratio

between rural population and cultivated land. 1/ In the major Sierra depart-

ments (Puno, Cuzco, and Cajamarca), the figure is as high as 400 to 500 per-sons per km2 (0.2 ha per person). In comparison, most coastal areas have a

ratio of between 100 and 200 persons per km2 (0.5 to 1.0 ha per person). In

addition, water availability, climate and soil conditions permit cultivated

land in the Coast to produce at least twice as much as such land in the Sierra.

Another indication is average gross value of farm output per rural person. 2/

In the Coast, this is in the order of SI. 15,000 (US$400), but in the Sierra,

it is not more than a quarter of that amount. Data on income distributionwithin each area are not available 3/ but the impression is that poverty is

rather evenly spread in the Sierra, with below-average levels in the Altiplanoand parts of the Cuzco area and somewhat better incomes in the Central Sierra.

The spread in coastal farm incomes-is larger, with those of small individualholdings in the South possibly half those of the worker-owned production

cooperatives in the North.

7. The scope for non-farm employment in the Sierra appears so far quite

limited 4/ so that the prospects for income improvement depend largely on the

resource base for agriculture, especially in the Sierra itself, but, in theory,elsewhere in the country as well. From the discussion in Annex 2, it will be

clear that the mission does not share the optimism of some observers who havediscerned a large untapped potential of idle land. Admittedly, with only2% of the country's territory used for crop production, and an additional12% for extensive pastures, most of the land is unused. Unfortunately, it

is also mostly unusable. In addition, surface communications between and

within the three regions are constrained by topographic and seismic conditions

(Map IBRD 10838). There are, however, some possibilities of expanding the

agricultural frontier, along the Coast (particularly rehabilitation of150,000 to 200,000 ha of irrigable land, and possibly some expansion of

irrigation areas beyond those now under construction) and in the Selva; there

1/ Cultivated land is a more relevant yardstick than total farmland, whichincludes fallow land and large areas of marginal grazing areas.

2/ Data on the more relevant concept of net output per agricultural personare not available.

3/ Efforts to estimate income distribution on the basis of farm size distri-

bution are particularly meaningless in the case of Peru, even withinecological zones, because many farm units support more than one family,

sometimes as many as several hundred. Also, many of the small coastalfarmers derive a substantial part of their income from off-farm activities.

4/ The Government is presently making efforts to find alternative sourcesof employment. Although the mission agrees that these efforts should

be pursued, it is still too early to assess the quantitative impactthese measures may have.

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is also considerable scope for increasing output through more intensive useof existing cropland in the Coast and some in both crop 1/ and grazing landin the Sierra. Although this offers some chance for improvement, it is notlikely that the country's unused agricultural potential can reduce Sierraunderemployment and poverty to acceptable levels even if the population growthrate remains at past levels (since 1940 only 1.1% p.a. 2/). This rate, in-cidentally, has been low because of high mortality and massive migration tothe coastal towns.

The 1968 Revolution

8. Creating the "new Peruvian" and promoting a society that is neithercapitalist nor communist were among the aims of the 1968 revolution thatbrought the present Government to power. 3/ In matters of agricultural policy,this was reflected in a series of measures to remedy what were then perceivedto be the major problems of the rural sector -- inequitable distribution ofland ownership; economic and political isolation of the rural masses; andunsatisfactory marketing arrangements leading to rising food prices, but stag-nating farm incomes.

(a) Comprehensive agrarian reform legislation was drawn up (i) to breakthe power of the large and middle-size landowners (national and foreign alike)by converting the properties into cooperative-owned and operated holdings, and(ii) to improve the situation of the minifundistas. So far, implementationhas dealt principally with the first of these aims. The target for end 1975

,is 12,000 farms totaling 10 million ha to be allocated to 350,000 families. 4/Between mid-1969 and mid-1974, 6,000 farms, amounting to a total of 5.8 millionha, were expropriated (i.e., seven times as much land as was taken over duringthe preceding five years under previous legislation), 4.6 million ha of whichwere allocated to 190,000 families. 5/

1/ It should be noted, however, that part of the cropland in the Sierra isof such a marginal quality that it is classified in soil capabilitystudies as suitable only for grazing.

2/ The national annual growth rate over that period was 2.2% (currently about3%); that of the non-Sierra part of the country, 3.2%; and that of theLima area, nearly 5%.

3/ The complete definition of the ideological base of the PeruvianRevolution was published in all newspapers on February 26, 1975.

4/ The total number of farm families in the country can be estimatedat about one million.

5/ In official accounts of the number of beneficiaries, the authoritiesinclude a further 50,000 farmers who have received exemptioncertificates.

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(b) The political base of the country has traditionally been concentratedin the coastal cities, and, to some extent, in the workers in the largeplantations. Down on the scale remained the 6 million Indians of the Sierra.Although the present regime has also to reckon mainly with the coastal popula-tion (including the workers of former estates that have now been transformedinto worker-owned production cooperatives), a considerable effort is beingmade, particularly through the National System of Support for SocialMobilization (SINAMOS), to mobilize the Indian masses into greater aspirationsas to their political and economic status.

(c) The desire to assure a regular and cheap supply of food for the urbanconsumer led to placing strict price regulations on half a dozen basic commo-dities, fixing of trade margins, Government agencies entering distribution (and,lately, production and processing) activities, and imposing several measuresregulating the movement of produce. At the same time, recent legislationaffecting the industrial sector aims at a gradual transfer of industry owner-shlip to the workers.

9. Although the Government has on several occasions shown a considerabledegree of pragmatism, most of the measures taken are quite basic to its eco-nomic and social philosophy. It must therefore be expected that the programof property transfer will continue until at least the end of 1975, the announcedtarget for completion of this phase; that there will be a continued preferencefor associative rather than individual ownership; that the concern with theunderprivileged categories of the rural population will be expressed in concretesteps to improve their welfare; and that there will continue to be a considerabledegree of Government intervention in the marketing process.

B. Objectives

10. It is against the above-sketched background that the basic objectivesfor the agricultural sector must be seen:

(a) provide a regular and relatively cheap supply of agriculturalcommodities, without massive recourse to imports; and

(b) raise the living standards of the most underprivileged of therural population.

What remains open for discussion is the emphasis each of these objectivesshould receive and the most appropriate ways to pursue them (Section C).The first point is particularly relevant because of possible trade-off effectsbetween interests of producers and consumers, or between the Sierra and Coastalpopulations. Within a given availability of administrative and financial re-sources, it would be reasonable to assume that development activities (e.g.,input supply, pasture improvement) in favor of the people of the depressedareas of the Sierra would not yield the same returns in terms of output growth

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as would the same effort in some other parts of the sector (e.g., rehabilita-tion of saline irrigable land in the Coast). W4hile an all-out administrativeand financial effort only on the Sierra could effectively alleviate hardshipamong the most underprivileged of the rural population and reduce the incomegap between them and other categories of farms, it could lead to deficienciesin domestic food supply, from which the rapidly growing class of urban poorwould suffer the most.

11. While it can thus be argued that, in general, increased emphasis onone objective would be at the expense of the other, it should also be recog-nized that there are balancing effects -- the investment needs in the Coastarise to some extent because little has been done so far in the Sierra. Acase in point is the construction of new high cOst irrigation infrastructure,e.g., near Arequipa, which is mainly justified by its promoters as a contri-bution to alleviate the minifundia.problem around that city, but which, inturn, has been aggravated by migration from the Altiplano. A similar case con-cerns the effort in public housing in the coastal cities. Thus, the argumentis that the pressure for public investments on the Coast could be reduced bydoing more in the Sierra.

12. Price policies might give rise to trade-offs between the interestsof consumers and producers. It should be pointed out, however, that half ofall consumers are also producers, most of them subsistence producers in theSierra. Price policy would therefore mainly affect the urban population andcommercial producers. 1/ Many of the former are poor and rely heavily on acheap supply of basic foodstuffs. On the other hand, although the terms oftrade for commercial farmers have deteriorated until recently, factors suchas security of tenure (in the Coast) and availability of inputs (in the Sierra)would be equally powerful or more effective production incentives than prices.Obviously, subsistence farmers, whose nutritional standards are among thelowest on the scale, would not be served at all by generally higher farmprices; on the contrary, until they reach the commercial stage, they wouldbenefit from other measures to raise the productivity of their land.

13. In view of the above considerations, the desirability of slowingdown migration to the coastal towns, and the fact that the living standardin most of the Sierra is so much below that of the Coast and even Selva,there is a case for giving equal attention to the two objectives, rather thancontinue to put almost exclusive emphasis on the first. Furthermore, adequategrowth in domestic food supply, at least in the Coast, can, to a large extent,be accomplished by measures other than public investment (such as security of

1/ The bulk of marketed foodstuffs is produced in the Coast and some inthe Selva. The Sierra accounts, however, for most of potato, wheat,and lamb production. Of these three, only potatoes are a staple foodfor the urban poor, while wheat and lamb are mainly consumed by theurban middle class.

tenure, availability of credit and inputs, improved marketing arrangements),while measures to alleviate the Sierra problems depend heavily on a capitalinflow into the region. 1/

14. There remains then the question of whether the Sierra can absorb amajor administrative and financial effort. In other words, is there reallya lot one can do to promote a sustained and substantial rise in living stan-dards in the Sierra? A frequently encountered opinion has been that any effortis wasted because of the magnitude of the problem, the extremely harsh naturalconditions, and the apathy of the population. The obvious rejoinder is thatone does not know if one does not try. Also, there do exist indications thatthe land can produce (para 23) more and that the people have shown interestin improving their lot, as witnessed by the numerous demands for Governmentassistance in small irrigation works.

15. On the basis of available technology, a concentrated effort in theSierra can increase agricultural productivity and hence living standards.But, unless technological breakthroughs are made and put to use, there isno agricultural solution that would bring, on a sustained basis, the averageliving standards in the Sierra up to an acceptable level (say, the level nowreached by the beneficiaries of the land reform in the Coast); further, theredo not seem to be sufficient obvious non-agricultural employment opportunitiesin the Sierra, with the exception of road construction and minor expansion inmining (cf footnote of para 7). Consequently, there is great risk that anygain will last only until population growth catches up on it. The missionwould therefore like to make a plea for a rapid and massive program of infor-mation about birth control to accompany any other efforts to improve livingstandards, lest the latter have only a temporary effect. It is recognized,however, that the Government rejects any type of demographic control, becauseit considers underdevelopment not the result of rapid population growth, butof inadequate social, political and economic structures.

16. In addition to the two objectives mentioned above, there appears tobe one that will directly affect agricultural development in one of the threeregions. Integrating the Selva with the rest of the country is a major objec-tive, as it was under the previous Government. The current boom in oil ex-plorations, the sudden urgency of developing the oil resources and the factthat Brazil has now completed the Transamazonian highway all the way up tothe Peruvian border has turned the Selva into a politically strategic region.This change is likely to be accompanied by better communications with therest of the country and thus improve the prospects for developing the agri-cultural possibilities that hitherto were constrained by the isolation ofthe region.

1/ The fact that the mission assigns priority to investment in irrigationrehabilitation in the Coast seems to contradict this statement. However,the economics of this activity appear to be so attractive that it is,in the mission's opinion, clearly justified, despite the fact that thedirect beneficiaries do not belong to the lowest income category of therural population.

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C. Recommendations

17. In the following parts of this chapter, a number of policy sugges-tions and proposals for pre-investment work and projects have been formulated

that would help to attain the goals outlined above. It is in the very natureof recommendations to imply criticism. However, it should be stressed that the

mission, in making its suggestions, has very much kept in mind -- and the reader

is invited to do likewise -- the important strides forward in the last few yearsin various fields of public policy, including the increasingly prominent placedevelopment of the rural sector occupies in the actions of the Government.

Resource Development

18. General. Studies of natural resources (land, water, and climate)

that are important for agriculture have so far mainly been concentrated on theCoast. The National Office of Evaluation of Natural Resources (ONERN) hascompleted an inventory of coastal soils and surface water, although a numberof regional studies have also been made for other areas. The same applies tothe Directorate General of Water Resources, who has only recently started tohave a limited interest in water availability and exploitation in the Sierra.Other institutions who are involved in determining what the country's resourcesare have also tended to concentrate in the Coast. Foreign assistance effortshave been less unbalanced, regionally speaking. It is suggested that futurework programs be brought in line with the major objectives for the rural sec-tor; specifically, that more emphasis be given to the study of the resourcebase of the Sierra and the Selva and ways to develop it.

19. Despite attempts to avoid overlap and duplication in determiningthe country's agricultural potentials, present coordination leaves much to bedesired, and there are many instances where one institution embarks on acti-vities that fall under the responsibilities of another. Examples are ONERN'sactivities in project preparation, which in the case of agriculture shouldfall within the General Office of Engineering and Projects (OGIP), 1/ or re-search activity by the D.G. of Agricultural Production, undertaken because ofimpatience with the D.G. of Research. It is suggested that ONERN, which isofficially responsible for studies of all natural resources and is the insti-tution best equipped to carry them out, should be solely in charge of basicresource studies. Its work program should be established by The NationalPlanning Institute (INP) on the basis of requests by the various ministriesthat have a stake in ONERN's work. Each ministry should list its requests inorder of declining priority; in the case of the Ministry of Agriculture, the

Agricultural Sector Planning Office (OSPA) should centralize the requestsfrom the various parts of the Ministry and decide on priorities. On thebasis of ONERN's work, more detailed studies could then be undertaken, as thecase and the necessity may be, by the D.G. of Research or D.G. of Water Re-sources.

1/ In some instances, ONERN engages in project preparation because there is

as yet no organization set up to prepare multi-sectoral projects.

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20. OGIP should concentrate on the project preparation aspects of thefollow-up, and pay close attention to economic matters as well as to engineer-ing. It should become the sole institution in charge of preparation of agri-cultural projects, not necessarily with its own permanent staff, but by super-vising work contracted out to private engineering firms. Its work programshould correspond with the priorities set by OSPA.

21. Once it has become clearer what the agricultural resource base lookslike, research has an obviously crucial role to play in developing its use.Again, the accent has been mainly the Coast, so far. Also, the effort hasbeen small and scattered over several institutions. And, most importantly,research activities concern virtually only purely technical aspects and neglectagro-economic considerations. In other words, efforts are concentrated onmaximizing the yield of a given crop, but not on maximizing the returns fromthe scarcest factor, a hectare of land, or a cubic meter of water. This is acommon situation, in developing and developed countries alike, and individualfarmers normally decide for themselves, by trial and error, how to optimizetheir returns, taking into account such things as market prices, risks, andlabor availability. In the present situation in Peru, however, many pricesand decisions on land use are not determined by market forces, but by theGovernment. This makes proper agro-economic research all the more essential.Systematic agro-economic research, if accompanied by measures for effectiveimplementation of its results, could have a significant impact on output andfarm incomes. It is also recommmended that the research effort be expandedand concentrated in one institution, the D.G. of Research, and that moreattention be given to problems typical of the Sierra. Considering theinadequacy of the present situation and the potential gains, an agriculturalresearch project that would include these features is proposed for externalfinance,

22. The Sierra. Although only limited information exists on the possi-bilities of developing production in the Sierra, there is a strong impressionthat there are no large tracts of idle land that can be brought into production,and there is not much chance of converting 'Land now under extensive grazinginto crop land. However, the magnitude of the problems facing the Sierrapopulation makes it imperative that use be made of whatever possibilitiesexist, even if such use will only partially and temporarily solve the problemat hand and be costly compared to development of possibilities in other regions.

23. While awaiting studies that may produce major breakthroughs on howto overcome the natural constraints of Sierra agriculture, the obvious routewould be to take some specific steps to intensify production. Rather thanapproaching the problem with a comprehensive, but necessarily thinly spread,prograrn that would introduce improved seeds and breeds and improved cultiva-tion practices and make attempts to raise the fertility of all soils, it wouldseem preferable to concentrate on programs in two or three regions (Altiplano,Cajamarca, and Cuzco). Such programs should consist of only a few activitiesin which there is already some promising experience available, such as (a) useof fertilizer and improved seed in potato production, (b) introduction of asystem of pasture management in the higher elevations, (c) construction of

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small irrigation works, and (d) marketing arrangements. In the case of theAltiplano, one could also consider expanding the cultivation of rape seed,provided the ongoing experiments prove this to be a viable cash crop, andimproving both the production and marketing of guinua, a protein-rich nativecereal crop.

24. It is suggested that a start be made to design a project for one ortwo well-defined parts of the Altiplano that would consist of only the above-mentioned directly productive components, be designed and implemented withactive participation of the beneficiaries, and be carried out at a cost perfamily that permits the project to reach tens of thousands rather than hundredsof families. 1/ Other features that the project should include are as follows:

(a) Central production units of the Agricultural Societies of SocialInterest (SAIS) should be used as a channel for the supply of fertilizer andrelated credit to its member communities and as a collection center for mar-ketable surpluses of potatoes. They should also organize the necessary ex-tension work (assisted by the ongoing FAO fertilizer demonstration program).

(b) Plans for improved pasture management should be commissioned tothe regional research center in Puno, in consultation with the beneficiaries(central production units of the SAISes, and member communities); the execu-tion of necessary investments (fencing, water points) should be entrusted tothe beneficiaries or local contractors.

(c) In much the same way, the Directorate General of Water Resourcesshould help in determining where irrigation works would be useful, draw upthe plans, and supervise the execution. For this purpose, it should detachsome technicians to the relevant "Oficina Agraria."

(d) The entire program should be under the responsibility of theAgrarian Zone of Puno, possibly a specially created unit therein.

25. In order to keep problems of execution and coordination to a mini-mum, it is suggested that institutions not, or not directly, responsible tothe Ministry of Agriculture (like Banco de Fomento Agropecuario, SINAMOS,other ministries) be involved only in an advisory capacity. And also, acti-vities that are not directly productive (social infrastructure), desirableas they may be, should be excluded from a first project. On the other hand,it is not suggested that a special project authority would be set up, as this

1/ The approach proposed here would be quite unlike that of the 1970 FAO/IDB proposal for four small "Integrated Regional Development Projects"(Proyectos Integrados de Desarrollo (PID), a notion introduced in theagrarian reform legislation), two of which would be in the Sierra. Themission's objections to that proposal are that: it involves numerous as-pects, agricultural and non-agricultural. This "integrated" approachwould not only complicate implementation but would also render localparticipation problematic. Secondly, the envisaged cost per family(US$2,000 per family) precludes'the possibility of reaching a sizeableportion of the target population.

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would run counter to the desirability to strengthen the new regional structureof the Ministry of Agriculture. As soon as sufficient experience is gained,projects can be designed that include other activities and institutions andreach people outside the SAIS framework.

26. The projects as envisaged by the mission would show similarities witha recent IBRD project in Ethiopia, the "Minimum Package Project" insofar asit concentrates on a few activities and aims at numerous beneficiaries. Aproject of this type in Peru would have advantages over the Ethiopian one inthat there is no problem with land tenure security, a vehicle (the SAISes)already exists to help in carrying out the project, and the beneficiariesare already grouped in well-established communities. It is suggested thatthe experience gained in the Ethiopian project be used in preparing the firstproject of this type in Peru. Also, inform.ation should be drawn from theproject recently prepared by the FAO/IBRD Cooperative Program for the BolivianAltiplano because the technical aspects of that project are obviously quiterelevant for the Peruvian Altiplano. Once a first project is underway, stepsshould be taken to prepare follow-up projects of the same type for the Altiplano.

27. For Cajamarca, the emphasis would be on afforestation, in combinationwith improved livestock and crop production. It mid-1974, project preparationwas about to start and could have advanced quickly thanks to the experiencegained by the Belgian and British technical assistance teams there and a pre-feasibility study prepared by UNA la Molina and the D.G. of Forestry.

28. In the Cuzco area, a first project should preferably include theProduction Cooperative "Anta," which is the largest in the area and consistsoF a Lumnber of for-mer liv-estock haciendas in the Anta valley and a dozen or'30 comunlidades on the surrounding slones. Recently, the CAP "Anta" has beenplagued by a number of internal conflicts, probably because too many coimunitieswere '-gratted' on too small a production unit (the furmer haciendas in theva-113,½) arid because a large part of the valley suffers from severe drainageproblems (about 10,000 ha). Solution to the latter problem, for which studiesare underway, would alleviate the pressure on productive sources.

29. Afforestation should become increasingly important in the parts ofthe Sierra. Planting with eucalyptus and pine on unproductive land has beengoing on for several years (e.g., some 10,000 ha during the last four yearsin the Cuzco area) and is now showing promising results. The communities showgreat interest in this activity, particularly since funds became availablefrom an AID loan 1/ to provide the planting material on credit; the communi-ties provide the labor. There is a dire need for wood, throughout the Sierra,not only for fuel purposes, but also for the mines. 2/ The annex on forestry,which discusses this activity in some more detail, indicates that it may have

1/ These funds are now exhausted.

2/ For the mines, eucalyptus wood presents advantages over other woodspecies, first because of its safety and second because it can be grownlocally.

attractive returns. In addition, afforestation would help to control erosionand alleviate the recurrent flood problems. Protection of the plantings.which in other countries is often an obstacle for undertaking afforestation,does not seem to present problems here because there are no goats in the area.The mission recommends that the number and capacity of the nurseries be in-creased and that the current activities be expanded along the lines of theprogram now being developed by technicians of the Agrarian Zone of Cuzco. ItsDirectorate for Natural Resources has identified some 300,000 ha suitable forafforestation. Because of the time lag (eight to twelve years) between plant-ing and the generation of revenue, it is suggested that some financial com-pensation be made for work provided by the communities.

30. Use of otherwise unproductive land at high altitudes (say, over4,000 m) has been quite successfully demonstrated in the Nasca area, wherethe Directorate General for Forestry and Wildlife has organized a project aimingat the multiplication and management of vicunas. The wool of this non-domes-ticated (and extinction-threatened) animal sells at prices several times theprice of wool, alpaca and llama, which are related but domesticated species. 1/At minimal cost and in a time span of a few years, the number of vicunas inthe area has increased from 400 to 7,000. Even if the price of vicuna woolwould drop due to larger supplies and legal exploitation, it appears recommend-able that this type of activity be replicated in other high areas of the Sierra,so as to provide a basis for commercial exploitation of the vicuna resource.

31. The mission endorses the work currently underway in the DirectorateGeneral of Water Resources for a series of small projects in the upper valleysof the coastal rivers. These projects serve the dual purpose of providingpart of the population of the lower Sierra with limited areas of irrigatedland and protecting the watersheds at this altitude, thereby regulating thewater flow of the rivers in the coastal area.

32. Finally, and most importantly, it is recommended that the Governmentgive immediate attention to the problem of polluted irrigation water from somerivers (e.g., the Mantaro) in the Sierra. This problem, resulting from miningactivities, presents a serious health threat to consumers of food products

grown in the area, as the pollutants (mostly minerals such as lead and copper)gradually build up in the bodies of man and animal and are only perceivedwhen a critical and fatal stage is reached. As reflected in present legisla-tion, the Government is quite ecology-minded, 2/ and it should see to it thatno polluted water is used for irrigation before solution of this problem(reportedly a technically solvable problem) is reached.

1/ Since it is illegal to kill or shear the vicuna, the price is reallya "black market" price. But even under legal conditions, vicuna woolwould sell at a premium.

2/ This was also illustrated at the recent nationalization of the Cerro dePasco mining company when the company was accused of not respecting thislegislation.

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33. The Selva. Several factors have so far hampered agricultural

development of the Selva (roughly two-thirds of Peru's territory, but less

than 10% of its pop-ulation). Roads within the Selva and connecting with the

Coast are poor and most are hazardous, thus limiting marketing; only limited

areas with favorable natural conditions for agriculture, concentrated in the

high Selva (Ceja de Selva) hiave so far been identified and developed, while

the ecological conditions make most of the region unfit for sustained crop

or livestock production. Absence of a clear Government policy vis-a-vis the

Selva was acting as a strong constraint for private ventures. As indicated

above, the increasing strategic importance of the Selva may prompt the Govern-

ment to give higher priority to the transport problem and it has already led

to a law for Selva development (Ley para la Promocion de la Selva), issued in

mid-1974. These factors set the stage for the Selva to play a more important

role in the country's agriculture.

34. It should be recognized, however, that Selva development is unlilely

to make a significant contribution in easing population pressure of the Sierra,

at least for manv years. First, there are environmental problems -- settlers

from the Sierra have been shown to be highly vulnerable to diseases and other

problems of the humid tropics, even in the higher parts of the Selva.1/

Second, there is already a substantial population in most of the areas of

possible development. Settlement activity has so far resulted more in relocation

of the Selva population than in migration from the Sierra or Coast. It seems

doubtful that this pattern will change in the near future. And most importantir.

only limited parts of the Selva have natural conditions that allow any type of

agricultural production.

35. The Governrument lhas realized that new ventures of a promotional nature

require a minimum scale to enhance their snc ces s. Cases in point are the

ENDEPA11MA oil plantation in Tocache and the five I ivestoc. farms epe-rater

b "I7PSA Canadera.". The same would probably ap*' v to some of the other Selv;,

activit:ies suggested by the mission (1cassav.a, water buffalo, aguaje; see

below). It is also suggested tlu-t, if for one reason or another, the private

sector was not permitted to take up these activities or was o It'' Irlt r.te f o

doing so, they should transitorily be entrusted to enterprises of nhe tvpe ot

ENDEPALMA or EPSA Ganadera, both daughter companies of tne Government-owned

Public Enterprise for Agricultural Services (EPSA). Once these new ventures

are successfully underway, they could be turned into worker-owned cooperatives

along the lines of the expropriated estates on the Coast.

36. On the basis of the discussion of Selva resources in Annex 2,

the mission suggests that efforts should be directed to:

(a) colonization of the limited areas that have an identified

Dotential for crop production;

1/ Experience with settlers brought in from the Lima slums has proven equally

disappointing, e.g., in the case of the Tigno Maria-Tocache settlement

project.

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(b) livestock development in the less favorable areas, onceongoing activities have proven satisfactory;

(c) forest exploitation and forest-based industry;

(d) introduction of water buffalo for meat production;

(e) promotion of fishing;

(f) exploitation of the aguaje (wild palm) reserves; and

(g) large-scale commercial production and processing of cassava.

The first three lines of activity are already actively pursued. For thefollowing two (water buffalo and aguaje), only preliminary work has been done,while cassava production, though widely spread in Selva agriculture, has sofar taken place only for direct human consumption.

37. Comprehensively organized settlement schemes have proven to bea costly affair in Peru and elsewhere. Not only do actual costs by farexceed those anticipated, but returns have remained below expectations. Acase in point is the Tingo Maria-Tocache project. An ex-post calculationwould show that this project was not justified in purely economic terms. Buteven if it were, an investment per family of US$12,000 (latest estimate) isnot compatible with, on the one hand, the number of potential settlers, and,on the other, the financial resources available for development of the sector.

38. Spontaneous settlement is another alternative. Most of the populatedareas in the Ceja de Selva have been developed this way as people settledalong rivers or newly opened roads. Public expenditure for this type ofsettlement is relatively small, but whether the cost to the individual and tothe community is also small remains to be seen, particularly as there are norecords of the losses involved in the numerous failures.

39. To avoid the disproportionate cost of comprehensively organizedsettlements, and undue sufferings accompanying entirely spontaneous ventures,an intermediary way is suggested, whereby the role and expenditure by theauthorities should be limited to (a) assessing the land use capability of thearea; (b) providing and maintaining road access; (c) undertaking organizedallocation of land; (d) providing long-term credit for land, land clearing, 1/

1/ Land clearing is an important cost element. The choice between manualversus mechanical clearing should be determined by local conditions suchas the opportunity cost of labor, density of the forest, possible recupera-tion of desirable species, soil fragility and, most importantly, type ofintended land use. Roughly, hand clearing costs about S/.2,000 (US$50) perha, and mechanical clearing, S/.7,000 (US$175) per ha. In general, theformer method (which leaves stumps and half-burned trees on the land forseveral years) is preferable where the land is to be used for pasture,while land that is suitable for crop production should be mechanicallycleared (possibly preceded by partial hand clearing to save machine time).

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farm implements, farm buildings, and, in cases of mixed farming, for thepurchase of cattle, and short-term credit for current inputs; (e) selectingprospective settlers; and (f) supplying a heavy dosage of extension. Con-struction and financing of housing, social infrastructure, and service roadsshould be left to the initiative of the settlers or be carried out as thenormal activities of the relevant specialized ministries or agencies. Typically,public investment per family in a settlement project should not exceed S/. 80,000to S/. 120,000 (US$2,000 to US$3,000) and should be, in principle, on the basisof cost recovery. Not only would the proposed intermediary way keep the initialinvestment within reasonable (better, equitable) limits, it would also simplifythe institutional arrangements for project implementation. Whether these settle-ment schemes should be on the basis of individual farms or production cooperativeswould depend on the circumstances. In instances where the land to be settledis heterogeneous (which seems to be'the case most often), the cooperativeapproach would be preferable.

40. Of the several areas of the Ceja de Selva for which basic data onnatural resources exist, and that appear suitable for settlement, HuallagaCentral and Palcazu Pichis would deserve priority consideration. The HuallagaCentral area presents very favorable conditions -- good soils, and an averagerainfall of less than 1,000 mm, versus 4,000 mm in the Tingo Maria-Tocachesettlement. Also, an FAO team has recently made a thorough study of thearea, and preparation of a feasibility study for one or more projects couldthus be done in a relatively short time. 1/ Such a preparation should drawon the experience gained by the ongoing pilot scheme near Tarapoto. Unfor-tunately, the region has absolutely inadequate transport connections withthe rest of Peru -- in the road connection with Lima, several river crossingsare missing and a 50-km stretch in the road to Chiclayo is not completed;the only practical road connection is with Yurimagas and from there down theAmazon. Further work on this project should wait until either the road toChiclayo or the one to Lima is completed; reportedly, the road to Chiclayo willbe finished during 1974.

41. Considerable information is also available (from an ONERN study)on the Palcazu-Pichis settlement area. Again, many of the prospectivesettlers are already there and road connections are inadequate. But, unlikethe situation in Huallaga Central, the rivers are navigable for small boats.Once the stretch of the Carretera Marginal de la Selva, which is planned tocross the area, is linked up with the Via Central, this area would be the partof the Ceja de Selva with the best connection to Lima, and thus in an ex-cellent position to supply the Lima market. A bilateral assistance group is

1/ In 1973, the Agrarian Zone of Tarapoto prepared, on the basis of the FAOwork, a development plan for a first slice of 200,000 ha of settlementof 20,000 families, most of whom already reside in the region. rhis planshould, however, be redesigned, as it includes a number of elements(housing for all families, a lavish network of roads, about 200 servicecenters) that bring its (ex-ante!) cost to Sl. 500,000 (US$12,500) perfamily.

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about to start a pilot scheme near Puerto Bermudez in the center of the areaand, if the authorities agree with the suggestions made above about the scopeof settlement projects and the maximum investment per family, it would beuseful if the group's terms of reference were drawn up accordingly.

42. Other areas that may be considered for settlement projects in themedium term include Pucallpa, in conjunction with forest-based activitiesthere (see below), and Puerto Maldonado, when and if connected with theTrans-Amazon highway in Brazil.

43. The above-mentioned regions -- and possibly others -- seem, at leastpartly, to lend themselves well to crop production, possibly mixed withcattle production. There are much larger tracts of virgin land of lesserquality that would be suitable for grazing. There are, however, some doubtsabout the economics of Selva livestock production. EPSA Ganadera operatesfive ranches at different locations in the Selva, for which it has importedbreeding animals from Central America. It is suggested that the results ofthese operations be observed two to three years before it is decided to expandthis type of activity.

44. One problem that has appeared in the EPSA haciendas, as well as inthe Tingo Maria-Tocache settlement scheme, is the lack of resistance of theimported animals to the distinct conditions of the Selva, resulting in lossesand low calving rates. Much more favorable results have thus far been ob-tained by the Iquitos University in the lower Selva with Brazilian water buf-faloes: lower purchase price, disease resistance, higher fiber convertability,no land clearing costs, higher calving rates. It is suggested that (a) moreextensive tests should be undertaken, and (b) if successful, a project for alarge-scale operation in the low Selva should be undertaken. As with mostlarge-scale livestock operations, the employment-creation aspect is relativelyunimportant. 1/ This, and the fact that labor shortages in the low Selva(due to petroleum projects) have driven up wages and incomes well above thenational average, should be taken into account in establishing the priorityto be attached to such a project. These factors should be weighed againsta growing national deficit of livestock products.

45. There are several million ha of aguaje palm in the Selva, much ofwhich is in pure stands of 50,000 ha or more. Even if, as it has been reported,up to 80% of the trees are sterile, the oil producing capacity is estimatedat 4 to 6 million tons p.a. 2/ In addition to oil, the fruit has a 12% pro-tein content. Because of the location of the aguajales in swamp areas and

1/ However, water buffalo production could be more family-oriented andlabor intensive. Water buffaloes can be of multiple use in the Selva.

2/ Exploitation of 1 or 2% of this potential would suffice to cover presentoil deficit. Total Peruvian consumption of edible oils is currently100,000 tons, of which, in 1972, 40% was imported. The data in thisparagraph are based on work by IIA.

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because the fruit is high above ground (or water) level, harvesting is the

principal obstacle to commercial development. It is suggested that the

studies so far carried out by The National Agriculture University (UNIA) and

the Institute for Agro-industrial Investigations (IIA) be pursued and that

particular emphasis be given to the extraction problem. Once a solution has

been found, there is little doubt that a project for the exploitation and

processing of aguaje would be justified.

46. Development of the aguaje potential should be considered in relation

to the plans to increase ENDEPALMAts oil palm plantations by 15,000 ha (in

the Iquitos and Pucallpa areas), in addition to the nearly 5,000 ha now being

planted near Tocache. Despite affirmations circulating in Lima that the

initial disease problems. have been overcome, information based on on-the-spot

inquiries convinced the mission that the outcome of the Tocache operation is

still uncertain and that it would be premature to go ahead with the other plans.

47. There appears to be a great potential to increase cassava Production

in the Selva and to process the added orodtuction locallv into starch as an

inuredient for bread, 1/ animal feed for domestic requirerents, and for export

of cassava chips to the ElC. Prc-investm)ent work should be started as soon

as possible and should be directed at identifying the aDpropriate areas

(possibly the river banks in the lower Selva), the adequate Production form

(possibly a semi-Government plantationi), the size of the operation, and the

location of processing. facilities. Cassava cuiltivation is a rather labor in-

tensive process and could create a substantial number of jobs. For additional

aspects of this proposal, see Annex 7.

48. Considerin- the forest resources available, the current dependence

on imports of a number of forestry products, and the growth in the world market

for tropical hardwoods, the forest-based subsector is only in the earliest

stage of development. Although still short of staff, the D.G. of Forestry and

t'ildlife has latelv shown a number of promising initiatives. The draft forest

lax? also includes measures that will help to get forest activities moving,

especially if the staffing constraints can be overcome and a number of profes-

sional foresters can be assigned to the aRrarian zones; so far, the decen-

tralization of the Mlinistry has hardlv affected the Directorate, whose limited

staff is stationed at the central office in Lima.

49. The Goverrnent has assigned direct responsibilitv to the Directorate

for development of some major projects in the Selva, one of which, an integra-

ted forest-based complex in the National Forest Alexander von hlumboldt, looked

quite promising, particularly as the project area is close to the riverport

1/ A 15 to 20% cassava content in bread is compulsory in other countries.

A similar requirement could be imposed in Peru in view of the growing

import reouirementq of wheat.

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of Pucallpa 1/ and on both sides of the only road 2/ connecting the Selva withLima. An FAO/UNDP team began in January 1974 to work out, over a period oftwo years, the technical details of the project and a feasibility study. Pre-liminary information on project cost (US$20 million), wood requirements, directjob creation (1,100), and gross output (US$10 million p.a.) are contained inAnnex 9. A Government enterprise will own the complex, but in view of itshighly specialized nature and possible shortage of specialized Governmentemployees, it is suggested that a management firm or some form of jointventure be considered to operate it. In deciding what priority to give thisproject, the important foreign exchange savings should be weighed against thecapital intensive nature of the operation and the relatively limited numberof jobs created by it. 3/

50. The Coast. With average rainfall close to zero, resource develop-ment in the Coast means irrigation. Outside the 50-odd valleys that crossthe coastal strip from East to West all along the Pacific, there is no agri-cultural activity, except for the grasslands that develop in the North in anoccasional rainy year. Irrigation has been practiced since pre-Colombian timesand today, the coastal area is predominant among the three ecological regionsin terms of output. Out of a national arable acreage of 3 million ha, theCoast represents only 0.8 million ha, but it produces about two-thirds ofthe total value of output. The reason is irrigation -- all of the 0.8 millionha in the Coast is irrigable, most of it all year round. Elsewhere (i.e., theSierra), however, only 1.3 million ha are equipped for irrigation, and ingeneral badly used during the part of the year that irrigation is possible.

51. The success of coastal irrigation and the contribution it makes to

national output, particularly commercial output, is undoubtedly one of the

factors that has pushed the present as well as previous Governments to exnandthe irrigable acreage. The point has now been reached, however, at whichwater for large additional areas can be derived only fromi the Atlantic sideof the watershed through tunneling. A number of these large new schemes underconstruction or proposed were discussed and the conclusion was that, even if

their non-agricultural benefits (e.g. electricity) was taken into account,their econonic justification is doubtful. On a per-hectare basis, thesenew schemes require an investment of S/. 200,000 to S/. 250,000 (US$5,000 toUS$6,000). To assure a reasonable return, net value added should be in theorder of SI. 35,000 to S/. 45,000 per ha; in practice, and depending on theregion and the crop, this value will range from S/. 15,000 to SI. 25,000.WJhile it is realized that economic considerations are but one element in deci-

sions on public investments and that pressures from regional or other interest

1/ Scheduled to be improved shortly, together with the ports of Iquitosand Yurimaguas, under a planned IBRD loan.

2/ Parts of this road have been financed by past IBRD highway loans; otherstretches are to be financed under forthcoming loans.

3/ However, possibilities for integrating this project with settlement and(labor intensive) agricultural activities are being considered.

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groups play an often important role, it is suggested that the costs to thecommunity that these non-economic considerations entail be calculated and thatother, less expensive ways be investigated to satisfy these regional or otheraspirations.

52. From the previous paragraph, it may be clear that this mission (likeprevious IBRD economic missions) has strong reservations about the desirabilityof launching large new irrigation schemes. A possible exception is the devel-opment of groundwater resources, especially in the Tacna area; preliminarystudies show that (a) a substantial area could be irrigated by pumping ground-water and (b) such a development could be economically justified. Furtherstudy is required, however, before a definitive judgment can be made.

53. The mission's reservations about new projects are further strength-ened by its conviction that the present irrigable area offers scope for con-siderable and rapid output expansion and creation of employment for Coastfarmers. The measures to bring this about fall into two categories -- bring-ing the irrigable areas affected by salinity back into full production, andusing available water resources more economically.

54. About 150,000 to 200,000 ha of irrigable land are affected by salin-ity to varying degrees, with a large part being entirely unproductive now.Experience has already been gained in the recuperation of salted land throughexperimental drainage works in the San Lorenzo project, in the Canete valleyand near Camana through experiments carried out by the Under-Directorate forDrainage and Land Reclamation (SUDRET) in the D.G. of Water Resources of theMinistry of Agriculture. The experimental phase is now nearing its end, acomplete inventory of the affected areas has been drawn up, and the stage now,appears to be set for a series of full-scale projects to bring the affectedareas, which are spread over many of the 50 irrigation valleys and represent20 to 25% of all irrigable land, back into full production.

55. The economics of this type of project appear quite attractive. Thedrainage works require an investment of S/. 25,000 to S/. 30,000 (US$600 toUS$800) per ha and minimal maintenance expenses. Entirely unproductive landcan be back in full production two to three years after the drainage worksare completed and yield a net value added of S/. 15,000 to 20,000 (US$400 toUS$500). There is a question, however, as to how comprehensive the scope ofthe projects should be. Should the project activities be limited to drainageof the saline lands alone, or should the occasion be used to correct or im-prove the irrigation works and other infrastructure of the entire valley?For reasons of administrative expediency and the time loss implied by themore comprehensive approach, the mission would favor the former approach,which is technically less perfect but reportedly quite feasible. A fullfeasibility study that would take all factors properly into account shouldgive a definite judgment on this.

56. There are two employment aspects to this type of project. The lesserone is that related to the execution of the drainage work. In principle,this work could provide considerable employment for unskilled workers; however,

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the mission would agree with the opinion of the D.G. of Water Resources that,

in practice, a mechanical solution would be preferable for all ditching below

one meter, i.e., virtually all work, for two reasons -- safety and cost. The

mechanical solution involves only a fraction of the earth-moving needs of the

manual solution and would probably be more economic even if labor and capital

were properly shadow-priced. Again, it is a matter to be investigatedin a feasibility study.

57. The land affected by salinity belongs either to production coopera-

tives, individual owners, or, since the law enabling the State to take over

non-producing land came into effect, to the State. Depending on who the

owner is, or will be, by the time the work is executed the land will be

cultivated by individual farmers, remain in an existing production cooperativeor be placed in a newly set up cooperative. The latter alternative is the

most likely for State land. But whatever the farm type will be, the employment

aspect of this type of project is likely to be substantial. If one assumes

that 2 ha of irrigated land per family provides an acceptable living standard, 1/

not too much out of line with other categories of the population, the rehabil-

itated land would provide a living to 75,000 to 100,000 families; if one fur-

ther assumes that the present productive capacity of this land is such that

it provides a living to only 10,000 to 15,000 families, the incremental number

of families directly benefitting from the projects would range between 60,000

and 100,000. As it may be assumed that each additional farm job will entail

one additional non-farm job, an equal number of non-farm families should be

added. With a population growth of 3.0 to 3.5% p.a., the number of familiesincreases nationally by 90,000 to 100,000 p.a.

58. It is generally recognized that Peruvian farmers tend to over-

irrigate, in many cases using twice or more the water required for a particular

crop. The main reason is that, so far, water charges are only a tiny fraction

of operating and maintenance (O&M) cost, with the general taxpayer covering

most of O&M and all of the investment cost. The new water legislation provides

for higher charges, but the Government has so far been reluctant to implement

them. The mission suggests that, as a first step, this provision be rapidlyintroduced. To make implementation more palatable to farmers, it is suggested

that at least part of the revenues be used for tangible improvements in the

valleys where they (the revenues) are raised.

59. The costs of over-irrigation are two-fold. First, the seepage

water in the upper valley raises the groundwater table in the lower part of

the valley, and, because of evaporation, gives rise to the salinity problems

described above, particularly as there are, in general, no proper drainagefacilities. Second, the water wasted can obviously not be used for other pur-

poses. Therefore, if unnecessary use of water could be reduced, it would help

to avoid future salinity problems and it would make water available for expand-

ing the irrigated area in the higher part of the valleys.

1/ The present average number of ha per coastal family farm is unknown, but

it lies in a range between 1 and 2 ha. In the Sierra the ratio is prob-ably lower in terms of (less productive) crop land.

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60. The above argument contends that water can be saved under presentcropping patterns. Judicious changes in that pattern could further optimizewater use. These changes should result from the agro-economic researchsuggested earlier in this chapter and should be based on such considerationsas:

(a) the economic cost of water;

(b) the possibility and cost of growing certain crops in other partsof the country, e.g., rice and maize under rainfed conditions inthe Selva or cattle feeding on the basis of cassava, combined withdomestic or imported proteins, rather than on the basis of irrigatedalfalfa;

(c) the self-sufficiency requirements of the country, or, alternatively,comparisons between domestic cost prices and world market prices;in considering world market prices, it is suggested that attentionbe paid to long-term trends rather than to present off-trend prices;and

(d) the employment aspect of specific cropping patterns, in particulartaking into account the seasonality of labor requirements.

Public Administration 1/

61. Although it is still early to make definite judgments, the organi-zation and administration of the Ministry of Agriculture as implemented sinceNovember 1972 seem in general well devised. In several areas in which presentpractices are open to criticism, such as some aspects of personnel administra-tion, correction appears on the way. A few suggestions, however, can beventured, some of which also concern parts of the public sector outside theItinistry of Agriculture.

62. One of the most promising features of the new organization of theMinistry is its decentralization. To make it work, especially in the firstyears, it is necessary for the central office to ensure that the delegatedauthority is used properly. It is suggested that more use be made of actualvisits to the field and that the time-consuming output and review of writtenrecords be limited. However, to avoid a succession of inspection teams, thevisits should be organized, scheduled and conducted by the Inspector General'soffice, if necessary with participation of representatives of the technicalDirectorates General. It is not suggested that the decentralization bepushed any further at this stage. In particular, the announced plan of for-mally delegating authority for program formulation and budget preparation to

1/ See paragraph vi of the Preface to this report.

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the agrarian offices and agencies 1/ seems premature and should probably waituntil more experience is gained with the present set-up.

63. Like the other ministries, the Ministry of Agriculture preparesfive-year and two-year development plans. Independently from the latter, butcovering the same two-year period, the ministries make their budgets. Thetwo-year plans have so far been of doubtful value, especially as they werenot adopted until well into the period they were to cover; there were alsosignificant discrepancies between the biennial budget and these plans. It istherefore recommended that the two-year plan be merged with the budget andcease to exist as a separate document.

64. It would be desirable for the Ministry of Economy and Finance tomodify, if not to abandon, its present policy of holding operating budgetsto a rather small increase, usually a fixed percentage, over the correspondingitem for the previous budget period. This practice makes the operating bud-get undesirably rigid and encourages the tendency to divert investmentbudget funds for purposes that should be financed from the operating budget,thus making the whole budget less meaningful than it could and should be.

65. The Ministry should increase the number of its employees who havedirect regular contact with farmers. Out of a total staff of 15,000, lessthan 1,000 are sectoristas (extension workers). One way to increase theirnumber would be to raise the operating budget; another way would be to convertpositions in the agrarian zones and offices into sectoristas jobs. It hasbeen suggested that the sectoristas have too many duties in addition to theirmain task as extension workers, such as collecting statistics, appraising loanapplications, and executing the land reform. It is recommended, however, thatno change be made in this situation to avoid confusing the farmer by confrontinghim with several different representatives of the Ministry, conceivably givingcontradictory instructions. Increasing the number of sectoristas and spendingmore money for upgrading their quality and mobility would probably be thebetter solution.

66. It is suggested that the General Office of Statistics, which nowreports to the Superior Director, should be attached to OSPA. The presentpractice, with the two agenices separately compiling data, sometimes contra-dictory, is unsatisfactory. Joining efforts could help to improve the qualityof statistics and the speed with which they are produced.

67. Many Ministry of Agriculture employees believe that their colleaguesin other ministries are better paid for similar work. Such suspicions cannotbe proved or disproved until the ongoing position classification plan for the

1/ Annex 3 explains the place of these institutions in the administrativehierarchy. Briefly, the country is divided into 13 agrarian zones (MapIBRD 10840), each zone into three to five offices, and each office intothree to five agencies; then, each agency has a number of "sectoristas,"who are in contact with the farmers.

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entire Government service is ready; it is to be hoped that the salary scalesresulting from this plan will represent a realistic evaluation of the situa-tion and needs of the Ministry and that they will be adopted promptly. Itwould also be desirable that the plan provide for pay differentials for fieldjobs as a means to attract and retain staff of the desired caliber for suchpositions. In addition, the Ministry might consider introducing, as a pre-requisite for promotion, the requirement of prior service in a field position.

68. Despite efforts by top officials of the two agencies to establish aclear division of responsibilities, relationships between the Ministry ofAgriculture and SINAMOS leave much to be desired. Differences in objectivesare the basic cause; also there are several instances in which SINAMOS isinvolved in activities that would seem to belong in the domain of the Ministryof Agriculture or even publicly criticizes the latter. It is desirable that theCouncil of Ministers spell out a clear division of functions; in deciding onthis matter, one point that should be kept in mind is that SINKMOS is meantto be a temporary agency, while the Ministry is a permanent one. Othersuggestions on matters of public administration are made elsewhere in thisGeneral Report and in Annex 3.

Land Reform

69. After rather timid efforts under previous Governments to bring abouta more equitable pattern of land ownership, the present regime, immediatelyafter its assumption of power, initiated a much more drastic and rapid courseof action. Even if the number of expropriations and adjudications has fallensomewhat behind schedule since, the execution of that part of the programdealing with the transfer of ownership must be considered as a major andirreversible achievement.

70. From the beginning in 1969, the promoters and executors of thecurrent legislation were well aware of the possible costs in terms of foregoneoutput and farm income. They were confronted with the choice of pursuing along process that would allow time to prepare the new owners for their newstatus, but would prolong uncertainty and disruptive effects on output overmany years, or of bringing about an immediate change of ownership, therebyeliminating uncertainty but creating considerable hardship for the old ownersand leaving the new owners unprepared for their task. Rather than adopteither of these extreme measures, an intermediate course was selected anda relatively early target (end 1975) was set for completing the expropria-tion process. By keeping the properties undivided, and entrusting ownershipto the worker community but their administration temporarily to SpecialManagement Committees, problems arising from turning farm workers suddenlyinto farm operators were avoided, leaving intact, however, the problems ofmanaging the large units.

71. Thus, it is not surprising now to find problems related to bothalternatives, uncertainty on the part of some segments of the farming com-munity and ill-preparedness of others. For various reasons, it is impossi-ble to measure all costs of the land reform program and weigh them against

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the hypothetical cost of not carrying out the reform. Hence, it should beobserved that the following remarks are not made in a spirit of criticismtowards the basic aims and principles of the land reform program. Indeed,th-is mission, as past IBRD missions, views the current program as exemplaryfor many countries suffering from inequitable distribution of land ownership.Suggestions on possible ways to mitigate the cost of the program are madeonly out of concern for the basic objectives for the rural sector.

72. Carrying out a massive program of ownershiip transfers in a relativelyshort time requires a concentration of administrative efforts that is out ofproportion with the small share of the rural population to benefit from theprogram and reduces the attention given to the greater part of the sector'speople and problems. 1/ The mission believes that the program has now reachedthe stage at which a significant redeployment of employees of all ranks tomatters other than land reform is of utmost urgency, not only for the benefitof the non-reformed part of the sector, but also in order to secure the ex-pected benefits of the land reform itself. 2/

73. The question then arises as to what particular aspects of the cur-rent program should be modified and what such action would do to the objec-tives of the agrarian reform legislation. It seems to the mission that high-est priority should be given to ensuring that the newly created productionunits are well operated, even if this means some flexibility in applying theprinciple of joint ownersh4p of these holdings (see para 80). Priority shouldalso be given to completing the transfer program. Consideration should begiven to simplifying that program and limiting it to farms that do not complywith the two or three major provisions 3/ out of the 20-odd that now make afarm expropriable.

74. The feeling of uncertainty prevailing among the owners of small andmedium sized holdings must be eliminated as soon as possible. 4/ Since mid-1973 the Government has made a considerable effort to reduce this feeling of

1/ In this statement, the mission considers as beneficiaries those personswhose income has directly and considerably improved as a result of achange in land tenure. The Government uses a much wider definitionthat results in much larger numbers.

2/ A case in point is the need to assist the new units in preparing farminvestment plans to obtain credit for maintaining or increasing theirproduction. The Agrarian Zones, however, do not have the capacity todo this, absorbed as they are in expropriation and adjudication issues.

3/ The size criterion could be one and another could be non-cultivation ofthe land. So far in 90% of the cases. expropriation was based on one ormore of the following criteria: size, absentee ownership, non-compliancewith labor legislation.

4/ The small and medium sized holdings hold a special importance in foodsupply, inasmuch as they produce the bulk of foodstuffs such as menestras(legumes), potatoes, wheat.

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uncertainty by stepping up the pace of issuing certificates of non-affectation:between 1969 and mid-1973 only about 1,000 of these certificates were issued,but in the following twelve months the number reached some 35,000.

75. Admittedly, the consequence of this proposal might be that a numberof small and medium sized holdings would "escape" land reform, but it shouldbe noted that they would represent only a small proportion of expropriableland and not the small group of very large holdings that is the prime targetof the legislation. Secondly, the proposal would enhance the significance ofthe certificates of non-affectation that are currently issued. Under presentrules, these certificates provide only nominal security, since they can bewithdrawn any time the holder ceases to observe any of a large number ofconditions. There would obviously be no need to continue the time consumingissuance of further certificates in zones where the reform process had beendeclared completed.

76. As noted before, a rapid completion of the expropriation-adjudicationprocedures would free staff and financial resources for solving other problemsfacing the sector, and possibly for achieving the second important aim of theagrarian reform legislation -- improving the tenure situation of the mini-fundistas. "Minifundia" reform has been considered as some sort of secondstage in the execution of the legislation to be tackled as soon as the current"latifundia" program was finished. So far, however, there is no clear ideain Government circles as to what can be done. It is indeed difficult to seehow farm structures can be improved, considering the low average land/manratio in the minifundia regions. Land consolidation might be a possibility,if it is acceptable to the farmers. 1/ Grouping minifundia into larger unitscould hardly improve the situation in terms of incomes and employment, unlesstllere were alternative employrment possibilities for some of the members ofthe group. The mission believes however that there are other ways to improvethe situation of the minifundia such as the ones discussed in paragraphs 22-29.

77. Future performance of the sugarcane production and processing com-plexes should be closely watched. All 15 of them are now cooperatively ownedand operated by the workers. Output has increased since ownership transfer,but allowance should be made for the fact that there is a certain time lagbefore deficient mill maintenance that was observed would show up in output.Official data on the financial situation of the sugar industry was notavailable, but field visits and contacts suggest that, with one major ex-ception (Casa Grande), most units were experiencing financial and staffproblems.

78. The most serious probler. results from strained relations betweenthe owner-workers and the technical and managerial staff, which had led tothe departure of considerable numbers of the latter, several to similar, but

1/ Sierra farmers in some areas consider fragmentation as desirable, inas-much as it spreads risks of frost and hail.

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reportedly better paid, positions in Ecuador and Brazil and others to otherjobs in Peru. All of the sugar complexes are now understaffed in regard totechnical and managerial personnel, some as much as 40% below previouslevels. Secondly, the new owners do not yet identify themselves with thecooperative unit enough to forego short-term benefits in order to maintain orincrease the viability of the enterprise. This has led to increased laborcosts and reduction in expenditure for maintenance and investment (exceptinvestment to reduce reliance on temporary outside workers). A major con-founding factor is that the responsibilities of the Central of AgriculturalSugar Production Cooperatives (CECOAAP) and the SITNAOS-controlled SAF-CAP arenot clearly delineated, and the latter exercises control over more activitiesthan just the auditing of the accounts for which it was set up.

79. In view of the importance-of the sugar industry in terms of foreignexchange earning capacity, existing assets, and employment and the degree towhich success or failure of the experiment in the sugar industry will be con-sidered as representative of the entire land reforrm program, it is suggestedthat the Ministry of Agriculture be strongly represented in CECOAAP so thatit can provide adequate technical and managerial assistance. This wouldenable SAF-CAP to limit its functions to auditing. CECOAAP should also keepa close watch on the level of remuneration in the cooperatives, keeping inmind that the 25,0%0 owner-workers are already considerablv better off thanthle great majority of the population. It should also keep the interests ofthe surrounding temporary workers in mind. While it is essential that thecurrent training programs provided for new staff by the National Training andResearch Center for Agrarian Reform (CENCIRA), assisted by FAO, he intensifiedand reoriented towards practical matters, it is also suggested that an effortbe made to retain technical and managerial staff anti, possibly, recuperatesuch staff that has left in recent years. This wou:Ld probably require notso much in the way of financial incentives but rather a greater measure ofjob security and authority. Finally, the Governmenit should make it clearthat it is prepared to take over, not only the operation, but thie ownershipof cooperatives that fail to show prospects of long-term viability.

80. Not allowing the former sugar and cotton estates in the Coast andthe livestock haciendas in the Sierra to be broken up into small individuallyheld plots made good sense from an economic point of view, because theseholdings represent considerable economies of scale. However, this reasondoes not apply to most of the other categories of land that were subject toland reform, such as the medium sized farms in the Coast and in theSierra. These farms were also grouped into large cooperative productionunits. The lattet represent a large part of the thus far reformedsector in terms of acreage and potential output. Their present situationis also the most worrisome. In several cases, there is reluctance on thepart of the owner-workers to accept any cooperative management. The mainproblem is that they do not offer any scope for economies of scale and that,consequently, there is a tendency for these units to split up into smallercooperative units. To respect the concept of associative ownership, currentlegislation does not allow splitting up into groups of less than 15 members.

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The mission suggests that this interdiction be lifted in cases where the

type of cultivation, the absence of good management, or inadequate cohesion

among members warrant it. Members could be allowed, after a majority vote,

to work out a plan to split units up into individually owned holdings, and

present it to the Agrarian Zone authorities for approval. The production

cooperative structure could in approved cases then be converted into a service

cooperative. The prime criterion in the approval procedure should be the

likely effects on productivity of the land. During discussion of this

suggestion with the authorities of the Ministry of Agriculture, the latter

rejected it. They pointed out that, while, in general, individual land

property is allowed, the Agrarian Reform legislation does not provide for

associative units to split up into individually owned plots.

81. Unlike the situation of the coastal cooperative production units

(sugar and non-sugar alike), the SAIS experiments, by incorporating the Indian

communities surrounding the former livestock haciendas in the Sierra, have

the potential to improve income distribution within the areas they cover.

Although the income generating capacity of most of the SAISes is limited,

due to the harsh natural conditions of the Sierra, they can contribute to

programs that aim to raise living standards in the Sierra and can assure

participation by the beneficiaries in designing such programs.

Marketing and Price Policies

82. Concurrent with the reform of part of the production structure, the

present Government has adopted a series of measures over the last few years,

aiming at regulating the marketing of agricultural produce at as stable and

low consumer prices as possible. Prices of half a dozen basic products are set

at producer, wholesale and consumer levels; prices of most other commodities

are free, though subject to Government-set marketing margins. To help enforce

the price control measures, EPSA, a State-owned marketing agency was set up in

1969, and, although its activities have expanded rapidly (not only in retail

and domestic wholesale trade, but also in production and foreign trade), the

bulk of marketed agricultural production is still handled by private traders

and transporters. The present situation is further characterized by numerous

measures to control the movement of produce, frequent localized shortages,

large operating losses on EPSA's wholesale activities, and a (reportedly)

widespread black market.

83. The mission fully endorses the Government's desire to ensure a

regular and cheap supply of food. It has, however, a number of reflections

on the means used to achieve this.

84. It was pointed out earlier that there is a possible conflict be-

tween aiming at low consumer prices and at national self-sufficiency, to the

extent that these low consumer prices are reflected in farm prices that offer

inadequate production incentives. As even more massive subsidization of food

is clearly out of the question, and the actions in the marketing field have

not reduced the margins between producer and consumer prices as much as

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expected, the Governnent decided in the last few years to counter the de-terioration of farmers' terms of trade and the stagnating production byraising prices of some commodities -- first of rice and lately of beef,potatoes and wheat. Other commodities are likely to follow.

85. The mission is of two minds about these increases. There seems tobe a case for higher producer prices, inasmuch as for many years they havelagged behind prices of farm inputs and non-food commodities, and also, be-cause farmers have proven to be quite responsive to price measures. On theother hand, most commercial producers, in particular coastal producers, haveincomes already well above the majority of urban consumers. 1/ Low incomenon-commercial producers (the majority of Sierra farmers) are obviously notserved by price raises, although there exists a category of subsistencefarmers that potentially can become part-commercial farmers if the prope;incentives are made available to them. But it is believed that there arestill non-price incentives available. Removal of tenure uncertainty faced bymany small and medium-sized coastal farmers (who produce the bulk of marketedfoodstuffs) has already been mentioned. Greater availability of inputs andcredit to buy them can also be a decisive factor, not only to encourage coastalproducers, but also to generate marketable surpluses on some of the Sierrasubsistence farms.

86. On balance, it is suggested that these non-price factors be con-sidered before prices are raised. And also that, when a raise is pondered,the authorities take into account the income levels of both the producersand consumers most affected. For example, in deciding on the farmers' pricefor wheat, it should be considered that the limited domestic supplies ofthis commodity are mainly produced on low income Sierra farms and are prin-cipally consumed by the urban middle class. The contrary would be true fora commodity like beans, which is solely produced on coastal farms and isthe main source of protein for the urban low income groups.

87. Subsidization of consumer prices should be subject to similar con-siderations. The desire to limit the incidence of the erratic behavior ofworld market prices on domestic food prices has led to considerable subsidieson imported wheat and meat; in addition, sugar producers are required tosupply the domestic market at prices well below export prices. In 1974, tnesubsidy on imported wheat alone will cost the Treasury at least as much asSI. 2,400 million (US$60 mL_Ilion).

88. In an effort to diminish dependence on imports, so-called "pan-llevar" laws have been in effect for several years. Under these laws, farmersare obliged to devote 40% of their arable land to the production of food crops.These laws have been enforced with mixed success, though violators can, in

1/ One could still argue in favor of price incentives if all or part of netincome increases were taxed away from the larger producers and used tosubsidize production inputs in less privileged areas or consumption bylow income groups. In the view of the mission, however, the advantagesof such an approach would be outweighed by the administrative problemsand farmer resistance it would create.

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principle, be penalized by being cut off from credit and irrigation water.The measures have led to a reduction in the acreage of cotton. They appearednon-economic inasmuch as the returns from cotton cultivation were higiler thanthose from food crops. Recent events on the international commodity marketshave provided, however, an ex-post justification for the policy. Furtherthe mission would support the objective of self-sufficiency in food (with theexception of wheat), even if it meant a violation of the principle of inter-national comparative advantages. This stand is taken because of the excessivefluctuations of import prices and even of the non-availability of certaincommodities at any price (i.e., the 1973 U.S. export embargo on agriculturalcommodities), and further, because the prospects for international commodityagreements that could stabilize world market prices have not yet reached apromising stage. What is suggested, however, is that consideration be givento applying the 40% rule (or any other percentage that would be required) ona countrywide basis, rather than requesting each individual farmer or, even,each individual region to comply with it. From this, advantages from regionalspecialization in certain crops could be derived, or regained. As coastalagriculture had to switch from export crops to food crops in compliance withthe panllevar laws, a Sierra region like Cajamarca (and possibly other partsof the Sierra) has lost its traditional outlet for certain foodstuffs (potatoes,vegetables) in the coastal towns.

89. As to the Government role in the actual marketing of produce, itshould be noted that the various measures to control and restrict the move-ment of commodities result in a loss in market efficiency, the cost of whichis ultimately borne by the consumers and/or producers. These measures wereinitiated in order to eliminate the alleged abuses by middlemen, but in practicethey have developed to such an extent that they now represent one of the majorconstraints for raising agricultural production. It should be recognized thatthe commercial sector has a real function to fulfill in terms of collection,storage, grading, transport, and risks, which requires an appropriate remunera-tion. It would seem that there are other, less costly ways to avoid abuses bythe marketing sector and that reconsideration of the present measures, includingthose affecting exports, would be beneficial.

90. The alternative proposal would be roughly along the lines nowfollowed by EPSA in its wholesale and retail activities. It would consistof entrusting to this public enterprise a marketing function similar to thatof the private sector. EPSA would operate in competition with private traders,both in buying, storage, transport and selling operations. Safeguards shouldobviously be introduced against unfair competition and predominance by EPSA.For example, EPSA would have to be subject to the same taxes as the privatetrader and should not be allowed to handle more than, say, 20% of any indivi-dual commodity. While this approach is not incompatible with a system offixed consumer or producer prices, it is incompatible with the present systemunder which the Ministry of Agriculture imposes, in some cases, prices at allstages, and, in all cases, wholesale and retail margins that do not alwaysreflect real costs. While EPSA has tU comply with all these prices andmargins and thus incurs losses, the private trade, despite frequent severe

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sanctions, manages otherwise. It is therefore suggested that guaranteedproducer prices be continued for the most basic commodities, and that allother price and administrative controls be abandoned for these and othercommodities. This may have to be a gradual process, product by product,simultaneously and proportionately as EPSA's role in the marketing of acommodity is strong enough to avoid sudden fluctuations in consumer prices.EPSA's role as a safeguard against abuses by the private sector shouldobviously be strengthened by a Government check on EPSA itself. The mechanismfor this should include representation by both the Ministry of Finance andEconomy and the Ministry of Agriculture. EPSA should not remain a channelfor consumer subsidy nor should its own operations be subsidized.

91. A prerequisite for a regular supply of foodstuffs at stable prices,whether through Government marketing or private traders, is an adequatenetwork of collection, storage, processing and transport facilities andsufficient funds to carry stocks. The first point is recognized by theauthorities and the D. G. for Marketing in the Ministry has proposed anambitious investment program in marketing infrastructure, consisting of(a) wholesale markets in five main cities; (b) a network of warehouses forsugar, grain and fruits and vegetables; (c) distribution warehouses; and(d) a network of market checkpoints. Most feasibility studies are completed,and external financing is being sought from USAID and possibly IDB to financesome components of this program, while other parts are already under con-struction and financed from national funds. The cost of the entire projectis estimated at US$50 million.

92. Other priorities in marketing infrastructure concern rice millingand storage and facilities for cattle slaughtering ,and meat distribution.The project components, as suggested by the mission, and other aspects arediscussed in Annex 6. A provisional estimate of the rice project puts thecost at US$18 to US$24 million, of which the foreigni exchange part would be27 to 35%. The cattle marketing project would cost some US$3 million.

Agro-industry

93. Agro-industry could potentially make an imTportant contribution tothe development of the rural sector as a source of income and employment.Presently, however, the subsector, which represents about a third of thetotal industrial sector in terms of employment and value added, is facinga number of serious constraints to further growth.

94. There is uncertainty as to the role and prospect for privateinitiative in the present economo-political context. With the exceptionof two planned ventures in cotton (that are to be partly financed throughland reform compensation bonds), the few initiatives currently taking placeor planned are made by enterprises such as EPSA, the production cooperatives,SAISes, and the Central Government itself. Significantly, no real difficultyappears to exist in obtaining finance for new ventures from the three insti-tutions, COFIDE, Industrial Bank of Peru, and the Agricultural Development

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Bank. COFIDE has even commissioned a study to reveal project opportunities.The fact that S/. 8,530 million (US$200 million) in agrarian bonds arepotentially available to partially finance new ventures serves to underlineproject scarcity. The reluctance the private sector is manifesting is mainlycaused by the industrial legislation 1/ whereby half of the ownership is tobe jointly vested gradually in the workers, the other half remaining withthe former full owners. An additional cause is probably the legislation onsocial property, 2/ of which the possible impact is not clear as yet.

95. Unless there were some drastic changes in the Government's attitudeviz-a-viz the private sector, it would appear that in the years ahead, anynew initiatives will continue to come from the non-private sector. Theselead to pointing out the second major constraint, viz, unclarity as to whatpart of the Government is responsible for promoting and administering agro-industrial activity. Both the Ministry of Agriculture and the Ministry ofIndustry are, according to their charters, concerned. Allotment of functionsis ill-defined and the two institutions have a different outlook as to therole of the subsector and the goals to be pursued. To put it briefly, theMinistry of Agriculture sees agro-industry mainly as a means to consolidatethe land-reformed part of the agricultural sector, whereas the Ministry ofIndustry sees, as agro-industry's prime role, the improved supply of food-stuffs (qualitatively and quantitatively), the substitution of imports andthe promotion of exports. It is strongly recommended that responsibilitiesbe clearly defined. With the Ministry of Industry presently being the bestequipped in administrative terms, entire transfer to the Ministry of Agri-culture would not be prudent. Because of the many links with agriculturalproduction and marketing, thoughts of relieving the Ministry of Agricultureentirely of its responsibilities in the field of agro-industry should alsobe dismissed. The mission suggests that (a) the sugar industry be leftundisturbed, i.e., under the patronage of the Ministry of Agriculture, (b)the latter be assigned to administer defined simple "primary" processing,(c) all other agro-industrial activities be put under the aegis of theMinistry of Industry, and (d) the two ministries establish mechanisms foreffective coordination.

96. Another major constraint, particularly affecting existing industriesusing agricultural inputs, is the inadequacy of these inputs, both in termsof quantity and quality. Existing plants operate below capacity, especiallyin the field of fruit and vegetables, livestock feed, dairy, and oilseeds.There is obviously no ready solution for this situation as long as the tightsupply situation prevails. Aside from the sugar industry, it is estimatedthat the agro-industry subsector as a whole could increase output by an over-all one-third without significant addition of equipment.

11 Law on "Comunidad Industrial."

21 Law on "Propiedad Social" of May 1974.

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97. Whereas the general picture thus seems to offer little scope for amajor expansion of agro-industrial activities, the mission believes thatthere are a few project opportunities that deserve to be further explored.In the discussion of the Selva development potential, mention was made ofthe possible wild palm (aguaje) exploitation and of the desirability to growand process cassava. Both projects will require considerable pre-investmentwork. Less preparatory work will be involved in another priority project,viz, a packing and processing plant in the San Lorenzo area to assure outletsfor the fruits (mangoes, avocado, and limes) and milk produced in that area.With FAO/UNDP assistance, a small pilot plant has already been set up andmarket trials have been conducted for mangoes. The eventual project shouldprovide for an intake of 80,000 tons of fruit p.a. and 25,000 liters of milkper day. Estimated project costs would be in the order of US$5 to US$6 mil-lion, and might be financed through BFA, COFIDE, or out of the ongoing IBRDSan Lorenzo Irrigation Project.

98. Apart from these specific projects, there is room for a project ofa general nature to provide technical assistance to improve processing ac-tivities by producer cooperatives. The assistance would concern projectformulation and initial operations. Financing of the agro-industrial ven-tures thus prepared would come from the regular institutions (BFA, COFIDE,or CECOAAP). It is suggested that their financing would include the cost ofthe technical assistance services. In this way, a revolving fund could beestablished. Many of the newly established producer cooperatives are feelingthe need to integrate their agricultural production with some simple proces-sing. Others already operate processing facilities (e.g., the sugar coopera-tives) but have inadequate expertise to prepare credit requests for expansionor modernization.

99. The Institute for Agro-industrial Research (IIA) is probably themost appropriate organization through which to channel this project. IIA,a public organization under the aegis of the Ministry of Agriculture, wasset up in 1970. With the help of considerable UNDP/FAO support, it has sincedeveloped into an agency that possesses excellent facilities for food process-ing and provides services of high standard, almost exclusively to the privatesector. So far, public institutions have made little use of IIA and havetended to work up projects in isolation (i.e., COFIDE's recent survey ofagro-industrial project possibilities). The suggested technical assistanceproject will further strengthen the IIA role. It is also recommended thatIIA's governing board be broadened and that representatives of COFIDE andprivate enterprise be incorporated.

100. The mission has also looked into the problems of the industriesproviding non-agricultural inputs to agro-industry and into those providinginputs to agricultural production. In addition to providing a more detailedanalysis of agro-industry proper, Annex 7 discusses these two subsectors.Suffice it here to say that the mission strongly endorses the planned phosphaticfertilizer facility in Bayovar. This project (estimated cost US$300 million)would not only make Peru self-sufficient, but would also provide for sub-stantial exports.

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Credit

101. The vast majority of Peruvian farms so far have no access to in-stitutional credit and the ones that do (some 50,000 out of over 1 million)are facing a variety of difficulties in obtaining such credit in the rightamounts, at the right time and for the right term. A major, but decliningshare, of all institutional credit is for short-term production purposes. Itfinances about 20% of the value of annual production. A small part of medium-and long-term on-farm investment needs is financed by medium- and long-terminstitutional credit. Non-institutional credit (from suppliers, merchants,relatives and moneylenders) is reportedly widespread, in particular toindividual holdings in the coastal area, but its precise importance is notknown.

102. Out of the scarce and sometimes conflicting evidence, the missionhas tried to distill answers to the following two questions: to what extentshould and can institutional credit become accessible to those who do nothave access now, and, how can present lending procedures be improved?

103. The mission believes that many farms, probably over half a million,are so small in terms of potential output, that their owners should not beconsidered potential borrowers of commercial-type credit. These farms, thevast majority of which are located in the Southern and Northern Sierra, shouldbe considered as sub-subsistence farms; any imaginable increase in outputwould be absorbed in higher consumption or by more consumers. Credit canonly aggravate the plight of these people. To help them to exploit the littleunused agricultural potential they have, they should receive the necessarymeans (seeds and fertilizer) free of charge. The best help would consist ofoff-farm jobs in the Sierra, for example, through a public works program.

104. There are also a large number of subsistence farms, possible asmany as 300,000 to 400,000, in all these regions, but again mostly in theSierra, that so far have no access to any credit but sufficient unused poten-tial to generate marketable surpluses, provided they have credit to buy thenecessary inputs. The question is, through what mechanism should this creditbe channelled? In view of the high cost involved in a large number of smallindividual loans and the difficulties of recovery, one should think of aformula whereby credit could be made available through BFA to groups offarmers. The representation of the group would then take care of the dis-tribution to and collection from individual smallholders. The SAISes werealready mentioned as one possible channel. The task is facilitated, at leastin the Sierra, by the fact that the population is socially and politicallyorganized in so-called indigenous communities. The SAISes, or any otherappropriate entity, would onlend the money to the members of the group, pref-erably in kind, and be paid back, also possibly in kind.

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105. Tihe members of the group would be collectively responsible for theindividual debts, so as to enhance the chances of repayment. This collectiveresponsibility may be considered as a half-baked idea, 1/ but, according tothe mission's information, it works in such places as Pakistan (LyallpurProject), .Madagascar, Ethiopia (CADU Project), Indonesia, Paraguay (USAID-sponsored CUNA experiments) and probably others. One important condition forsuccess is that the group have no more than 30 members. The mission doesnot have a-ny definite ideas about the terms of the onlending or who shouldcarry the administrative cost involved, but it would think it reasonable thata subsidy element be allowed and be carried by the public treasury. Whatis important though is that credit be given for only a few specific purposesand that there be adequate arrangements for marketing the output.

106. Availability of credit to this category of potentially commercialfarmers should be preceded, or at least accompanied, by efforts in favorof farm faail ies that cannot be helped by credit. This is important becausethe two categories often coexist in the same region, possibly in the samecommunity.

107. Moving further up the scale, there is a considerable number ofsmall farms, possibly as many as 100,000 to 150,000, that produce partly orentirely for the market, but most of which have no access to institutional-redit. In many cases, such farmers obtain credit from other sources, at

quite onerous terms. Again, most of these are in the Sierra, but, in termsof output, their main importance is probably in the Coast, where they accountfor much of the food crops other than wheat, potatoes (Sierra) and bananas,tropical fruit (Ceja de Selva).

108. Records show that, currently, nearly 50,000 small-scale commercialfarms receive credit (virtually all short term) from BFA. The missionbelieves that, ideally, all commercial producers should have access to BFAcredit, but it realizes the present constraints:

(a) a preference by the public authorities, including BFA,zo give highest priority to the new production cooperatives,probably for ideological reasons as well as to serve adesire to enhance the possibilities of success of theland reform program; and

Cb) a reluctance by many of the farmers to borrow because ofTheir uncertain land tenure status and a reluctance by3FA to lend to them for the same reason.

Ways to e?nl the prevailing land tenure uncertainties were already suggested.As to the ligh priority attached to associative farming, the mission obviouslydoes not want to comment on the ideological or political motives behind the

1/ See, however, IBRD "Bank Policy on Agricultural Credit" (May 1974) foran endorsement of credit to farm groups with collective responsibility.

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preference for the associative farms, but it believes that their need forcredit is considerable because of the decapitalization that occurred priorto expropriation. It needs to be pointed out though that, despite stagnatingproduction, a substantial part of commercial output is still produced byinidividual smallholders. If one is to assume that they should continue tocontribute to food supply for the foreseeable future, these smallholders willneed credit, short term as well as medium and long term. This point wasalso made by the IBRD mission that appraised the 1973 IBRD loan to bFA(Loan 933-PE).

109. BFA's loans to small-scale farmers amount to some 90% of all itsloans, but only to 20% of the amount lent. Doubling or tripling its involve-ment with this category of borrowers would, in the present circumstances,put a strain on BFA's administrative capacity and, because of the relativelyhigh cost of small loans, it would also have an adverse effect on operatingexpenses. An interesting proposal to mitigate both problems was made to themission by the Directorate General of the Agricultural Sector Planning Office.Rather than go through the whole procedure of application, justificationand reveiw each time a farmer wants to borrow money, local BFA branches oragencies (Map IBRD 10840) would open, once and for all, a line of credit tofarmers at amounts based on standards related to each farmer's size ofoperations.

110. The creation of an increasing number of associative farms isreflected in the place they occupy in BFA's activities. Yet, the missionfound that lending to these new entities poses problems and is well belowtheir needs. Firstly, BFA is reluctant, and rightly so, to lend to entitiesthat do not yet have proper management, such as several large non-sugarproduction cooperatives. This is particularly true when BFA makes loansfrom its own funds. When BFA lends from so-called Trust Funds (para 112)and non-BFA staff have a predominant voice in the appraisal of loan applica-tions, there has been a tendency to be more lenient in this respect. Second-ly, the new entities often do not yet themselves have the capacity to present"bankable" investment plans. Because such expertise is readily available inthe private sector, it is suggested by the mission that the cost of projectpreparation be financed, together with the investment itself.

111. BFA charges different interest rates, depending on the source,destination and purpose of funds. Rates range from 2% to 12% on Trust Fundsand a dozen or so external credits (bilateral and multilateral) which theGovernment has entrusted to BFA to administer. For its own funds, BFAcharges according to the size of the loan --from 7% for small loans to 13%for large loans. 1/ To reduce confusion on the part of borrowers and tosimplify BFA's administration there is a strong case to make interest ratesmore uniform. IW'ith current inflation over 10% p.a., most of the interest

1/ The rate on loans for associative farms is determined by dividing theloan by the number of members and is mostly 7%. The rates mentionedwere valid until April 1974, but since then, some changes have been

made. The rate on small loans was reportedly increased to 9%.

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rates are negative; rates should thus be set at the top of the present rangeand be adjusted as the rate of inflation changes. 1/ Some differentiationaccording to size of farm would be justified and would be consistent withthe suggestion that marginally commercial farmers receive credit at sub-sidized rates as a means of income transfer in favor of the low income farmers.

112. The mission further suggests that the procedures for processingloans from Trust Funds be modified, in the sense that BFA have sole authorityto approve loans. Under present arrangements, special committees predominant-ly composed of non-BFA personnel appraise applications for loans from TrustFunds. Committee members are not necessarily qualified; they also tend tofavor the objectives of the institution they represent. As a result, loansmay be approved that are not necessarily economically justified. 2/ A signof this is the relatively high incidence of defaults in the case of TrustFunds as compared with defaults on loans from BFA's own funds.

113. BFA, as the largest source of institutional credit to agriculture,has adequate funds for lending at present. It holds far more liquid fundsthan are required under banking regulations. Another major potential sourceof lending is the commercial banks; agricultural loans represent only 5% oftheir portfolio, versus 10% a few years ago. By allowing them discountfacilities with the Central Bank, they could become more interested againin agricultural lending. CECOAAP, the central organization of sugar coopera-tives, also disposes of considerable funds from savings, some of which it cur-rently uses for diversification programs of their members. Thus, the needfor additional capital does not appear to be great in the immediate future.However, if lending were to increase to levels consistent with present needs,in other words, if the constraints in lending to small-scale commercialfarmers and associative holdings would disappear and an effort were made toincorporate potentially commercial farmers into the credit system, moreexternal finance could be required, in particular for medium- and long-termon-lending. Among its proposals, the mission has therefore projected threecredit projects of a type similar to that under the 1973 loan to BFA, thefirst for as early as 1976, the others for 1978 and 1980. Whether theseprojects will be needed for the years mentioned will obviously depend on howthe total credit picture will develop and in particular on the way the 1973loan develops.

D. Projects Identified by the Mission

114. The projects identified and proposed by the mission have been listedin the table presented on page 38, and their locations are shouin on Map IBRD10837. While all of the projects listed fit into the priorities for sector

1/ The 1973 IBRD loan introduced a provision for adjustment.

2/ Another aspect is that losses are not borne by BFA but by the Treasury.

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development, the list is not exhaustive. The map also shows the projectsthat have been undertaken by the Government, but that, in the view of themission, do not deserve priority consideration (such as the large new irriga-tion projects on the Coast) or that have, at this stage, serious doubtfulaspects (such as further oil palm plantations in the Selva). The missionrecognized, however, that the Government's selection of these projects isbased on several criteria of which economic justification is only one.

115. Obviously, several of the projects listed are not more than promis-ing ideas at this stage that require considerable pre-investment work. Inother cases, work is going on that is undertaken specifically to prepare aproject or that would be relevant in project preparation. Finally, in a few-instances, preparatory work is well underway and so far advanced that prepara-tion of a feasibility study would require less than a year. The table showsthese various stages of preparation.

116. The indicated timing is intended to reflect (a) the relative prior-ity, and (b) an assumption about the time required to complete preparation.In this respect, it should be noted that the first project is a drainage proj-ect on the Coast, although the preceding discussion makes much of the case forthe priority of Sierra development. The reason is that preparation of aSierra project has to start from scratch, or almost, while preparation ofthe drainage project could be done rather quickly and could make a rapidand substantial contribution to food supply in the next few years when thesupply situation is likely to deteriorate. The mission's assumption aboutthe rapidity of project preparation is based on the view that the projectshould be as simple as possible and be limited to drainage of the salinelands (paras 54 and 55). If this view would appear not to be justified,and if a more comprehensive approach would be taken to rehabilitate entirevalleys, this would most likely lead to delays in project preparation andexecution. In that case it might be desirable to concentrate right away onpreparation of a project for the Altiplano, or another Sierra project, or,possibly, on the Huallaga Central settlement project.

117. The amounts shown as total project costs are in most cases purelytentative. In the case of the first drainage project, it is based on a perhectare estimate of US$800 and an area of 30,000 to 40,000 ha. The HuallagaCentral project is based on 20,000 settlers at a cost of US$2,000 each. Forthe other projects, the consideration has been that, for a country like Peru,a lower limit of US$30 million and an upper limit of US$50 million areprobably reasonable.

118. The proposed agricultural credit projects include several activitiesthat are too ThzgL fizianced by credit tc, iidividual Latiners but toosmall to warrant separate projects, such as development of water buffaloproduction in the Selva; small dairy industries in various locations in theSierra; restoration of the vicuna herd, along the lines of the current projectnear Nazca (Sierra); development of cassava production and processing on theSelva river banks; and several projects for agro-industry and marketinginfrastructure. They could best be financed through BFA or COFIDE.

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Possible Agricultural Projects through 1980 _

(Amounts refer to total project costs in US$ million, 1973 dollars)

Completion of Stage of PreparationFeasibility Study in 1975 1976 1977 1978 1979 1980 as of Early 1974 2/

Drainage Projects, CoastI 25 1/ CII 40- BIII 140 BIV 40 B

Groundwater, Tacna 40 B

Agricultural CreditIV 40 CV. 40 CVI 50 C

Research 30 A

Rural Development, SierraAltiplano I 50 ACuzco 30 BCajamnarca I 30 BAltiplano II 50 ASmall Irrigation 50 ACajamarca II 50 AWool Processing 30 BLivestock SAIS 50 A

Settlement, SelvaHuallaga Central 50 CPto. Bernudez 50 BPto. Maldonado 50 A

Forestry & Forest Ind.,von Humboldt 30 B

TOTAL 25(1) 70(2) 150(4)190 (5) 240(5) 190(4)

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