Document of . L

The World Bank i I

FOR OFFICIAL USE ONLY

Report No. P-3371PE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$81e2 MILLION

TO

PETROLEOS DEL PERU, S.A.

WITH THE GUARANTEE OF

THE REPUBLIC OF PERU

FOR A

PETROLEUM PRODUCTION ENHANCEMENT PROJECT

July 22, 1982

This document has a restricted distribution and may be used by recipients only in mw-

their official duties. Its contents may not otherwise be disclosed witlout World Bnk authorizaton.

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CURRENCY EQUIVALENTS

The exchange rate is being adjusted daily roughly in line with thedifferential between domestic and international inflation. The exchange rateand currency equivalents in 1981 and as of June 1, 1982 were as follows:

Currency Unit = Sol (S/.)

Calendar 1981 June 1, 1982

US$1 SI. 426.60 S/. 644.04S/. 1 US$0.0023 US$0.0016S/. 1,000 US$2.34 US$1.55

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS

bpd - Barrels per day

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

ERP - Economic Recovery Program

IDB - Inter-American Development Bank

IPC - International Petroleum Company

MEM - Ministerio de Energia y Minas(Ministry of Energy and Mines)

MW - Megawatt

PET1FOPERU - Petroleos del Peru, S.A.(National Petroleum Company)

TOa - Tons of oil equivalent

USAID - United States Agency for International Development

FOR OFFICIAL USE ONLY

REPUBLIC OF PERU

PETROLEUM PRODUCTION ENHANCEMENT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Petroleos del Peru, S.A. (PETROPERU)

Guarantor: Republic of Peru

Amount: US$81.2 million, including a capitalized front-endfee.

Terms: Repayable in 17 years, including four years ofgrace, at 11.6 percent interest per annum. TheGovernment of Peru would charge PETROPERU aguarantee fee of 1.2 percent per annum.

Project Description: The objectives of the project are to increaseproven oil reserves and the production level inPETROPERU's Laguna-Zapotal fields on the northcoast'of Peru and to improve the company's capa-bility to prepare and implement petroleum develop-ment projects. These objectives would be accom-plished through the provision of: (i) equipmentand infrastructure as well as drilling and projectmanagement services for 1.59 new wells to bedrilled and 76 existing wells to be reactivated inthe Laguna-Zapotal fields; (ii) training forPETROPERU's staff; and (iii) consultants' servicesto assist PETROPERU in project supervision and tostudy ways of optimizing the exploitation of theLaguna-Zapotal fields and prepare productionenhancement projects in adjacent areas. The proj-ect faces no special risks. The Laguna-Zapotalfields have a long production history and anexperienced international. project managementservice company would be contracted by PETROPERUto assist in executing the project in an efficientmanner.

|This document has a restricted distribution and may be used by recipients only in the performance of|their official duties. Its contents may not otherwise be disclosed withoijt World Bank authorization.|

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Estimated Costs (including about US$24 million equivalent in local taxes andduties):

Local Foreign Total-US$ millions--

A. Production Enhancement 69.7 112.9 182.6

(i) Infrastructure 4.3 5.3 9.6

(ii) Well completion andpumping equipment 23.8 31.5 55.3

(iii) Drilling and well services 40.5 64.8 105.3

(iv) Project management 1.1 11.3 12.4

B. Consultant's Servicesand Training 0.5 2.7 3.2

Base cost 70.2 115.6 185.8

Physical contingencies 7.0 11.6 18.6Price contingencies 12.4 23.2 35,6

Total project cost 89.6 150.4 240.0

Front-end fee on Bank loan - 1.2 1.2

Total financing required 89.6 151.6 241.2

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

Bank --- 81.2 81.2PETROPERU 40.0 --- 40.0Export Credits --- 60.0 60.0Commercial Banks 49.6 10.4 60.0

Total 89.6 151.6 241.2

Disbursement Estimate:

Bank FY 1983 1984 1985 1986 1987…US----------US millions--------

Annual 13.1 11.2 22.0 24.3 10.6Cumulative 13.1 24.3 46.3 70.6 81.2

Rate of Return: In excess of 100 percent.

Staff Appraisal Report: No. 3856-PE of July 19, 1982

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

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

PETROLEOS DEL PERU, S.A. WITH THE GUARANTEE OF THE REPUBLIC OF PERUFOR A PETROLEUM PRODUCTION ENHANCEMENT PROJECT

1. I submit the following report and recommendation on a proposed loanto Petroleos del Peru, S.A. (PETROPERU) with the guarantee of the Republic ofPeru for the equivalent of US$81.2 million to help finance a PetroleumProduction Enhancement Project. The loan would have a term of 17 years,including four years of grace, with interest at 11.6 percent per annum. TheGovernment of Peru would charge PETROPERU a guarantee fee of 1.2 percent perannum on the outstanding amount of the Bank loan, bringing the cost of theloan to PETROPERU to 12.8 percent per annum.

PART I - THE ECONOMY _/

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

Natural and Human Resources

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

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

5. Although Peru's energy resource base is relatively diverse, withscope for expanding hydro and coal based power generation, petroleum isexpected to remain the major energy source in Peru through the rest of this

1/ This part is substantially unchanged from Part I of the Peru Sixth PowerProject President's Report of May 24, 1982 (Report No. 3339-PE).

century. Peru's domestic oil production more than doubled between 1977 and1981 to over 190,000 barrels per day (bpd), and it became a net exporter ofabout 60,000 bpd. To enable Peru to remain a net petroleum exporter, theGovernment has embarked on a strategy of accelerated exploratiOTi developmentefforts to increase production and of rational pricing policies to containdemand growth. Prices for domestically consumed petroleum products havebeen increased at regular intervals. In addition, new legislation wasenacted offering special tax incentives to domestic and foreign investors,and the response has been positive. The Government strategy is alreadybearing fruit with petroleum output expected to increase in 1982 to anaverage level of 207,000 bpd.

6. As a result of three decades of rapidly falling mortality rates,Peru's population growth accelerated during the 1930-1960 period. Since theearly 1960s, birth rates have fallen gradually, mainly caused by the urbani-zation process and improved education. But with declining death rates, popu-lation has continued to grow at about 2.6 percent p.a. and is currently esti-mated at about 17 million. The country's urban population is increasing at4.2 percent p.a., and about a quarter of all Peruvians live in the Limaarea. Given the structure of Peru's population, the labor force is expectedto grow in excess of three percent per year during the next 20 years. Overthe same time frame, it is expected that overall population growth will fallonly slightly to about 2.4 percent p.a. unless an effective populationcontrol policy is adopted. The Government is conscious of the need to slowdown Peru's demographic growth rate and is now developing a primary healthcare program which would contain a family planning compon,ent.

Past Development Policies and Perfomance (1968-78)

7. Two successive military Governments, in office from October 1968until July 1980, followed a development strategy aimed at promoting economicgrowth and improving distribution of income and wealth, not only betweenindividuals but also between regions. The pattern of asset ownership in theeconomy changed drastically through nationalization and a sweeping landreform. The Government took direct control of key economic sectors andimposed complex legislation to control the private sector. Many of thepolicies carried out after 1968 had an excessive cost, and their implementa-tion was inefficient,

8. Between 1968 and 1977, Peru's Governments followed expansionaryfiscal and credit policies. As a result, aggregate demand considerablyexceeded aggregate supply resulting in strong inflationary pressures andwidening external gaps. Inflation accelerated from five percent per year in1970 to 38 percent in 1977. interest rates, however, remained substantiallynegative in real terms, discouraging financial savings and stimulatingcapital flight. Moreover, the exchange rate remained practically constantbetween 1968 and 1975, thus contributing to the overall disequilibrium.

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

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

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

11. Between 1975 and 1977, several unsuccessful attempts were made tocope with Peru's deteriorating economic situation. By mid-1978 the economiccrisis had reached grave proportions, with a drop in real GDP and inflationapproaching 100 percent on an annual basis. Moreover, the private sector wasfinding it increasingly difficult to open letters of credit for new imports,and the banking system's net international reserves had dropped to a negativelevel of US$800 million.

12. Beginning in May 1978, the Government adopted a number of importantmeasures aimed at strengthening public finances, improving the balance ofpayments and curbing inflation. The Government also negotiated a stand-byarrangement with the IMF in support of the stabilization program.

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

14. To overcome the economic recession, in late 1978 the Governmentadopted a comprehensive Economic Recovery Program (ERP), which, in additionto the above-mentioned stablization actions, included measures to open up theeconomy, promote non-traditional exports, strengthen the tax system bybroadening its base, and generally improve the efficiency of resource alloca-tion in the private and public sectors. These policy changes--together witha declining domestic market because of the recession---resulted in a majorreorientation of industrial development, with a large increase in the valueof manufactured exports from about US$200 million in 1977 to the US$750-800million range in 1980-81 (equivalent to about eight percent of output). TheGovernment also drew up a public sector investment program that aimed atredirecting investment towards projects of clear economic priority and withpositive effects on production and employment. In support of the ERP, theBank approved a US$115 million Program Loan in May 1979.

15. The Government's stabilization-cum-economic recovery programresulted in a strong improvement in public sector finances in 1979.Public sector current account savings rose from -0.5 percent of GDP in 1978to about 3.7 percent of GDP in 1979, and the overall deficit was reduced from5.7 percent of GDP in 1978 to 1.7 percent in 1979. In spite of Peru'simproved fiscal performance, inflationary pressures remained strong with aconsumer price increase of 67 percent in 1979. The more careful managementof public finances also had a positive impact on the balance of payments.

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Moreover, an increase in petroleum exports and a substantial improvement ofPeru's terms of trade contributed to high overall surpluses of the balance ofpayments in 1979 and 1980. At year-end 1980, the net reserve position hadimproved to about US$1.3 billion, equivalent to about four months ofimports. Peru also made greater use of assistance from official bilateraland international sources, thus improving the structure of its externaldebt. Real GDP growth rebounded to 3.7 percent in 1979; in 1980, however,growth dropped to 3.1 percent owing, in part, to a drought which affected theagricultural sector. Moreover, because of a relaxation in fiscal discipline,the public sector deficit increased in 1980 to six percent of GDP, keepinginflation for the year at a high level--59 percent.

Recent Developments and Outlook

16. In July 1979, the military Government promulgated a new constitu-tion, written by a popularly elected constituent assembly. Elections wereheld in May 1980, and following his electoral victory, Presideni: FernandoBelaunde was inaugurated on July 28, 1980. His Government faced achallenging economic and social situation with a number of acute problemswhich had been disguised by the apparently solid financial situation. Theseincluded: high levels of under- and unemployment, particularly in urbanareas; higher underlying inflation than had been reported because of pricecontrols and deferred price adjustments for public goods and services; apublic sector deficit that had been reduced by freezing expenditures foreconomic and social services (including education, health and housing);a balance of payments with a substantial surplus, which, nowever, was partlydue to unusually high commodity prices and to the fact that import levelswere depressed and manufacturing exports high owing to the recession; and,finally, deteriorated income distribution over the past several yearsresulting in increased social unrest.

17. The Government named an economic team committed to economic effi-ciency, decontrol of the economy (including divestiture of sone of theState-owned enterprises), promotion of the private sector (including foreigninvestment), and policies aiming at a more equitable sharing of the benefitsof development through job creation and specifically targeted socialprograms. Its reliance on, and promotion of, private initiative, in parti-cular, distinguish the present Government's philosophy and economic programfrom that of its immediate predecessors.

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

19. In an effort to improve resource use, the Government made progressin correcting major price distortions. Food subsidies were greatly reduced

and most controlled agricultural prices were adjusted to internationallevels. The marketing of agricultural products was liberalized, anld publicutility and petroleum prices were adjusted at regular intervals. Moreover,the Government endeavored to rationalize public investment and its financing-- an effort that was supported by a Bank sponsored Consultative Groupmeeting in May 1981.

20. The above efforts were complemented by measures to strengthenpublic sector institutions. The important public enterprise sector, forexample, was granted greater autonomy by transforming these enterprises intoState-owned limited liability corporations operating under private law. Thismeasure gives these companies, inter alia, greater freedom in fixing staffcompensation and, thus, helps them to recruit or to retain capablepersonnel. Many of the above measures have already had positive short-termeffects, and they have laid the ground for medium-term structural adjustmentsof the Peruvian economy.

21. In spite of the above policy initiatives, economic performance in1981 lagged behind expectations. GDP grew only at about four percent, andemployment generation was also sluggish. The balance of payments deterior-ated substantially as a result of declining export prices, high interestrates on the country's debt with commercial banks, and a rapid expansion ofimports. The loss in net reserves amounted to about US$580 million, equiv-alent to about 2.5 percent of GDP. A major factor in the deterioration ofthe balance of payments was the large public sector deficit which reachedabout eight percent of GDP. On the positive side, some progress was achievedin reducing inflation: while inflation on a December 1980-December 1981basis reached 73 percent, during May-December 1981 it dlecelerated to anannual rate of about 50 percent, mostly because of the openness of theeconomy, the price dampening effects of an increase in imports, and--to someextent--to a deceleration of the mini-devaluations. During 1982, inflationis expected to reach 60 percent (which is also the average rate during thefirst five months of the year). The Government is aware that this level isstill too high, however, and is following restrictive demand management whichit expects will result in a further drop in inflation.

22. Reducing the public sector deficit has, once again, become themajor challenge facing Peru's economic managers. While the deterioratedexport situation has had a negative impact on tax revenues, the 1981 deficitwas mostly the result of steep increases in expenditurels and somewhat laggingadjustments of petroleum and rice prices. Excess expenditures over initialbudget allocations were incurred mostly for investment projects of lesserpriority. To tackle the difficult public finance situation, the Governmentis following a restrictive financial program for 1982 with tight creditceiliags and limits to foreign indebtedness. The Government also trimmed thepubli: investment program in line with its investment priorities. The Bankhas ai ongoing and frank dialogue with the Peruvian Government on theseissues. Moreover, in June 1982 the IMF approved an SDR850 millioncompensatory-cum-EFF arrangement to support Peru's stabilization efforts.Peru's total debt outstanding to the IMF as of April 30, 1982 amounted toSDR567.9 million.

23. Based on cautiously optimistic assumptions with regard to economicmanagement, through the medium term the country is expected to have economic

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growth of about 4-5 percent per year and a manageable balance of paymentssituation. Peru's balance of payments could, however, become precarious ifthe exportable surplus of oil declines. While measures are being undertakento speed up petroleum exploration and to increase manufactured exports, theresults of these endeavors may not come in time to countervail the potentialforeign exchange shortfalls. Against this background, there is a continuingneed for official development assistance. Taking the above factors intoaccount, considering an expected debt service ratio hovering around 35 per-cent of exports (which are relatively diversified) and assuming that theauthorities continue the initiated course of economic policies. Peru iscreditworthy for Bank lending.

PART II - BANK GROUP OPERATIONS IN PERU

24. The Bank has approved 49 loans to Peru for a total amount ofUS$1,221.1 million, net of cancellations. About 30 percent of the Bank'slending to Peru has been for transportation (mainly highways and ports), 18percent for agriculture, 20 percent for the energy sector, 15 percent formining and industry, about seven percent for education and urban developmentand 10 percent for a program loan in support of the ERP in 1979.

25. Annex II contains a summary statement of Bank loans and theirdisbursement status as of March 31, 1982 and notes on the execution ofongoing projects. As of this date, US$440 million was undisbursed.Disbursements on Bank-financed projects moved slowly in the late 1970s,primarily because of weak project execution capacity and a shortage ofcounterpart funds that worsened as the economy deteriorated during thisperiod. Disbursements have improved, however, owing to vigorous Bank andGovernment efforts to correct the situation by, inter alia, (i) opening aBank resident mission in Peru; (ii) restructuring a number of slow movingprojects; (iii) Government provision of adequate counterpart funds; and (iv)Government creation of a special commission to monitor loan execution andresolve administrative problems. These actions are bearing fruit,Disbursements on project loans amounted to US$44 million in FY80, US$70.5million in FY81 and US$75.8 million in FY82. This compares witla averageyearly disbursements of US$27.5 million during FY77-79.

26. The main objectives of Bank lending to Peru are to assist in (i)the creation of the physical infrastructure needed to sustain and fostereconomic development; (ii) the expansion of productive capacity in crucialsectors, i.e., petroleum, agriculture and mining; (iii) the strengthening,through technical assistance loans and regular operations, of public sectormanagement and of local capacity to prepare, implement and operate projectseffectively; and (iv) the improvement of living conditiors for the urban andrural poor. In the past, Bank lending concentrated on infrastructure in thetransportation and power sectors. More recently, the Bank's emphasis hasshifted to more directly productive fields--mining, petroleum, agricultureand industry--to help Peru to strengthen its balance of payments. Lendingfor social projects has also grown and will be further stepped up in thefuture. The next operations that would be ready for the Executive Directors'consideration include a project to improve public sector management,and ruraldevelopment, health, education and power operations.

27. Bank loans constituted an estimated 6.4 percent of Peru's totalpublic external debt outstanding and disbursed at the end of 1981, andabsorbed about three percent of the country's public external debt service in1981. Assuming increased recourse to long-term bilateral and multilateralaid by Peru, the Bank's share in the country's outstanding public foreigndebt by 1985 could reach about ten percent, and its share of debt-servicewould be around 4.5 percent.

28. IFC commitments as of March 31, 1982 were US$37.3 millionof which US$18.9 million is held by the Corporation. A summary statement ofIFC investments as of March 31, 1982 is presented in Annex II. In addition,a palm oil and a polymetallic mining project were riecently approved, and aventure capital company is now under consideration.

29. The other principal lending agencies active in Peru are the Inter-American Development Bank (IDB) and the United Statess Agency for Interna-tional Development (USAID). Their total commitments as of December 31, 1981were US$849 million and US$348.8 million, respectively, and their shares ofpublic debt service as of end-1980 were estimated at 0.6 percent and 0.5percent, respectively. In its future lending, IDB is expected to emphasizelending for agriculture, industry, mining, roads, and small scale irriga-tion. USAID is expected to stress rural developmenl and health.

PART III - THE ENERGY AND PETROLEUM SECTORS

The Energy Resource Base and Balance

30. Peru has a large and diverse energy resources base consisting ofhydroelectric power, oil, coal, natural gas, some geothermal power, andrenewable resources such as firewood and bagasse. HIowever, in spite of therecent acceleration of exploration and production activities, Peru's energyresources are relatively untapped. The country's economically viable hydro-electric potential, for example, is estimated at 60,000 MW of which onlyabout 1,650 MW are currently being exploited. Estimates of total oil, coaland natural gas reserves vary from 9,700 to 3,500 miLllion tons of oilequivalent (TOE), with proven and probable reserves of 200 million TOE. Thecurrent annual rate of energy consumption is estimated at 12 million TOE.

31. Known (proven and probable) oil reserves are estimated at about 110million TOE or 800 million barrels. Some coal deposits suitable for thermalpower generation or for metallurgical coke have been identified but most ofthe country has not yet been adequately explored. T'he Government hasrecently formed a coal exploration company and requested a loan from the IDBto initiate coal exploration efforts. Furthermore, there are some naturalgas reserves and substantial geothermal potential wlich the Government is nowbeginning to study systematically.

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

Primary Energy Source % Share End Use % Share

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

100.0 100.0

Source: Ministry of Energy and Mines - National Energy Balance, 1981

33. As is evident from the preceding table, the country depends heavilyon petroleum to meet its energy needs. Oil accounts for about 60 percent ofthe country's energy consumption and for an even higher share (about 70percent) of commercial energy requirements. Even with the acceleratedexploitation of hydroelectric power and coal resources, oil will continue tobe the most important source of energy during the next two decades, with anestimated share of around 50 percent of total energy consumption by the endof this century. The second major source of energy in Peru is firewood,principally in the rural areas. About 60 percent of Peru's land surface iscovered by natural and cultivated forests. However, measures to preventdeforestation and the continued shift of population from rural to urban areaswill tend to decrease, in the long term, the share of this resource in totalenergy consumption.

Energy Sector Organization and Planning

34. Operational responsibility for the various energy subsectors inPeru is divided among several autonomous Government entities. PETROPERU, thenational petroleum company, has responsibility for State-run productionoperations and almost all refining and distribution of petroleum products inPeru. International petroleum companies--Occidental, Belco, Superior, Shelland Hamilton Bros-Petroinca--are exploring for, and the first three produce,petroleum under contracts with PETROPERU. Primary responsibility for powergeneration lies with the national power company, 5ELECTROPERU, and variouslocal State-owned companies handle distribution in the :Larger cities. Coalexploration and development are undertaken mainly by the State miningcompany, MINEROPERU. Development and conservation of forestry, resources areunder the aegis of the Ministry of Agriculture.

35. The Ministry of Energy and Mines (MEM) is responsible for overallplanning and policy-making in the energy sector and for initiating sectorpricing actions, which must be approved by the Government. In recent years,MEM has received considerable technical assistance for energy planning. Thishas included an energy balance study (completed in 1976 by UNDP) and anassessment of energy resources and energy planning efforts (done in 1979 by ateam composed of U.S. Government and Peruvian officials). The GermanGovernment financed a survey of hydroelectric potential in 197Y9 and has,together with the Bank under the Fifth Power Loan (Ln. 1215-FE of 1976),financed a power sector master plan (completed in 1980) in order to develop aleast-cost investment program for the sector. MEM thus has sufficientknowledge of the country's energy situation--except in the areas of coal

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resources and geothermal potential--to develop a comprehensive resourcedevelopment program. The Government is considering the establishment of anational energy council to develop such a program and coordinate sectorpolicies. Its major efforts to date, however, have been directed towardaccelerating lagging development of the subsectors with the greatestpotential--petroleum and hydropower.

Government Energy Sector Strategy

36. The principal objectives of Government policy in the energy sectorare to increase hydroelectric capacity and expand pettroleum production tocontinue to satisfy domestic requirements and maintain, or increase, oilexports. To help accomplish these objectives, the Government is attemptingto reduce the growth of internal demand through adequate pricing and otherdemand management measures.

37. Currently, installed hydroelectric generating capacity accounts forless than three percent of Peru's estimated 60,000 MW of economically viablehydro potential. The failure of previous Governments to develop this poten-tial in a timely manner has put Peru in the position of having to install atleast one, and perhaps more, thermal plants to meet short run growth inpower demand. In order to minimize costly investment in thermal plants, theGovernment has adopted an ambitious hydro power development program, whichcalls for the expenditure of about US$500 million per year through the late1980s. The Bank's recent US$25 million Power Engineiering Loan (Ln. 2018-PEof June 1981) will finance the preparation of 12 possible hydroelectricprojects. The construction of most of these would begin in the next two tofour years. The high cost of this program, which is in large measure aresult of the location of most hydroelectric sites on the eastern side of theAndes mountains far from population centers, will reiquire a substantialincrease in power tariffs. Toward the end of 1980, the Government initiateda program of monthly power tariff increases, which averaged close to threepercent per month in real terms during 1981. The Government is maintaining aprogram of regular increases, with the objective of enabling sector entitiesto finance about 40 percent of the cost of their investment program frominternally generated resources.

38. As a result of petroleum exploration and development in Peru'snorthern jungle, which began in the early 1970s, the} country had becomeself-sufficient in oil by mid-1978. Total petroleumL production in 1981--primarily by Occidental and PETROPERU--reached 193,000 bpd, of which about30 percent was exported. Nevertheless, because of low levels of petroleumexploration and development in the second half of the seventies and growingdomestic demand, Peru faces the possible need to import petroleum in the late1980s. To avoid this, the Government has adopted a strategy of promotinginvestment by foreign companies under production-shaLring arrangements withPETROPERU. To attract such investment, the Government put into effect areinvestment tax credit and eliminated restrictions on foreign participationin secondary recovery projects. On this basis, Occidental and Belco haveincreased their investment programs. Exploration contracts have been signedwith Superior Oil and Hamilton Bros-Petroinca for northern jungle areas andwith Shell for a southern jungle block. Moreover, discussions are underwaywith a number of other firms. PETROPERU, whose operations current accountfor about 22 percent of the country's crude oil production, would restrictits operations to three jungle blocks and the coastal area, and the company

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is being strengthened so it can more effectively exploit these traditionalareas. Its administration, staff and operations are being upgraded withsupport from the Bank's US$32.5 million Petroleum Rehabilitation Loan(Ln. 1806-PE of 1980). This support would be continued under the petroleumproduction enhancement project recommended in this report.

39. To induce energy conservation and make PETROPERU financiallyviable, the Government has been periodically raising domestic petroleumprices. In 1981, prices were increased 36 percent in real terms. TheGovernment's policy is to continue a program of regular price increases in1982, so that the domestic prices for petroleum will gradually approach theprevailing international price levels (for details, see para. 49). Attentionis also being given to reducing demand by improving energy efficiency inindustry. The Petroleum Refineries Engineering Project (Ln. 2117-PE ofFY 1982) will help in this effort by financing a project for reduction ofenergy consumption in oil refineries--Peru's largest energy-intensiveindustry.

The Petroleum Sector

40. Production Prospects. Peru has four major geological zones, eachof w' 4c^h contains sedimentary basins with hydrocarbon potential: (i) theCosta, particularly around Talara in the north wlhere, until the 1970s, almostall of Peru's oil production was concentrated; (ii) the Selva region--the lowjungle plain east of the Andes mountains--currently the source of mostproduction and the area with the largest potential reserves; (iii) theoffshore regions lying between the Peru-Chile trench and the coastline wherefour basins have already been detected; and (iv) the Sierra, where the like-lihood of finding commercially attractive oil deposits appears low. Peru wasone of the world's first oil producing countries and was self-sufficient inpetroleum for many years. During the 1950s, however, with domestic pricesfor petroleum products as well as producers' margins at low levels, domesticconsumption began tb outstrip lagging production. As a result, Peru becameincreasingly dependent on crude oil imports in the 1960s and during most ofthe 1970s. As noted in para. 38, in the late 1970s--following the discoveryof oil in the Selva--Peru once again became self-sufficient in petroleum andbegan to export.

41. Almost all the increased production that permitted Peru to renewexports came from Occidental Petroleum's activities in the northern jungle.As noted above, the Government has made substantial progress since 1980 inattracting additional investment by foreign oil companies and ambitiousprivate investment plans are expected to be carried out in the 1982-85period by the companies which currently have contracts with PETROPERU.Occidental, the largest foreign oil investor in Peru, would spend aboutUS$200-$300 million per annum to sustain production in its jungle areas andfor secondary recovery investments on the coast where it participates in ajoint venture with Bridas, an Argentine firm. The other companies cited inpara. 34 are expected, together, to invest about US$300 million during thenext four years. The actual amount of investment would depend upon thenumber of contracts ultimately signed with foreign oil companies and thesuccess of their exploration efforts. Investment in exploration and produc-tion, however, should total about US$2.0 billion in the 1982-85 period.About 70 percent of this would come from foreign investors, with the balancecoming from PETROPERU.

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42. Based on increased production from the incorporation of newreserves recently discovered by PETROPERU in its jungle concession and theinstallation of new pumping equipment for its jungle operations, thecountry's petroleum production is expected to increase to abotat 207,000 bpdin 1982, of which about a third would be exported. Not taking into accountthe possible results of new exploration now being undertaken by privatecompanies and PETROPERU, the outlook is for total production in Peru toremain above 200,000 bpd through the 1980s. With domestic demand expected togrow at a rate of five percent p.a., Peru would again become a net importerby the late 1980s unless the new exploration programs are successful.

43. PETROPERU. The State-owned national petroleum company, PETROPERU,was established in 1969 following the government's nationalization of theInternational Petroleum Company (IPC), a subsidiary of Exxon. PETROPERUtook over the assets of IPC and those of a small Government-owned oil companyas well as those of several other privately owned oil firms. Currently,PETROPERU's own operations account for 22 percent of the country's crude oilproduction, 100 percent of refinery capacity and 98 percent of the marketingof petroleum products. In addition to conducting all State exploration andproduction activity, it owns and operates the Transandean pipeline andproduces petrochemicals and fertilizer. While the Government's strategycalls for foreign companies to continue to be the miajor petroleum producers,PETROPERU is expected to retain its dominant position in petroleum refiningand distribution.

44. PETROPERU is the largest public sector corporation in Peru, with atotal staff of about 8,700. It has a board of directors of nine members.Three are appointed by the MEM, three by the Ministry of Economy, Finance andCommerce, one by the Armed Forces, and two are representatives of theemployees of PETROPERU. The company's President, who is also Chairman of theBoard, has broad management authority within the company. PETROPERU's seniormanagement is generally competent and has extensive experience in thepetroleum industry in Peru. PETROPERU's middle management--especially in itsexploration operations, on the other hand--was weakened by the loss of manyof its technical and administrative personnel in 1977/78, primarily becauseof the limitation placed on salary levels. In early 1981, however, PETROPERUwas given greater autonomy to improve its salary structure (para 20). As aconsequence, its salary scales are now competitive with those of the privatepetroleum companies in Peru and the loss of experienced personnel hasdeclined. In order to avoid a recurrence of difficulties experienced in thepast, there is need for PETROPERU to keep a close watch over its vacancysituation and, also, to ensure that its professional staff salaries remaincompetitive. Under the proposed loan, PETROPERU would maintain the competi-tiveness of its salaries and other staff benefits with those of private oilcompanies operating in Peru, and would inform the Bank, at least once a yearuntil the Closing Date of the proposed loan, of any vacancies in itsexploration and production departments and of the action it intended to taketo fill such vacancies (Section 4.01(b) of the draft: Loa. Agreement).

45. The headquarters of PETROPERU are located in Lima and functionssuch as personnel management, training, finance and budgeting, marketing,legal, planning, research and development, engineering, project managementand procurement are centered there. The operations of the company are

12 -

divided into five units: (i) northwest o,erations, including Talara oilfield operations, the Talara refinery and petrochemical plants; (ii) northernjungle oil field operations, (iii) central Jungle operations; (iv) oilpipeline operations; and (v) the La Parmpilla refinery operations in Lima. In

general, decision-making authority in the company tends to be overlycentralized in the Board of Directors, with limited delegation to lowerechelons.

46. With financing provided under the FY80 Petroleum RehabilitationLoan (1806-PE), PETROPERU has appoin ted Price Waterhouse to review itsfinancial management system and to make recommendations for its improvementwith emphasis on management inf ormationa systems, financial planning and

capital budgeting. In additiori, PET.OPERU has hired the consulting firm ofArthur D. Little to make a detailed study of its management and organizationat the corporate level. This study aims at recommending ways of improvingthe company's organization, and management efficiency (including dealing withthe problem of over-centralized decision-making in the Board of Directors).It will also recommend improvements in planning and logistics services,

47. PETROPERU's Financial. Situation. Aside from the loss of profes-sional staff, PETROPERU's most serious problem in recent years has beenfinancial. A number of factors resulted in a fi:nancial crisis in 1979, whichrequired Government action to help PETROPERU avoid bankruptcy. Thesefactors included: (i) the incurrence of US$400 million in short-term debt bythe company to finance petroleum purchases from private oil companies whichwere then sold domestically at subsidized prices; (ii) the contracting of

almost US$800 million in loans on relatively stringent supplier andcommercial terms to finance the Transandean pipeline which, until the late1970s, yielded no revenues; and (iii) the requirement under itsproduction-sharing contracts with foreign oil companies that PETROPERU payall Peruvian taxes for these companies. In 1979, the Government took aseries of measures to help resolve PETROPERU's financial problems and torestore its solvency; further measures were taken in connection with theBank's Petroleum Rehabilitation Loan. These actions included Governmentcontributions of S/. 70 billion (about US$242 million) in 1980 to strengthenPETROPERU's capital structure and S/. 30 billion (about US$70 million) in1981 as equity to finance the company's capital investment (para. 48 below).The Government also changed the law which required PETROPERU to pay theincome taxes of foreign oil companies operati,ng in Peru. Under the newarrangement, such companies now pa;i their own income taxes directly to theGovernment and these taxes are transferred to PETROPERU as a Governmentequity contribution. Overall, however, investment i-ncentive for foreigncompanies have improved--as evidenced by the recent increase in suchinvestment--because of the reinvestment tax credit and the removal ofrestrictions on their participation in secondary recovery projects (para.38)

48. Primarily because of the large equity contributions made by theGovernment in 1979 and 1980, PETROPERU's financial situation improved consid-erably in 1980. As a result, the company complied with the financial cove-nants of the Bank's Petroleum Rehabilitation loan (Ln. 1806-PE). In 1981,however, there was again a deterioration in the company's financial posi-tion. The main contributing factors were: (i) the continued need forPETROPERU to purchase oil at international prices from its contractors forsale at subsidized prices on the domestic market; (ii) a reduction in

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PETROPERU's production; (iii) passage into law of the reinvestment tax creditwhich reduced the income tax liabilities for foreign oil companies and henceresulted in less Government equity contributions to PETROPERU, while at thesame time, the Company continued to bear a very heavy tax burden (a 55percent income tax as well as export, import and royalty taxes); and (iv) adecrease in export earnings because of lower spot market prices. PETROPERVJwas able to generate a profit of only US$1.7 million in 1981. The companycovered its cash flow needs through short-term borrowings on the order ofUS$115 million by end-1981, and it was not able to meet the 1.4 debt servicecoverage ratio agreed under Loan 1806-PE for 1981; the actual debt servicecoverage was 1.2. Also, the quick ratio at the year-end was 0.5, as comparedwith the agreed level of 0.7 for 1981. However, the company met the Bankloan debt-equity covenant for 1981; this ratio was 6)7/33, well within theagreed level of 75/25.

49. Petroleum Pricing. Despite the substantial progress made inraising petroleum prices in 1981, with an increase of 36 percent in realterms, continued effort will be necessary in order to achieve prices whichare both economically realistic (i.e., in line with international prices) andwill help resolve PETROPERU's financial problems. Thus far in 1982, theGovernment has instituted increases in average petroleum product prices thattotal about 19 percent in US dollar terms. With these increases, theweighted average price of all petroleum products is now the equivalent ofUS$0.73 per gallon, which is about 90 percent of international prices. (Theprice of 84 octane gasoline is US$1.02 per gallon.) The Government hasconfirmed its intention to continue its program of increases for the balanceof 1982 so as to reach international levels by end-1982 and to implementfurther increases thereafter, as required, to maintain prices at levelsnecessary to enable PETROPERU to achieve the financial targets set forth inthe proposed loan agreement (para. 70).

Previous Bank Petroleum Lending and Strategy

50. The Bank has made two loans for the petroleum sector of Peru total-ing US$37.8 million. The first loan of US$32.5 million was made in February1980 (Ln. 1806-PE) for a production rehabilitation project. It aimed athelping PETROPERU to rehabilitate its existing producing wells, to reactivateabandoned wells, and to develop new production potential through seismic andreservoir studies and preparation of a secondary recovery project. After aslow start, satisfactory progress has been achieved in recent months. Bidsfor most equipment are either being evaluated or invitations will be issuedin the second quarter of 1982. Seismic and reservoir studies are now wellunderway and studies for institutional reform have been completed.Currently, loan commitments are about US$18 million and disbursementsstand at over US$8 million and should increase substantially in comingmonths. The Bank's second loan (No. 2117-PE) of US$5.3 million, approved oQMarch 25, 1982, is helping financing a petroleum refineries engineeringproject which, in addition to developing plans to reduce refinery energyconsumption, would improve maintenance, train staff and strengthen refineryand other industrial operations' management and planning.

51. The Bank's main lending objective in the petroleum sector is tosupport a policy of efficient management of this important resource and tohelp maintain Peru as a net petroleum exporter. The strategy for

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accomplishing this is to continue to help strengthen PETROPERU's ability toeffectively carry out the role assigned to it by the Government (see para.38), to support a realistic domestic petroleum pricing policy, and to assistGovernment efforts to attract foreign investment to the sector. A substan-tial institution-building effort for PETROPERU has been, and would remain, amajor feature of the Bank's petroleum lending. Its aims are to help upgradethe company's management systems and improve staff quality, financial admin-istration, and exploration, production and industrial operations. The Bank'soperations give special attention to putting PETROPERU on a sound financialfooting and provide a vehicle for a dialogue with the Government on arational domestic pricing policy for hydrocarbons. Finally, as in the past,the Bank would support increased foreign investment in petroleum explorationand development. Through lending to the sector, the Bank has been in a posi-tion to provide the Government with an objective assessment of PETROPERU'scapabilities. This evaluation has helped the Government to define an impor-tant but limited role for the company consistent with its operating capa-city. The proposed petroleum production enhancement loan wou]d furtherpromote the Bank's objectives in support of the petroleum sector in Peru.

PART IV - THE PROJECT

52. The project was identified by a Bank mission which visited Peru inMay 1981 and was appraised in October 1981 on the basis of a feasibilitystudy prepared by PETROPERU with the assistance of a consultant. Theappraisal mission's report entitled, "Staff Appraisal Report -- Peru PetroleumProduction Enhancement Project (No. 3856-PE, dated July 19, 1982) is beingdistributed separately. Negotiations took place in Washington from June 28-July 2, 1982, and the Peruvian delegation was headed by Mr. Victor Guevara,Legal Advisor to PETROPERU. Supplementary project data are contained inAnnex III.

Project Objectives and Background

53. The objectives of the project are to increase proven oil reservesand the production level in PETROPERU's Laguna-Zapotal fields on thenorth coast of Peru and to improve PETROPERU's capabilities to prepare andimplement petroleum development projects within its sectoral role. Theproject is also providing PETROPERU with experience in arranging projectfinancing packages. With financial assistance from Loan 1806--PE of 1980,PETROPERU contracted Bechtel Financial Services to identify and helpnegotiate export credit co-financing for this operation and the Bank has alsolent support in this effort. By participating in this process PETROPERU'sst.ff are being trained in the organization and execution of a projectfinancing campaign.

54. The Laguna-Zapotal fields, located in the Talara area, are owned byPETROPERU, which has carried out most onshore operations since itsestablishment. Other operators in the area are: (i) the Oxy--Bridas jointventure, which is carrying out an onshore secondary recovery project under aservice contract with PETROPERU; and (ii) BELCO, which operates the offshorefields as a PETROPERU contractor. Historically, most of Peru's crude oil hascome from the Talara area, which has been in production sirce the 1920s.More than 10,000 wells have been drilled in this area and production to date

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has been about one billion barrels. Current production from Talara is about69,000 bpd, about one-third of which comes from PETROPERU's operations, 39percent from BELCO's and 28 percent from Oxy-Bridas. While Belco hasgenerally maintained its production level, PETROPERU's output has beensteadily declining for some years. This has been duae mainly to PETROPERU'sreduced operational capacity because of limited financial resources and lossof technical and managerial staff.

55. Despite its long production history and the large number of wellsthat have been drilled, a considerable volume of oi:L can still be recoveredfrom the Talara area with little or no risk through reactivation of oldwells--which require rehabilitation and new pumps--and further drilling tomore effectively tap the existing reservoirs. Such a reserves and productionenhancement program in the Laguna-Zapotal fields is expected to increaseproduction by about 40 million barrels over the life of the project. Becausethis project entails a low risk and is in an area long owned and operated byPETROPERU, the Government has made the company responsible for itsexecution. PETROPERU, however, lacks the technical and managerial capabilityto efficiently carry out the project and the Bank played a key role inconvincing the Company to contract an experienced international projectmanagement service company to ensure that the project is carried outefficiently. The service company would also train E'ETROPERU's staff and thushelp it develop the capacity to prepare and undertake similar projects in thefuture.

Project Description

56. Production Enhancement. This project component would account forabout 98 percent of total project costs. It would involve the procurement ofwell completion materials (e.g., casing, tubing, wellheads, downhole equip-ment), drilling services and pumping equipment for drilling 159 new wells andreactivating 76 old wells. To transport the increased petroleum productionto PETROPERU's storage facilities at El Alto, 15 km west of the project area,gathering pipelines, tank batteries and pumping stations would be installed.The project would also provide living accommodations for PETROPERU's staffand the project management company personnel and office space and storagefacilities for materials and equipment.

57. PETROPERU would contract a project management service company whichwould be responsible for the day-to-day coordination and supervision ofproject activities to be carried out by drilling and well workover con-tractors. Management services would require about 600 staff-months atUS$18,000/staff-month (including travel, subsistence and overhead). Themanagement service company would prepare the detailed project work programsand budgets. It would also prepare and evaluate bids, recommend awards andadminister contracts on behalf of PETROPERU for all equipment, materials andcontractor services. The management service company would be primarilyresponsible for technical recommendations to increase production. Therefore,in addition to a fee to cover overhead and profit, it would be eligible roran incentive bonus which would be based upon oil production above an agreed-upon target. As a condition of loan effectiveness, ]PETROPERU would enterinto a contract with a management service company acceptable to the Bank onterms and conditions satisfactory to the Bank (Sections 3.03 (a) and 7.01 (a)of the draft Loan Agreement).

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58 Technical Assistance. This component, representing about twopercent of project cost, would consist of about 110 staff-months ofconsultants' services at about US$18,000 per staff-month (including travel,subsistence and overhead) to: (i) assist PETROPERU in supervising theproposed project management service company; (ii) undertake studies to refinethe production potential estimates and to improve reservoir management forthe Laguna-Zapotal fields on the basis of more detailed data to be obtainedduring project implementation; (iii) determine whether the spacing betweenexisting wells is technically and economically justified or whetheradditional drilling should be undertaken; and (iv) undertake studies ofadditional drilling programs in the project area or adjacent areas to lead tofurther production enhancement projects. The hiring of these consultantswith qualifications and under terms and conditions satisfactory to the Bank,would be a condition of loan effectiveness (Sections 3.02 and 7.01 (b) of thedraft Loan Agreement). Not later than October 31 of each year until theclosing date, PETROPERU would provide the Bank with an updated version of theproject feasibility report as refined through the studies mentioned in (ii)above and project execution experience. This report would provide thetechnical and economic justification for new wells still to be drilled andexisting wells to be rehabilitated; the Bank would have 15 working days afterits receipt of the report to determine whether it is satisfactory and Bankacceptance of the justification provided therein would be a condition ofdisbursement for the wells to be drilled or reactivated (Section 3.06 andpara. 4(b) of Schedule 1 of the draft Loan Agreement). Also, the Bank andPETROPERU would, upon their completion, exchange views on the studiesmentioned in (iii) and (iv) above and on PETROPERU's prcposed program to putthe recommendations of these studies into effect (Section 3.07 of the draftLoan Agreement).

59. PETROPERU's operational staff would be trainedi both abroad and inthe field working with the project management service company and withPETROPERU's project unit, which will be set up to administer this project(see para. 60 below). The agreed upon terms of reference for all projectconsultants include a requirement that they develop and carry out a trainingprogram for the PETROPERU staff assigned to work with them. As a conditionof loan effectiveness, PETROPERU would select the staff to be trained underthe project (Section 7.01 (c) of the draft Loan Agreement).

Project Execution

60. PETROPERU has established a project unit satisfactory to the Bankand has appointed a project unit manager with qualifications eLcceptable tothe Bank. This unit would supervise the operation of the project managementservice company, as well as the consultants to be hired under the project,and would be responsible for approving the management service company's workprogram, budgets, expenditures and recommended contract awards (Section 3.03(d) of the draft Loan Agreement). It would ensure that the project was beingcarried out in accordance with the agreed work programs. The project unitwould be assisted by the consultants referred to above in carrying out thesetasks. The project is expected to be executed in a four-year period.

Project Costs and Financing

61. Total project costs are estimated at US$240.0 million (includingabout US$24 million equivalent in local taxes and duties), of which US$150.4

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million, or 63 percent, would be for foreign costs. Physical contingenciesfor the project have been estimated at a composite ten percent rate forequipment, materials and consulting services. Price contingencies are basedon projected international price increases of eight percent in 1983, 7.5percent in 1984, seven percent in 1985 and six percent in 1986. ILcal costcontingencies have been calculated in US dollar equivalents on the assumptionthat variations in the exchange rate would compensate for the differencebetween local and international inflation. Total financing required for theproject is US$241.2 million, including a US$1.2 million capitalized front-endfee.

62. The proposed Bank loan of US$81.2 million would cover aboutone-third of the total estimated project financial requirements, includingthe front-end fee and about 54 percent of the project's foreign cost. Of theremaining US$160 million of financing required for the project, US$120million would come from cofinancing. Half of this cofinancing is expected tobe in the form of export credits for the equipment and part of the drillingand other services to be purchased under the project. The balance of thecofinancing would be provided by commercial bank loans. PETROPERU hasreceived preliminary commitments for the export credits, which Bechtel ishelping to arrange (para. 53) and the commercial bank 'Loans would benegotiated toward the end of 1982. The Board would be advised of anycofinancing arrangements resulting from this proposed project. PETROPERUwould provide the equivalent of US$40 million in local cost financing for theproject.

Disbursement and Procurement

63. Disbursements for eligible services under the Bank loan wouldextend over about four years and would be made against: (i) 100 percent offoreign expenditures for well completion and recompletion services and 60percent of total expenditures for well drilling and workover services (thetotal cost of these services would be US$105.3 million; the drilling programto be financed by the loan would consist of the operation of two rigs in thefirst two years of the project and four rigs during the remainder of theproject--the balance of the drilling program would be financed by exportcredits); (ii) 100 percent of foreign expenditures for project managementservices; (iii) 100 percent of foreign and 90 percent of local expendituresfor consultants' services and training; and (iv) 100 percent of the Bank'sfront-end fee. In order to launch project activities without delay, theproposed loan would provide for retroactive financing for the costs of themanagement service company of up to US$2 million, incurred after July 31,1982. The well drilling and workover services to be financed under the Bankloan would be procured under international competitive bidding procedures inconformity with the Bank guidelines. Highly specialized services requiredfor well drilling, workover, completion and recompletion would be procuredunder limited international tender up to a total of US$14 million. Selectionof the project management service company and specialized consultants wouldbe made in conformity with the Bank guidelines for the selection ofconsultants. In the selection of the project management service companyprice would be taken into account as a factor, together with qualificationsand experience, since the contract would include an incentive bonus clause(para. 57).

PETROPERU's Finances

64. Although the financial measures taken in 1979 and 1980 to correct

fundamental problems have helped to strengthen PETROPERU, its performance in1981 was less than satisfactory (see paras. 47-48). Three actions are now

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necessary to provide a solid financial foundation for PETROPERU in thefuture. These are: (i) a petroleum pricing policy which substantiallyeliminates subsidies to consumers currently borne by PETROPERU; (ii) improve-ments in PETROPERU's operating efficiency, which would enable the company tomaximize production from its existing reserves; and (iii) a realistic invest-ment program for PETROPERU, within the limits of the sectoral role assignedto it.

65. Prices. Progress toward meeting the Government's pricing objec-tives has been satisfactory and is summarized in para. 49.

66. Operating Efficiency. PETROPERU's petroleum production has beensteadily decreasing (from 46,000 bpd in 1979 to 42,000 bpd in 1981) as aresult of a lack of qualified technicians required to maintain production inexisting fields and to initiate production in new areas in the jungle tocompensate for declining output of older wells. As a result, to meetdomestic demand, PETROPERU has had to purchase oil from its foreign con-tractors at close to international prices, which has drastically increasedits operating costs. With recent steps (e.g. salary increases, improvedtraining) designed to strengthen its staff, increases in production fromwells rehabilitated under Loan 1806-PE and the start of production fromrecent discoveries in the jungle, PETROPERU's production is expected torebound to about 56,900 bpd in 1982. The proposed loan, together with Loan1806-PE, would help improve PETROPERU's operating efficiency and assist inthe implementation of required investments.

67. Investment. Following a period of high investments correspondinglargely to construction of the US$800 million Transandean pipeline in1972-77, PETROPERU's capital outlays declined considerably during the 1978-80period, averaging US$60 million per year. This decline reflected financialas well as manpower constraints. With improvement in planning and increasedefficiency, the level of investment in 1981 rose to about US$137 million.

68. Given PETROPERU's assigned limited role in the sector, its projectpreparation and operational capacity and its likely financial situation, thecompany's investment program in the 1982-86 period is likely to consistprimarily of the following projects: (i) the investments under the two Bank-financed petroleum production projects; (ii) a secondary recovery project oranother production enhancement project in Talara, whose preparation areincluded under the two Bank-financed projects; (iii) development of new findsin PETROPERU's jungle blocks; and (iv) expansion and improvements at existingrefineries. This program would cost about US$790 million for exploration anddevelopment and about US$420 million for refining and other investmentsbetween 1982 and 1986. PETROPERU would require assistance from consultants,in order to carry out this proposed program. To help assure that PETROPERU'sinvestment program is well-tailored to its financial and operational capacityand responds to sectoral priorities, during the project execution period, theBank and PETROPERU would have an exchange of views on PETROPERU's proposedfive year investment program annually at least 90 days before the end of thepreceding year. PETROPERU would then revise the proposed program in accord-ance with the agreements reached in the exchange of views (Section 5.04 ofthe draft Loan Agreement).

69. Financial Prospects. If the Government increases domesticpetroleum prices as planned and provided the above investments for the1982-86 period and improvements in PETROPERU's efficiency result in a

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currently projected output level of 72,000 BD by 1986, P]ETROPERU's internalcash generation--together with the Government equity contributions (para.47)--would be sufficient to cover about 55 percent of the proposed investmentprogram. PETROPERU should also be able to repay its current short-term debt(para. 48) and be in a position to finance the balance oif its investmentprogram through long-term borrowing.

70. The financial projections for PETROPERU reflec: the foregoingassumptions. They also assume that, starting from 151,000 bpd level in1981, contractor production would grow to 155,000 bpd by 1986 and petroleumexport prices would average US$31 per barrel in 1982 and remain constant inreEl terms thereafter. Under these assumptions, PETROPE]RU's finances wouldconsiderably improve in 1982 and it would return to a satisfactory financialposition in the following years. Loan 1806-PE contained financial covenantsproviding for: (i) debt service coverage ratios of 1.9 in 1982 and 2.0 in1983 and thereafter; and (ii) quick ratios of 0.9 in 198:2 and 1.0 in 1983 andthereafter. PETROPERU's debt service coverage ratio is projected to risefrom 1.2 in 1981 to 2.4 in 1982 and 1983. The debt service coverage targetsunder Loan 1806-PE would be retained for purposes of the proposed loan(Section 5.05 of the draft Loan Agreement). PETROPERU's quick ratio isprojected to rise from 0.5 at year-end 1981 to 0.7 at year-end 1982 and 0.9at year-end 1983. The quick ratio covenant would also be repeated, exceptthat the target for 1982 would be reduced from 0.9 to 0.7 to be achieved atyear-end, and the 0.9 target would be met by December 31, 1983. During 1984andL thereafter the quick ratio would be 1.0 (Section 5.016 of the draft LoanAgreement). These are levels PETROPERU is expected to be able to achieve andwhich are satisfactory. PETROPERU's long-term debt-equity ratio is expectedto improve from 67/33 in 1981 and 68/32 in 1982 to 59/41 in 1983. Thecovenant under Loan 1806-PE--providing that PETROPERU would not incur anylong-term debt without Bank approval unless its debt-equity ratio was atleast 70/30 in 1982 and 60/40 in 1983 and thereafter--would also be repeatedunder this loan (Section 5.07 of the draft Loan Agreement). In order toassure sufficient funds for investment, the Government would reinvest inPETROPERU dividends declared by the company to the extenl: that such funds arenecessary to help finance the PETROPERU investment program agreed with theBank (para. 69) (Section 3.04 of the draft Guarantee Agreement).

Economic Benefits

71., The estimated economic rate of return of the project is very high(a little above 100 percent), because the investment wou:Ld be made in anestablished producing area with good transportation and other infrastructureand well-defined undeveloped reserves and because it wou:Ld began generatingrevenues in 1983. The financial rate of return to PETRO]'ERU would besubstantially lower--about 35 percent--because of the high tax burden on thecompany (a 55 percent income tax, import duties, export taxes and an eightpercent royalty). Sensitivity analysis indicates that, because the rates ofreturn are so high, they would remain above the opportunLty cost of capitalundLer any reasonable set of assumptions.

72, Total incremental oil production over the life of the project isexpected to reach 40 million barrels. The incremental production wouldeither be exported or would substitute for imports, producing foreignexchange earnings and/or savings of US$ 850 million over the next ten years.

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73. In addition to its economic and financial benefits, the projectwould help improve PETROPERU's capacity to operate its petroleum fieldsefficiently and to prepare and execute future high-return projects of asimilar nature.

74. The project faces no special risks. The Laguna-Zapotal fields havea long production history and their recoverable reserve estimates are firm.The use of an experienced international project management service companyprovides added assurance that the project would be carried out efficiently.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

75. The (i) draft Loan Agreement between PETROPERU, COFIDE (which underPeruvian law must be party to all agreements providing for external loans forpublic enterprises) and the Bank; (ii) draft Guarantee Agreement between theRepublic of Peru and the Bank; and (iii) Report of the Committee provided forin Article III, Section 4 (iii) of the Bank's Articles of Agreement are beingdistributed to the Executive Directors separately.

76. These draft agreements conform to the pattern of previous Bankloans for petroleum development projects. The main features of the draftLoan and Guarantee Agreements are referred to in the text of this report andare listed in Annex III. Special conditions of loan effectiveness would be:(i) that the consultants under the technical assistance component of theproject have been appointed; (ii) that a project management service companyhas been hired under terms and conditions satisfactory to the Bank; and (iii)that the PETROPERU staff to be trained under the project have been selected.A condition of loan disbursement on wells to be drilled or reactived is thepresentation by PETROPERU of an updated economic and technical justificationsatisfactory to the Bank, for such activities.

77. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.

PART VI - RECOMMENDATION

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

A.W. ClausenPresident

by Munir Benjenk

AttachmentsJuly 22, 1982Washington, D.C.

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TABLE 3APERU - SOCIAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (WEIGHTED AVE7AGESAREA (THOUSAND SQ. OM.) - MST RECENT ESTIMATE)-

TOTAL 1285.2 MOST RECENT MIDDLE INCOME MIDDLE INCOMEAGRICULTURAL 305.5 1960 /b 1970 /b ESTIMATE lb LATIN AMERICA & CARIBBEAN EUROPE

GNP PER CAPITA (US$) 290.0 470.0 930.0 1902.0 2323.9

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 417.3 662.7 716.1 1259.9 2107.4

POPULATION AND VITAL STATISTICSTOPULATION, MID-YEAR (THOUSANDS) 10181.0 13461.0 17379.0URBAN POPULATION (PERCENT OF TOTAL) 46.3 57.4 67.4 65.7 47.9

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS) 27.3STATIONARY POPULATION (MILLIONS) 48.8YEAR STATIONARY POPULATION IS REACHED 2080

POPULATION DENSITYPER SQ. KM. 7.9 10.5 13.2 35.2 83.3PER SQ. KM. AGRICULTURAL LAND 33.3 45.0 55.5 92.5 155.4

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 43.6 44.3 42.9 39.7 31.1

15-64 YRS. 52.0 51.7 53.8 56.1 61.265 YRS. AND ABOVE 4.4 3.9 3.5 4.2 7.7

POPULATION GROWTH RATE (PERCENT)TOTAL 2.4 2.8 2.6 2.4 1.6URBAN 5.1 4.9 4.2 3.8 3.5

CRUDE BIRTH RATE (PER THOUSAND) 46.5 41.5 35.9 31.4 23.6CRUDE DEATH RATE (PER THOUSAND) 20.0 14.8 10.9 8.4 9.2GROSS REPRODUCTION RATE 3.3 3.0 2.4 2.1 1.6FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS)USERS (PERCENT OF MARRIED WOMEN) .. .

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71-100) 96.0 102.0 77.0 110.0 116.0

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 98.3 97.2 97.5/c 108.4 125.1PROTEINS (GRAMS PER DAY) 64.0 60.1 59.27Th 66.0 92.7

OF WHICH ANIMAL AND PULSE 28.0 25.1 24.07? 34.0 35.9

CHILD (AGES 1-4) MORTALITY RATE 37.8 20.2 9.5 5.6 9.2

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 47.4 53.1 58.1 64.2 67.6INFANT MORTALITY RATE (PERTHOUSAND) 162.9 119.7 87.7 64.2 65.1

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL 14.6 35.0 48.3 65.6URBAN 30.2 58.0 60.0 78.9RURAL 0.8 8.0 25.0 43.9

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 36.0 34.0 59.3URBAN .. 52.0 51.0 75.3RURAL .. 16.0 .. 30.0

POPULATION PER PHYSICIAN 2011.7 1904.9 1532.4/c 1617.3 1105.4

POPULATION PER NURSING PERSON 2205.0/d 1000.5 676.17? 1063.5 634.4POPULATION PER HOSPITAL BED

TOTAL 425.1 469.6 53

8.3/c 477.4 286.8URBAN 273.8/e 524.9 426.47& 679.8 192.0RURAL .. 3055.2 5705.2/c 1903.4

ADMISSIONS PER HOSPITAL BED .. 19.0 2 3

.0/c 27.3 20.0

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.9 4.8/fURBAN 4.8 4.97 ..RURAL 4.9 4.67 ..

AVERAGE NUMBER OF PERSONS PER ROOMTOTAL 2.3 1.9/fURBAN 2.0 1.7/fRURAL 2.7 2.47T

ACCESS TO ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL 26.0 32.0/f ..

URBAN 50.7 54.3/f ..RURAL 4.2 2. 77T ..

- 22 - ANNEX IPage 2 of 5

TABLE 3APERU - SOCIAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (WEIGHTED AVERAqES- MOST RECENT ESTIMATE) -

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

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 83.0 103.0 112.0 104.3 102.4MALE 95.0 111.0 115.0/c 106.4 107.1FEMALE 71.0 96.0 108.077 103.3 99.0

SECONDARY: TOTAL 15.0 30.0 50.0/c 41.3 60.2MALE 18.0 34.0 53.07? 40.4 66.4FEMALE 13.0 26.0 46.0/c 41.8 54.0

VOCATIONAL ENROL. (X OF SECONDARY) 19.9 17.1 18.3/c 33.7 31.6

PUPIL-TEACHER RATIOPRIMARY 33.6 35.5 40.2 29.9 25.8SECONDARY 12.3 17.3 29.2 16.7 22.2

ADULT LITERACY RATE (PERCENT) 61.0 72.5/f 79.7 79.1 75.9

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 7.8 17,1 18.6/c 42.8 51.0RADIO RECEIVERS PER THOUSAND

POPULATION 108.0 135.1 147.5 270.5 157.2TV RECEIVERS PER THOUSAND

POPULATION 3.2 29.3 50.2 107.7 123.7NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 123.3 51.4/c 63.7 112.3CINEMA ANNUAL ATTENDANCE PER CAPITA 6.4 .. .. 2.7 4.0

LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 3186.8 3891.8 5149.2

FEMALE (PERCENT) 21.2 20.8 23.2 24.4 36.6AGRICULTURE (PERCENT) 52.5 48.0 40.0 31.3 38.7INDUSTRY (PERCENT) 19.6 18.4 18.5 23.9 25.9

PARTICIPATION RATE (PERCENT)TOTAL 31.3 28.9 29.6 33.6 44.5MALE 49.6 45.8 45.5 50.4 56.3FEMALE 13.2 12.0 13.7 16.8 32.8

ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.6 1.3 0.9

INCOME DISTRIBUTIONNERCENT Of PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 39.0/ ..

HIGHEST 20 PERCENT OF HOUSEHOLDS 64.4T 61.0/fLOWEST 20 PERCENT OF HOUSEHOLDS 2.5/R 1.97 .LOWEST 40 PERCENT OF HOUSEHOLDS 8.0 7.07 ..

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URRAN .. .. 235.0/cRURAL .. .. 180.07 184.1

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USs PER CAPITA)

URBAN .. .. 29

3.0/c 518.0RURAL .. .. 200.07? 371.1 406.6

ESTIMATED POPULATION BELOW POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 49.0/cRURAL .. ..

Not availableNot applicable.

NOTES

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

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1978 and 1980.

Ic 1977; /d 1964; /e 1962; /f 1972; /S Personal income within labor force.

May, 1982

- 23 - ANNEX IDFNT OPSOSCA lcIINDICATORS Page 3 of 15

iets:Aals,ghg the aase dea free sources genrally judged trh matatoittiead reliable. it nbond alno be noted then hteymy no lt ine-,aeIasll cmparable benans of theflack of -taderdined defteitiee ad.c..cepts used by different eunsrlea is collecting tbs data. Tbs data are, noe-tlee -nfu1 to describe order ofmgitude, indicate troudo, and o .reefer cetInmjor dffseurs eI.... ... tren

Therefrene icup ar I(I rho s c gnr group of lbs -bject country and (2) I country troop with ansebat higbh- --ege intone than the coun try groupofth tb oc oocry(ecot or nggh Income oil .tru" grou whreMiddle I..e.- North Africa and Middle tact" ts rho-s t,- so- utosenocf -cnra fltte) h rotnrgoufaatE. acrag p are pplle eghe rtmtc as eet idcseadshe nyemajcr lty cC he oun..tries icaIgr...p h-ndosfur hrh lcdi _ctr - Since the.oeaeo to uIe.teiets g the i.,dicoto dendontenalhlyofaaand ic cot _sics culo ou io ee ud c ea s anerge of one indloal- to esothet. bn _nrages are only u..efal in comparIng the -al- of

AIOD (rhc.....du'q.hs.-) 17 .t Poplatien perlerna e totl,crbu,an rua F..Popultion(otlTotal - fTal iceyorersa -p,riulg land cre ad iInad salem; 17da.urs,sdrural) dndd L by their rspeet inn somber of hosrital bedsAgriacl1tc-l - Etuinte ofariutua rea cued tep-trlty or peres=etly alabeopuicsdrntegnneral tad speciclic-d berirtl, andrefeecop,oucee -ueo end kircheu g.rden or to Iis fattut; td9ata. bh ilitatccettt.toplis.I ar stbIshmet pe_snty Itffedbp ar leant ens phyt i-in iulabIihbnont prodding princiIpaly .. sto-191' ig CbPII (IS) -GNP Pee captee- sae ascren aket pricen. .. I- dial turn aresotitludd. Rural hasyipis.l bhmnsy intlude hbrbtculated by udeccerinmthod us World latc Atla (1978-80 basis); 1960, and medinl c -ruie so Permanently stffed by a phyclisis (but by 19)70.cd990 data, medical .tn.. ot 'urns midwife. etc.) hthb of fer ie-patiennoot edatian and pronide a~ 11sfted rasge of medicl.1ailtit.To tatin-ENERGY CONiUMPTTION PER CAPITA - Annulcosptn of eo-ou Ieeg (tea utol parpuses -rh- houpits inlue Oi.e prtnciPlpeg-eneal uptasaud ltgoire, petro1leum, naturel gau nod hydr--, nulear and geothermalelet.- an h-ra hsp~ital local or rura hspitais cod medical asd maternityitriciy in kileeac oo qivln pen tapirs; 1960, 1970. and 1979 cetrs Sp Iciaied hospitals Ite isciuded onyly ne tora

data. ~~~~~~~~~~~Adm ionnu re IfauPit4l Ned - Total tuhr fb mies co disebhrgesfrm hnupitla dnicitod by the nonter of hrds.POPULATION AND tITLeS SOATISTICS

Total Pore1utiot. Mid-tsa (thousan.ds) - Ad of July 1; 1960, 1979,. ad 1990 HuOUSINGldata. Anerage line f Unn-cio1d ....ut per huosehold) -total, urban, and rrlOrbas Poo.1ti.olc fysr'nrt R1t-ie) - Pae i. ofeha to rtota pupolatlon; A bonoehol esiott of s grop of indindu1s who share lining quartersdifferrt definitions of urban croc say sor pgerahility of data cud thermi mel, Ahorder or lodger may or say roh included issmegcutre;1961. 1970. en.d 19g0 data, the houshod Ifo Istti-tttr ..i uroes.P.t.le-i_n Projections A-euenuMeLf ece reb.cmioo. oe, andrra-negeu

PocolnIn yea 2000 - Current population prJori..os are base d no1980 bet of persons pro .O.n is ci urbs, and trura ... pi. P ocatltota population by age and son oud their ortslgt end fertilitY rae.de-ag.rnetsly. ltligeouo opraatsructuresanProjecIec paramters for erta1ilty rateslo epIf_ ofthre le-el _ns-unccpied pacic.lug life enpoctarr..y an birth intre..sing sui cute' p.er capta income Ac.est t Ele-crility (P.-neot of deellin,c) - netal, urban. sud -u-1 -lenl, ard fema.leitfe enpecrusty snbahi.icsgu 77.5 year. Tie parc- fonutnl wlig sith electricity in living quar.ters as Percentargenotert for fertility ruts also bane three I.L,cl som decline In of trIt,obu.. od rural ds-llisgsecpnc ni-ely.fertili ty according in 11 inom leveI and pat, fonly planiog promne

loheccr in hee soiu our c thesenie cenbisanioss of erta11try EDUtCATIRNand fortuity ttnodn for pr7eiuP.resn Adjonte Enrollment RuticsSItaionary y cine-lnacIa~tlcory popuhtto there In uo grooch tints Primaysho -a,mle ond female - irons not1, male an female

the hirhroto t equa cc th An_th roe,an .as the,, ag turr r-er s ofal ages at the primary lnel an peroe..ages of ..pe tinnolnicotutut - his i ac hievd ol ttrieiliy rtea decline. to" Primary nhclsepupuIitles; normlly intludeIc1hildren aged 6-11"the rPtaImn level of cotIt rerc lc rte, when serb ge-eruion yearu but adjusted for diffTereo lengths fpir dnaion; forci wome repla_ itself etoetly.Tesainr pnuatsseeescutries with onceral decol I enollen nay soee 00prcnectinoted enth nb-ihnt of the projected oautritt f theoulto since soepupils or halosor -b the nufitd schual ige.i he year 2000. osd tho race of do1olt or f-rrilitry rtel enrpae ec.oysho -. 1to, nob ted f-1al - Computed us shon; seoeyTer tcnico-r ,Porelatt iu reahed - The year oh- ueinypopulation p-ncid..turd ..cibna. ortet..het, iso fu-tructiun_ o pplnice olli be reac.hed. usualy ci 12 to 17 yours of Age; correspVondence. cores are genresl1y'crelati- Dennity included.

Per sq. km. - Rid-year populatior per nqcere kilometer10 flog-etaet) of Oc..atiunol lenenII-t(ecs fscodr)-fcou ni-i-utioosreichaa 1960 1970 and1979 data. iselude tenhei-a, ludutriu1, or other pregrees sith npeeate l.depend-Per _n k. ugieiua ad - Gosp-id u hv fee grru 1uollad estl'yeor as dapuarmect of ..... ndaryinistnuonly; 1960, 1977 and 1979 dan. fp-il-t eahe raItio - clmr.oed stsd - Totlsudnt Isrld is'Poycutiu Alr Strootre lyrroeet) - Childrrc (0-14 years). enrkiug-uge (15- priory and secoedart level divided by -une- of trehbee in thehi y..r... endreIrd(AS yorar and -ovr) an percentargen of mid-year pepo- nornenpundig le-el.ato;1960. 1970i'end 1980 daa Adult literacy rale (rerce..t) - Literate adultn fable to read nod -it.)yoopu-aio ireeth late (preront) - total - Acal..I grosih ratr of rtota mid- Isperoentagofc renal adult popalsion aged 1) years and over.year ycpul.asie fcc 1950-60, 1960-70, and 1970-go.

opuPlatIon itemS Rate freoecs) - eho- uua groeth rate if urban pep- CONSuTlfIONtfotlet fo 13-hi, 19260-TI, and'!q9y7-gg.' P..ue.ir Cats (per thead pulto)- Pat-eg-r tote cmpe insmaoCrude tirol lae-yo _h.sd Aco...I lice birtha Per thousand of mid-year .a.Ieain ln then eight personi; rueldni ambulances,. hearses cudpyaic;1960. 1970, -ed 1990 dan. sic itary entesoC1rude Teeth R 'lae(perhrcund) - An... Idethi per thousan.d oA mid-yea ladle tBellivr fo(er tosn ouaiu All types of receiv-r for Aindycyolaci-u; 1960. 1970, oud 1990 data. brood--ntnE gesers public per th.....d of 'poplaio_;e ouldeu o--Iron Rayroducion Rate - Aesage tu-hec of daughters. a .oma. will bea in licensd receivers i,. _utris and in years whetreioralo f radioher norml r..pr.ednoni-e period if ohs oeircnpresent age-spenlilo fer- nete was. in offeot. I.t! for re nyeses nay no he coparble sinesAit 1i riou usualyfin-y... .... cie en ding in I960, 1970, cud 190. masttestrion abolitbd licening.

falyP Ario - c trrcu. Aotul.(hasnI )-Anna numI..ber of acteptrsr TI Rgece~Leesper thescand pop.I.tiot) - TVreivs fee broadcast toof bir choenrldncsudrosie fotoolfml lsigpur. gnrlpbic peittic-d populati-n; eon ds unli-e-nd TV eanr~uoilyplanioc-Iner fyeroIcofmatriednoen) -Perrcoefnriditeo-triesau.dto yearn hnetcrneofv neissasi. ff.,unman f child-heari-g ae(15-44 yoaru) sh. cu bilthb-cotto1 d-el... to .ae Cicltio leer thouaind o-pul"ni) - Shows the averge tie-.all married seeciItmeae vop1eltlsCf "daiygseatirstssPar.defioed -sepI ilud"lelpoblltation deo-ted trimaruly in recr.ding genra nes .. icnideredFOOD AND NUTRITION noh dal"ifi p pest at Il..st f-c time a Ze.Indue of Pou Prdcto pe Catc (9-71-10D) - Icde.ofc per .cpta a..a.Ciem Anua Ared-se e Cyiope a-lane..d on the sober offrdcce f alfond c-noedirn Prdci.s ec loeI edndfe o tickets odd durinR the yeor, inelsdisg admission di die-in iCu. on c--dor yeao basin. G.-diiien covet primary gonn(e.g. ngarc ad mebile units.

custaelof c outat) chich -edible und cnan otiis(e.g. coffee cudtea arc _ncleasa. Aggregate p-oduntIfs f each cosun.ry in based oo LABOR FORCE-ational acutge producer price uighto; 19h1-65, 1970, and 1980 data. Total Lobr Force (thousonds) - FIce...ica11y attivo perse-, includi.gyet caplna -pply efoc.lrito (yrroet cirqlrer)- lesputd from crw ottan unlyd butroluding hasca teide-t., etc.,_norgyn

1 e iyalrc6 of c foodtceyplie available luco-ntryiper.capita ecene 'popultieofallaEe. lefiiti...u in car.. .ean .curri.ssepot dec.Avilable uyle _ ouspefuedomoi Wrdotin iyn less se comaroble; 1960, 1970 end 1980 date.rcyoru cod degn in kti Hert npylleo ro ldeanma ford, seeds, Female (2recnt - Petals labor f.ore as yerceags of total lahb forte.1eat leina cured in feed p-oceuning. ad lon.. in diutr ihusiun. Require- Agort-ltot (percent) -LAbo forte.i farmig, foretty huu _oderet. _.o one laced by PAO hosedc phyuiclegica1 oeds fo1r -ornl cn-fishno nprrt fi ccolt labor f.or; 1960, 19) an.d18 datacity and I"t oc" dretcicmnaleortrt oywihto, a5 .tdonity frpoet)- b.Ir toree in niniog, cntuto,m cfturIg

.nd ur diunlhni- o poaain,ad aIlwiog 10 percent for acue u and electricity8, wor and gun an percentage of tota laboe fenc;tec-h,,ld Onvo1; 1961-65, 1970 and 1971 datu. 1969, 19 70 and 190 'sa.Pr et capita , o frcc oroeic (ura_ pe a) - Protein connect cf Per ccpina P0btato ae p et)-toa.n ,ad le~ead-Poetic ipanion encan n-Pply of food per day. Net soyply ofoed i. defined at above, iRe- aelnsra aeconputed anttl -ml, d female labor forte asqeiresern for all cunti-o estblished by 1110A pr-ido fone suim perceotuge of "totl. mal-d fesale poplaltion of alla g.. reipec tivoly;allo...yco cf 60 gcn If tota pr-neis Per day ond 70 groa of animal and 1960. 970, end 1999ses lbI! roe. are bh...d en 1.0't per"tipcloionro.tePIlur preneic. of ehich If grtma thued he animalproteis. lbhes utand- tnflottis0 oge-no -iteete of the popelstin.. and lcg time ter.d. Aannar loo thao ihour ef 75 gran of total p,roein and 23 grama of fes stmtn te ro norico-ucurncolnol p-outino ecnogofor the norld, propoun.d by PAl is the Third io cleednvano-Rtoefpplatien under IS and 85 aid overtenJd Food Ser-y; 1961-65. 1970 and 1977 dat- to the rtota labor f-c.ePercoit yttit uPply f aos oc -o an polu _ Prnteio noppy of fondde

rie lrnaisuo and pullo Is mama Per day; 1961-65. 19701 und 1977 data. INCOME OSDINIBT1ONChild faton I-h) roibh Rlat betr cbhunad) - A-Iou deaths Per the....nd is P "cso of PrivateSIme (both in roh cud kiod - oteiced by richestage group 1Ayau oeld in thi age group. for net deneoping noun- 5 IpeCrot rithest 20 pecet, poores 20 percet. and poorest 40 percentries dam danced from life tables; 1960. 1970 and 1986 data. of house holds.

oELatdt POVERTY TARGET 100UP1Life feponaucy6at lim h(yearn) - A--rge eunhee of yerar of life rei.sisg The fullcsisg etmae re vey"Pprnlst messs ef p"Iety,eesof birth; 1960, 197 Iud 1990 data, and ohocld he inteep,t,te siebl coiderable POtioIrIfa-rnttli ae ftrey eheusand) - Actual deaths of isfunts ader ohe les Etstimaed Ahnolste Pevety IS -eee fR prcPi) - urban and rual-rfueye ilctoenanei.';,h,,d live hirthn; 1960, 1970on 1990 dare Auolote poet lsow ee in then inton !ee. bla he.amiiaAcon o Scf eatrIPnre o pocanc)- oa, unbm, and e-raI - Nu- sotritin.ally adequate diet plus essential us-fuod requiremetr is nether of people (rota1. urban, and rural) ith r_annuble oc... to safe affordable.

eatrspyly (inel-adeu I tre -dsrface octets or os.tretd hut onotmmtd Etimate Meltie-P t Income leel (10$ per -apito) - -rbai and rural-_ctn uh Ist. iepeetdhrbls oig.adsainywls s Mn esiepvry tn leve IiS one-turd of average per capitaPerceunges of the it .vepeciv popolatious. Isa 00ban seen a public pernon_l inosm of she .oamny. Urba leve is derived f roe the ror1foun tai or sandpost beane d nor met tban 200 meters tree a he..- may he le-e with adjustment tee bltgh cot of'iceg1 is urbanarascocuidered as being minhin reas_nobl acorn of than h...e. .Is repel areas. NAitmtl oulto lo bout oet Is_ omeI. - .evl .reees)-ortreoncoacble allens woud '-P ly tha the h bansfe o e tef the hamheld anfel-Prets populatien forbam ed rural) h. are "absolutedosthae. ospn, diproporrti t pas ofr thdy Isfthbig the Per.-(tally'0soe - s reds.

Access tc fE-rena Disn,o freecut of --ylatien oa.ubn n ua oefe c People (total hro. noi om)sie y org ipslaperenage o th Nt reseole peoa Is1os. Dtryetadaer al dpmay end

ththlega edr d-pesl wit or whti-o Etresmes e dip.-a eymera1st iatalltio ts

Pupu'tie ret. Pheyiota - Population dicided by suber ef penotmimg phyal- Foenmi. and ScmlI Data DNIiwiiclass qoclifild tree a medial nobe1 as nel-raity Iseel lese..mie dA-lynim and Peje.tilem DspaniassPeenlstios pmr Mssl :-eee - Psptsltnle dietded by .nbee ef praotialag Map 1902male -n feal grdeam tre mmentuet.prattion nae and

- 24 -

PERU ANNEX IPage 4 of S

ECONOMIC DEVELOPMENT DATA

A CT UA L ESTIMATED PROJECLTED GROWTH D-ATE 1% p.o.) 1977

NATIONAL ACCDDNTD 1965 197 0 970 1976 1977 1979 19Op l9oOp -1981 D985 1965-7b 1906-MO 1980-M5 3 of(m-illions of -10 dollars at 1977 prices) EDP

Croon Doesic Prodoo 89D2.5 1D693.6 13376.8 13640.1 13639.6 D3570.8 14D79.0 14516.4 150090.5 19092.5 3.~9 1.6 5.3 100.0OsosfrmTsrn ofTae610.9 130.0 -216.9 -109.4 0.0 -235.9 679.0 4:11.1 317.0 599.2 0. . .

Gro- Do-corl 1--n (GDY) 9291.6 10823.6 13129.9 13407.7 1363.6 13334. 14706.0 1539&.5 D5399-5 19350.7 4.4 3.4 4.7 100.0Importt 1840.2 2190.1 2985.4 2697.7 217D6.8 1888.,7 2086.8 3004.6 345,5.3 372.4.7 3.3 3.7 4.4 19.8Esportn 2314.3 2616.9 1906.9 1908.9 2129.:5 2431.0 2730.1 2078.1 2632.6 2979.6 -1.0 P. 2.9 15.6Enpnrtt, Terms of Trade Adjonied 1703.4 27466.8 1660.D 1729 .4 2129.5 2195.3 341D.0 345D .6 2949.6 3537.8 0.1I 1 9.9 0.5 15.6

Rroo. c Cot GP, Terms of Trade Adjosted (- opo) 136.8 -556.7 1325.4 968.3 577.3 -386.6 -1323.,2 -446.D 505.7 196.9 00.e.a4.0

Total Cossepti-o 6461.3 8669.D 11 313.3 11 694.8 12 172.3 112072.3 11633. 12543.7 12990.5 15787.9 5.4 184.7 99.2Inv-tanot 1967 .1 157. 3142.D 2741.2 2044.7 1756.0 1802.2 238821.797 3.-3.3 3.3 15.0

Dometic Doologs 1830 .3 3154.6 1016.6 17272.0 1467.4 2D62.6 3125.4 064-.9 2409.D 3562.8 -0.1 12.5 4.6 10.8

PRICES ON DO DOLLARS (1977 180)

Deport Price rodeo 32.9 46.5 87.4 90.6 100.0 97.1 148.6 175.4 164.3 243.6Imp ort PrIce loden 64.7 44.3 100.4 95.7 DDO.D 1f8.1 119.0 1131.0 146.7 205.1Term of TradeoIden 73.6 105 .9 87.1 94.7 100.0 90.4 124.8 133.9 012.0 118.7AkesoIl A_verog REchaDe Rate (Soles per 9) 26.8 38.7 40.8 57.4 83.8 156.3 224.6 288.7 416.0 .

CIP NY SECTOR LABOR PORCE CANOE PRODUCTTIVLTY

ODTPIJT CANO PORCE ONE PNOD1ICITOT I. Mill. of OS ~ Perceot of Groeth Percet of Gros,th Per-et of Gros,thON173PIC,S. Dolsls Total Nate In Thosoods Tsta1 Rate lo DS Dollar AverageaC

1970 1980 1976 1980 7-0-80 19-70 1980 1970-1980 7-0-80 1976 1980 1970 1980 70-8o

Agricoltore (io-l. EfInhig) 1534.2 1457.8 17.3 11.8 -0.5 2011.9 2248.0 48.0 40.0 1.1 760.6 648.5 36.1 29.4 -1.6Idoap (mne, an., elertr., c-ste.2 3226.3 4712.4 36.5 38.1 3.9 769.1 1037.2 18.4 18.5 3.0 4194.9 4543.4 198.6 006,2 0.8

Services (all others) 4884.8 6198 .1 46.2 50.1 4.3 1407.0 2328.3 33 .6 41.0 5.2 2902.0 2662 .1 137.4 120.8 -0.9

Total/A--rge 8845.3 12368.3 180.R 100.0 3.4 4188.6 5615.5 400.0 100.0 3.0 2111.8 2203.3 100.0 100.0 0.4

CENTRAL COIDERNMENT PENANCE, ESTEIMATED PROJECTED(an perc-t of C.orreo COP) 1965 1970 1975 1976 1L977 1978 1979 1980 1981 1982

C-rreot Revss13.2 14.6 14.0 13.4 13.5 14.3 16.0 19.4 16.6 17.2Corret Dpeoditare 12.6 12.1 14.4 14.8 16.9 15.8 12.8 16.2 16.5 15.7C-orrot Sa_Dogs 0.8 2.3 -0.4 -1.4 -3.4 -1 5 3.2 2.2 0.1 1.5Capital Espeoditares 3.9 3.7 4.5 4.5 3.5 3.1 _3.7 4.7 4.6 4.1Rorro1 Asaist..ce (Net) 1.0 0.5 2.3 1.8 3.0 0.4 -0.7 0.3 0.3 0

CDPRSCNT EXPENDITUREnorDETA AC T UA L (speocet of Total Corret Dopeoditore) 1968 1973 1976 1977 19-78 DETAIL EN 19618i5SDe-eipisel Pimo

PUDLIC SECTOR EN S 1 Total

Edacotioo 30.6 27.9 22.9 18.1 16.1 ON8EDTMOENT PNOGRAM MillionHcoith 9.0 6.3 6.2 4.7 6.0 1981 PriceAgticldtore 3.6 4.4 1.8 1.3 3.4Other Ec_-ami Serolce 3.2 4.0 0.2 3.0 2.7 Agricaltore, PishioN 1557.2 14.1

Gesro 'Sorices (iorldioN defens) 46.4 42.7 46 .9 54.1 492 Iodootey. T-oina end MieDog 924.11 8.3lorer-st oe Debt 5.4 11.3 10.8 15. 241Eeg2681 24.2

Other 1.8 3.3 6.2 3.5 2.5 Troospert ood Co-mnketion 2547.2 23.0Socal1 sod CocoI Usterest Projects 3367.6 30.4

Toto1 Corret npeoditCore 18000 100.0 100.0 iOO.O 100.0T 0 T A C 11084.2 100.0

MONEY AND0 CRDEIT 1973 1974 1975 1975 1976 1976 1977 1977 1678 1978 1979 1978 1980 1981 p(Billiloo of Soles ootst.aodogatrho e-d of period)

Moe adQos -Noe 98.3 12D.0 101.8 142.4 166.3 166.8 216.2 220.5 344.1 361.1 686.4 725.9 1305.1 1973.5Nook Credt to Pobic Ocra7.2 269 49.7 60.3 101.4 1D5.3 149.3 189 262.2 537 204.1 237.0 371.3 682.2Sank- Credit to Prvate Sector 73.2 84.5 108,2 109.8 134.9 136.0 167.8 173.8 233.1 243.2 382.8 442.5 801.8 1521.8U.ederipig RohsisDte (S/. per US$) 38.7 38.7 38.7 69.0 65.0 85.0 85.0 160.0 160.0 225.0 223.0 390.0 390.0 390.0

M000 os Pr--et of CUP 25.0 24.3 22.6 22.7 20.0 20.1 19.9 19.3 18.7 19.6 19.9 21.1 23.3 20.7Co-smo Price lodv- io Soles (1977-100) 37.5 43.9 54.3 72.4 100.0 157.8 264.7 421.4

A-ool Perc-otoge Change Eo:C...ase PrEen Ideo km Doles 9.5 16.9 23.7 33.5 38.0 57.8 67.7 59.2 75.4

Nook Credit to Poblic Nectar 53.7 -1.2 84.8 68.2 29.5 31.8 -32.8 56.8 83.6Sank Credit to Private Sector 27.7 13.5 28.1 22.4 23.4 34.1 57.4 81.2 89.8

- -. - - - -. - - ~~~~~~~~~~~~~~~~~~~~~~~~~~~ --- - -

9 8~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

---- --- ~ -- I --- .- - - - -

- 26 -

ANNEX IIPage 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN PERU

A. STATEMENT OF BANK LOANS (as of March 31, 1982) 1/

AmountLoan (less cancellations)

Number Year Borrower Purpose Bank Undisbursed--- US$ million ---

27 loans fully disbursed 409.2

949 1973 Republic of Peru Education 24.0 1.91196 1976 Republic of Peru Transport 76.5 22.01215 1976 Republic of Peru Power 35.6 4.91281 1976 CENTROMIN Mining 39.7 4.71283 1976 Banco Vivienda Urban Dev. 21.6 9.61358 1977 COFIDE Industry 35.0 3.91403 1977 Republic of Peru Agriculture 25.0 21.3S-il 1978 Republic of Peru Preinvestment 8.8 2.51771 1980 Republic of Peru Irrigation 56.0 51.11806 1980 PETROPERU Petroleum Prod. 32.5 27.01812 1980 Republic of Peru Rural Dev. 15.0 14.41888 1980 Republic of Peru Preinvestment 7.5 5.1S-19 1980 SIDERPERU Technical Asst. 5.0 4.71963 1981 CORPAC Aviation 58.0 57.61968 1981 COFIDE Industry 60.0 60.02018 1981 ELECTROPERU Power 25.0 25.02064 1981 Central Reserve Bank Industry 26.0 26.02091 1982 Republic of Peru Transport 93.0 93.02117 1982 PETROPERU Industry 5.3 5.3

Total 1,058.7of which has been repaid 183.5

Total now outstanding 75.2

Amount sold 18.3of which has been repaid 18.3 _

Total now held by Bank 875.2

Total undisbursed 440.0

1/ Since March, the Bank has approved three further loans to Peru: (i) US$40.6million for a Lima Water Supply Project, presented to the Board on May 11,1982; (ii) US$40.6 million for an Agriculture Research and Extension Project,presented to the Board on May 20, 1982; and (iii) US$81.2 million for a SixthPower Project, presented to the Board on June 15, 1982.

- 27 -

ANNEX IIPage 2 of 6

B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982)

Type ofYear Obligor Business Loan Equity Total

1960 Industrias Reunidas, S.A. Home Appliances 0.2 - 0.2

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

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

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

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

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

1975 Southern Peru Copper Corp. Mining 15.0 - 15.0

1978 Cia. de Minas Buenaventura Mining 2.0 0.5 2.5

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

1981 Sogewiese Leasing 3.0 0.1 3.1

1981 Consorcio Energetico de PowerHuancavelica Transmission 4.5 - 4.5

Total gross commitments 35.5 1.8 37.3less cancellations, terminations,repayments and sales 18.0 0.4 18.4

Total held by IFC 17.5 1.4 18.9

Total undisbursed incl.participants' portion 8.2 - 8.2

- 28 -

ANNEX IIPage 3 of 6

C. STATUS OF PROJECTS IN EXECUTION 1/(As of March 31, 1982)

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

The project has experienced serious difficulties and is now about 40months behind schedule owing to start-up problems including weaknesses in theproject unit and cumbersome bureaucratic procedures. In order to resolve theseproblems, the project has been modified to reduce its scope, increase the Bankdisbursement percentage, create a revolving fund and improve administrativeprocedures (see President's Memorandum R79-59 of March 27, 1979). As a result,the pace of project execution has improved substantially over the past year.Final disbursement requests are now being submitted and an extension of theclosing date is not contemplated.

Loan 1196-PE: Lima-Amazon Transport Corridor Project; US$76.5 million Loan ofMay 27, 1976; Effective Date: August 18, 1976; Closing Date:December 31, 1982.

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

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

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

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

- 29 -

ANNEX IIPage 4 of 6

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

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

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

Administrative difficulties, particularly the need to reconcilePeruvian procedures with Bank guidelines for procurement, delayed the project byabout one year. All components are now moving ahead well and disbursements standat US$12.0 million. Because of past delays, however, the Closing Date has beenextended to end-1982.

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

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

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

Because of the weakness of the project unit, there was a long delay incompleting the designs for civil works in the six valleys where irrigation systemiare to be improved. The unit has been substantially strengthened over the pastfew years, the design phase is now complete and constnrction has started. Theproject, however, is now several years behind schedule.

Loan S-11-PE: Water Supply and Power Engineering Project; US$8.8 million Loanof December 22, 1978; Effective Date: June 27, 1979; ClosingDate: December 31, 1982.

The main components of this project consisted of the feasibility studyfor the Mantaro water transfer scheme and a master plan for Lima's water system.The Mantaro study has been completed, and all other components are beingimplemented satisfactorily.

- 30 -

ANNEX IIPage 5 of 6

Loan 1771-PE: Lower Piura Irrigation Rehabilitation Project; US$56 million Loanof February 4, 1980; Effective Date: May 28, 1980; Closing Date:December 31, 1985.

Project implementation is well underway and proceeding satisfactorily.

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

The project got underway more slowly than expected because of the weakimplementation capacity of PETROPERU. All project components, however, have nowbegun and execution is proceeding well.

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

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

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

The feasibility report for the phosphate fertilizer project has beencompleted.

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

A consultant's report evaluating SIDERPEREU's expansion plans has beenreviewed. A plan of action to deal with the findings of this report is beingdiscussed with SIDERPERU..

Loan 1963-PE: Aviation Development Project; US$58.0 million Loan of August 19,1981; Effective Date: January 21, 1982; Closing Date:December 31,-1986.

Procurement activities for equipment have begun.

Loan 1968-PE: Second Industrial Credit Project; US$60.0 million Loan-ofAugust 19, 1981; Effective Date: February 25, 1982; ClosingDate: June 30, 1985.

About US$10 million of this loan has thus far been committed.

- 31 -

ANNEX IIPage 6 of 6

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

Final design of a number of projects included in this loan, includingthe Yuncan hydroelectric project, are now underway.

Loan 2064-PE: Small-Scale Enterprise Project; US$26 million of June 16, 1982;Effective Date: ; Closing Date: December 31,1985.

Initial subloan requests are now under review.

Loan 2091-PE: Eighth Highway Project; US$93 million Loan of June 4, 1982;Effective Date: ; Closing Date: June 30, 1986.

This loan was approved by the Board on February 16, 1982.

Loan 2117-PE: Oil Refinery Engineering Project; US$5.3 million Loan ofEffective Date: ; Closing Date: June 30, 1985.

This loan was approved by the Board on March 25, 1982 and is expectedto be signed shortly. Consultants are now being selected.

Loan 2139-PE: Lima Water Supply Project; US$40.6 million Loan of June 4, 1982;Effective Date: ; Closing Date: June 30, 1988.

This loan was approved by the Board on May 11, 1982.

Loan 2150-PE: Agricultural Research and Extension Project; US$40.6 millionLoan of - ; Effective Date: * Closing DateMarch 31, 1988.

This loan was approved by the Board on May 20, 1982. Some projectconsultants, to be retroactively financed, have been contracted.

Loan -PE: Sixth Power Project; US$81.2 million Loan ofEffective Date: ; Closing Date: June 30, 1988.

This loan was approved by the Board on June 15, 1982. It is expectedto be signed shortly.

- 32 -

ANNEX IIIPage 1 of 2

PERU

PETROLEUM PRODUCTION ENHANCEMENT PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I: Timetable of Key Events

(a) Time taken by countryto prepare project: Twelve months

(b) Project prepared by: PETROPERU with Bank assistance

(c) First presentation to the Bank: May 1981

(d) Departure of appraisal mission: October 1981

(e) Completion of negotiations: July 2, 1982

(f) Planned date of effectiveness: November 1982

Section II: Special Bank Implementation Action

None.

Section III: Special Conditions

It has been agreed that:

(a) PETROPERU would take all steps necessary to maintain thecompetitiveness of its professional staff salaries and other staffbenefits with those of private petroleum companies operating in Peruand would, until the closing date of the loan, advise the Bank at leastonce a year on any professional vacancies in its exploration orproduction departments and the action it intends to take to fill suchvacancies (para. 44);

(b) as a condition of loan disbursement for wells to be drilled orreactivated, PETROPERU would, by October 31 of each year, present anupdated technical and economic justification satisfactory to the Bankfor such activity and the Bank would provide its response within 15working days of receipt of the report; it would also exchange viewswith the Bank from time to time on the well-spacing study and projectfeasibility studies for adjacent areas, including its programs toimplement these studies (para. 58);

- 33 -

ANNEX IIIPage 2 of 2

(c) As conditions of loan effectiveness, PETROPERU would appoint all projectconsultants, contract a project management service company and selectstaff for training; both project consultants and the management companywould be satisfactory to he Bank as would their terms and conditions ofemployment (paras. 58 and 59);

(d) PETROPERU would exchange views with the Bank on the proposed PETROPERUfive year investment program at least 90 days prior to the end of thepreceeding year, and revisions agreed upon would be incorporated therein(para. 68);

(e) PETROPERU would: (i) attain quick ratios of 0.7 by year-end 1982, 0.9by December 31, 1983 and 1.0 in 1984 and thereafter; (ii) maintain debtservice coverage ratios of 1.9 in 1982 and 2.0 in 1983 and thereafter;and (iii) not incur any debt without Bank approval unless itsdebt/equity ratio is at least 70/30 in 1982 and 60/40 in 1983 andthereafter (para. 70); and

(f) the Government would reinvest dividends from PETROPERU to the extentl.at *uch funds would be necessary to finance PETROPERU investment-ogram agreed with the Bank (para. 71).

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