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This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

A REPORT

on the

PROPOSED SECOND LOAN TO PERU FOR AGRICULTURAL MACHINERY

in

PERU

March 26, 1954

Department of Technical Operations

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TABLE OF EQUIVALENTS

U.S. $ 1.00 = S/. 20.00

S/. 1.00 = U.S. $0.05S/. 100,000 - U.S. $5,000

S/. 1,000,000 U.S. $50,000

1 Quintal * 101.4 pounds

TABLE OF CONTENTS

PageI. Summary 1

II. The SCIPA Organization 2

III. Performance of Present Pools 3

IV. SCIPA's Request for a Second Loan 4

V. Justification of the Project 5

VI. Economic Benefits 7

VII. Recommended Basis for a Loan 8

Table I. Details about SCIPA's TractorFleet about October 1, 1953

t" II. Preliminary List of Goods

A REPORT ON THE PROPoSED SECOND LQA.N mO PERU1OR AGRIC-;JITTAL LYQJINERY

I. Summary

1. The Government of Peru has approached the Bank through SCIPA (Ser-vicio Cooperativo Inter-Americano de Produccion de Alimentos), an agency ofthe Linistry of Agriculture, for a second loan to finance the import ofagricultural machinery. This report presents an analysis of the projectand is based on information available in the Bank in the progress reportsfor the first loan, additional information supplied by SCIPA, and personalobservations made by members of the Bank's staff during visits to Peru inJanuary and February 1953 and 1954.

2. On July 8, 1952 the Bank concluded a loan agreement (Loan no. PE/67)with the Government of Peru, which made it possible for SCIPA to importagricultural machinery for an amount of US`1.3 million. Purchases have beencompleted and all the machinery has been received and is in operation. Onlya minor amount of spare parts remwains to be received. The informationavailable indicates that the targets described in Technical Report L-170 on thefirst loan to SCIPA have been met.

3. The present request is for a loan of US$1.7 million. The greaterpart of the machinery to be purchased under the proposed loan would be heavyequipment for the rehabilitation of land now cultivated and of abandonedland and for the clearing and preparation of new land. This machinery wouldvery substantially increase the pools of heavy machinery nov being operated.About one-third of the loan would be used to purchase equipment for tillagepools. Some of this equipment is to replace outwvorn equipment. M1aintenancemachinery and spare parts have been included.

4. SCIPA, now operating 16 machinery pools, can satisfy only part ofthe demand for development and rehabilitation work in the coastal plainswith the present stock of equipment. MIoreover, it envisages a demand forclearing work on the plateaus of the eastern slopes of the Andes to thedevelopment of which Peru now attaches inmportance.

5. The economic benefits of rehabilitating land in the coastal plainsand of clearing land in the other areas are large, and the costs compara-tively low.

6. SCIPA has built up a well organized and ef-ficiently run system ofmachinery pools which has expanded rapidly in recent years. Its purpose isnot to earn profits, but rather to render a service to Peruvian farmers.The pools have in the past covered ail their costs, including depreciationcharges which are calculated by SOIPA on a conservative basis. These de-preciation charges, which are geared to the repayment of the Bank's loan,would have to be increased if the sole were to depreciate substantially.Under a new supplemental agreement to be signed by the Government and SCIPA,the foreign exchange risk would not be undertaken by SCIPA, but unless thesituation became extreme, SCIPA will continue to cover the sol cost of ser-vicing the Bank's loans.

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7. Because of the profitability to farmers of the operations performedby SCIPA, they should be able to absorb any increase in rates which SCIPAmight have to impose wiere the sol to depreciate above 20 to the dollar.

8. The suggested term of the proposed loan is seven years, including atwvo-year period of grace on capital repayments to cover the period of pur-chasing, transporting and assembling the equipment.

!I. The SCIPA Organization

9. The Servicio Cooperativo Inter-Americano de Produccion de Alimentoswas formed in 1943 under an agreement between the Governments of Peru andof the United States. Tais basic agreement was renewed in 1950 and runs fora period of 5 years. The purpose of SCIPA is to aid in the formulation andexecution of the Food Production Program of Peru. It acts as an agency ofthe Ministry of Agriculture.

10. Its activities are of tvo main types: (a) the non-reimbursableactivities; mainly demonstration and advisory work among farmers, and:(b) the reimbursable activities, wihich consist in large part of the opera-tion of machinery pools, and furthermore of the supply of certain requisites(seeds, insecticides, etc.). The operation of the pools is intended to pro-vide a service to Peruvian farmers on a non-profit basis.

11. SCIPA has its headquarters in Lima and local offices in some 30 ruralcenters. There are now in operation 16 machinery pools. The machines ofthese pools are serviced by a central workshop in Lima and two regional work-shops, one in the north and one in the south. The central workshop isequipped to perform major overhauls, and the regional workshops perform dayto day servicing, repairs and preventative maintenance.

1a. The funds for SCIPA's onerations are contributed by the Governmentof Peru and the U.S.A. on a mutually agreed basis. The pools were organizedfor the first time in 1945 as a separate project, agreed upon by the twogovernments. The nroject agreement provided for the contribution which eachgovernment had to make for the pools initial funds. The pools have sincethen been operating on a self-supporting basis.

13. SCIPA is headed by a Chief of Party. who is an official of the Insti-tute of Inter-American Affairs, an agency of the U.S. Govermaent. The staffconsists of some U.S. exoerts and of Peruvian members who have received in-tensive and thorough training, and are now able to run all SCIPA's operationsefficiently.

14. Performance to date shows the organization, management and operationof the pools to be excellent.

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III. Performance of Present Pools

15. On July 8, 1952 IB.RD loan PE/67 for US,`.3 million was made to theGovernment of Peru for the purpose of enlarging the machinery pools of SCIPA.Purchases under this loan have been completed. On October 1, 1953 SCIPAowmned 176 tractors, of wvhich 114 were purchased under the IBRD-loan. Thedistribution of tractors allocated to pools in various parts of the countryis given in Table I.

16. Wriork done by the pools is classified under two main headings; "cul-tivation" work and "levelling" work. The first category includes plowing,harrowing, dusting, harvesting, etc. The second covers various types ofwork which aim at improving land already under cultivation, or at rehabili-tating land Which has been abandoned, or at clearing new land. This in-volves such operations as levelling, terracing, drainage, canal and ditchclearing, clearing of bushland, and improvement and building of farm roads.

17. SGIPA calculated that, using the machinery financed under the firstloan as described in Technical Report L-170, it would rehabilitate 5,000hectares a year and do tillage work on 20,000 hectares each year.

18. Reports of pool operations shown that the number of tractor hoursworked, and the number of hectares serviced, increased steadily over thelast few years and that the objectives under the first loan were reached.

Hours of Operation

Levelling Cultivating HectaresYear Total lork W,1ork Cultivated

1950 61,700 8,000 53,600 1h,9001951 75,700 20,800 54,900 16,8001952 108,200 3)4,300 73,800 23,3001953 (10 months) 171,100 84,400 85,300 32,9001953 (prelim.) 209,500 38,700

19. Figures for the first 10 months of 1953 indicated that the demandfor levelling work was increasing very rapidly. In these 10 months machinesassigned to levelling work operated for 84,000 hours, or half the total num-ber c' hours during vwhich all tractors were in operation.

20. Total costs of operating the pools during 1953 were S/o 9,720,000.The costs can be apportioned as follows:

M4ain Categories of Costs of SCIPA Poolsin 1953 as % of Total Qosts

Wages 17.0Fuel 4.6Lubricants 5.1Parts and repairs 13.2Transportation 5.3Depreciation 34.0Administration 20.8

100.0

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21. Gross receipts for all pools during 1953 were S,o 10,788,000 pro-viding a profit of S/o 1,068,000 on the years operation. This profit wasearned in spite of heavy allowances for depreciation. Although SCIPA isintended to be a non-profit organization, it has consistently shownl a smallprofit in each of the past six years. The strong demand for pool servicesindicates that farmers consider the charges to be economic. The profits ofthe pools can be attributed largely to the efficiency of the management andparticularly to the efficient maintenance organization that has been esta-blished.

IV. SCIPA's Request for a Second Loan

22. There is a very rapidly increasing demand for levelling work. Level-ling makes the application of irrigation water more efficient and, conse-quently, higher yields are harvested and more land can be irrigated withthe same supply of water. Although the machines allocated to levelling workoperate more hours per month (over 200) than those assigned to tillage work(azproximately 165), SCIPA is unable to meet the demand.

23. In order to expaind SCIPA's ooerations to meet this demand the Minis-terio de Agricultura has asked for a second loan of approximately l. mil-lion on terms and conditions similar to those of the first loan. The mainitems of the preliminary list of goods a-e:

(000 dollars)20 crawler tractors of 80 hp. 31425 crawler tractors of 65 hp. 25835 crawler tractors of 44 hp. 286

Heavy earthmoving equipment 175Scrapers, graders and borderers 88Plows, cultivators, sub-soilers, threshers 101Transport equipment 155Spare parts and shop tools 206Contingencies 117

General Total 1,700

The detailed list is attached to this report (Table II).

24. Thie list of goods includes transportation equipment and replacementsof old equipment obtained by SCIPA prior to the first IBRD loan. Transpor-tation items include trailers, trucks and pickups, which SCIPA needs for thetransportation of equipment to and from pools and farms, and for the trans-portation of staff members. A high degree of mobility of personnel andequipment is required in order to arrive at an efficient operation. Amongreplacement items are 30 tractors and most of the cultivation equipment.The extension of cultivation services is not contemplated.

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25. The major portion of the funds will be spent for the purchase ofheavy equipment to be used for the clearing of new or the rehabilitationof old land. This involves such operations as described in par. 16, aslevelling and building of farm roads. Since 30 tractors are to be ob-tained as replacements, the proposed loan would allow SCIPA to expand herfleet by about 50 tractors.

26. Most of the equipment now in use by SCIPA is manufacturerd in theUnited States (see, as Dar as tractors are concerned, Table I). SCIPAaims to simplify its maintenance operations by using only a few makes ofmachines. Since tuhere are advantages in purchasing the samre malces ofmachines as the ones now in use, procurement is intended to be mainly fromthe same suppliers as in the case of the first loan. However, since SCIPAwants to be acquainted with new developments, it intends to purchase a fewunits from other suppliers. Part of the shop equipment will be bought fromEuropean suppliers.

V. Justification of the Project

27. There are large areas of land (estimated at nearly 150,000 hectares,or one-fourth of the area listed by the Ministry of Public -hT1orks as beingunder irrigation) in the coastal plains that formerly were in production, butwhich are now out of use, as: (a) the land has never been properly levelledso that it uses too much irrigation water and its cultivation is too ex-pensive; (b) the irrigation ditches have deteriorated in the course of theyears and some of the fields require drainage.

28. Other lands which are still in use are also badly levelled so thatthey use too imch irrigation water and give low yields. Levelling -wouldnot only increase the crops, but also make water available for additionalland.

29. The rehabilitation of land with hand tools is costly and slow.Every year thousands of man-hours are spent cleaning, with hand tools, irri-gation ditches, which have been silted by muddy water. By far the largerpart of this land can be rehabilitated at rather low costs if the propermachinery is available. If the appropriate machines are rented such workgives a good return to the farmers. Farm.us on the Costa (The Coastal Plains)are as a rule oiner-operated so that farmers are interested in improvingtheir property and most of these farms are large enough for machine opera-tions. That farmers are able and eager tC pay the $CIPA-rates for thistype of work is shown by the fact that though in 1952 each machine assignedto levelling operations worked for an-average of 200 hours per month, SCIPAwas frequently unable to meet the demand.

30. It is also intended that the equipment will be used to clear landon the plateaus on the eastern slopes of the Andes. One of the SCIPA1 spools in this area is located in the region of Jaen-Bagua. This is a fastgrowvng agricultural area in the Departments of Cajamarca and Amazonas,which produces rice, tobacco and other tropical products. SCIPA is of the

opinion that it can employ there more than the 10 tractors which are nowallocated to that pool. Some tractors have to be of the heavy type forbrush clearing. There are about 8-10 thousand hectares to be cleared inthis region alone.

31. In addition to the foregoing demands there are the requirements ofthe Quiroz-Piura Irrigation Project. As a result of completion of Stage I,there is a large demand for levelling work wuhich SCIPA has been unable tomeet in full. If Stage II is constructed, about 40,000 hectares of newrland will have to be prepared for irrigation. The rate of clearance inany one year would probably not exceed 8,000 hectares. SCIPA has statedthat if the Bank makes a second loan, it would have sufficient equipmentready to undertake this operation wAhich would not get into full swing until1957 even if construction on the Quiroz-Piura project is started by themiddle of this year.

32., The experience which SCIPA has accumulated in six years of pooloperations together with the applications for rehabilitation and clearingwork now available, indicate that there will be such a volume of work tobe done by the pools that an expansion of their equipment is fully justi-fied.

33. SCIPA mvill continue its tillage work in the Costa but graduallymnore attention is being paid to increasing the production of food in thevalleys in the Andes. For this, the six existing demonstration pools inthat region are of great importance, and the purchase of some light equip-ment for tillage work in order to replace worn-out equipment is justified.

34. SCIPA charged on average 50 Soles per hour for machinery services,or about $3 at the avera-e exchange rate in 1953, but these charges mayhave to be increased under a substantial depreciation of the Sol. SCIPAwishes to depreciate its machinery at a rate sufficiently fast to repaythe first loan made by the Bank and intends to do the same for machineryfinanced under a second loan. Because of the greater margin of profit,and the fall in administration costs, which should follow from the in-creased volume of its operations, SCIPA expects it can continue -rith thesame scale of charges unless the Sol depreciates above 20 to the dollar.

35. If it were to depreciate above this figure, SCIPA would have tochoose between asking the GoverrrAent to subsidize its operations or rais-ing its charges. At the present time, the total cost of levelling andrehabilitating land can probably be earned back by the farmer in two orthree years operations. In the event of a substantial depreciation, itappears that SCIPA could well contemplate raising its charges, since thefarmer, particularly the cotton grower, would increase his profits inSoles.

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VI. Economic Benefits

36. As it is impossible to know in advance the exact area or locationof the lands to be rehabilitated or developed, or the type of crops to begrow^n thereon, it is necessary to base estimates of the economic benefitsof the project on certain assumptions.

37. The loan under consideration w'ould enable SCIPA to enlarge her fleetwiith 50 tractors. These tractors will be used for the improvement of landnow under cultivation, abandoned land, and for the preparation of land thathas not yet come under cultivation. The experience of SCIPA is that a fleetof 50 tractors could theoretically rehabilitate or clear 30,000 hectares perannum, if the machines work on average 2,000 ho'urs a year.

38. However, in order to make a conservative estimate of the economicbenefits, this report assumes that the new equipment will rehabilitate15,000 hectares and will make available another 5,000 hectares of new landper year, or a total of 20,000 hectares.

39. Further assumptions are: (a) that half of this land will grow ex-port crops (mainly cotton), and the other half will produce food cropsfruit, and tobacco; and: (b) that three-quarters of the production of ex-port crops will actually be exported.

40. Calculations based on these assumptions and on conservative priceestimates show that after five years of full opeiation, the period duringwhich the cost of the machines is to be amortized under the loan, an in-crease in agricultural production of the order of US$36 million will havebeen produced, of which the equivalent of US,17 million will be exported.After the clearing or rehabilitation operations have been completed, theland will continue to produce at a higher level. The value of the increasedproduction each year will be equivalent to 12 million after the 5th year.

41. The costs to the farmer of the increase in production consists oftv,io elements: (a) recurrent costs for the cultivation of new land, or anincrease in recurrent costs for the cultivation of improved land; (b)charges for SCIPA services, which are low if compared with the recurrentcosts.

42. The available information shows that the costs to the farmer areconsiderably less than either the value of the production from new land orthe increase in value of production from rehabilitated land. In fact theincrease in their costs calculated as an average over the 20,000 hectaresmentioned in par. 38 will be only about one-third of the average increasein the value of production.

43. Tlhe foregoing calculations of benefits and costs only cover the addi-tional "levelling" operations of SCIPA. Further benefits would be derivedfrom other operations of SCIPA including the ability to maintain past opera-tions at the present level through replacement items. Even without takinginto consideration these benefits, the cost benefit ratio is extremelyfavorable to the farmers.

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44. It is necessary, in addition to the foregoing appraisal of thecosts and benefits of the project to the farmers to consider the costs ofthe project to SCIPA. The foreign exchange costs of the additional equip-ment and expanded operations to SCIPA can be estimated as follows:

Amount of loan US$ 1.7 millionInterest: 5% over period of grace and 5 years

interest over the unpaid balance " 0.41 "Consumption of additional fuel & luorication(l) i 0.09 "

US$ 2.20 million

It is estimated on the basis of the figures shown in par.20 thatlocal currency costs of the expanded operations to SCIPA will be S/o 33million on the basis of S/o 20 to the dollar. The total costs of theproject estimated at S/0 77 million will be covered by SCIPA's revenuefrom its various services. Since the expansion of operations will occurover a period of years, no immediate provision to cover local currencycosts to SCIPA is necessary. The funds can be appropriated from currentincome as necessary, particularly as farmers pay for services in advanceby contract.

45. In accordance with the foregoing estimates of foreign exchangecQats and benefits, the foreign exchange earnings under the project amountto US$17.0 million (par.40), compared with foreign exchange costs ofUS$2.2 million (par. 44). The net improvement to the balance of paymentsposition would, therefore, be of the order of USt14.8 million. These roughfigures indicate that from a balance of payments standpoint this loan vwouldbe very advantageous.

VII. Recommended Basis for a Loan

46. Investigation and appraisal of this project indicates that it issound and that the list of goods is acceptable.

47. A term of seven years, the same as for the first loan to SCIPA, in-cluding a twvo-year grace period, in which SCIPA would be able to buy, importand assemble the machines, is reasonable for a loan of this kind.

48. On this basis the request for a loan to the equivalent of US:1.7 mil-lion as submitted by the Peruvian Government through SCIPA should be favor-ably considered.

(1) These items amounted to l0; of total costs in 1953, which vworks out at S5per hour. For the Suture a cost of fuel and lubrication of ,-O.30 perhour is assumed.The benefits of the project are calculated on the basis of 60,000 hoursof work of the addition to the tractor fleet. This means that over aperiod of 5 years a sum to the equivalent of $90,000 has to be expendedfor fuel and lubrication.

TABLE I

Details about SCIPA's Tractor Fleet about October 1, 1953

Number of Tractors owned by SCIPA

Producer Source of Funds TotalBank Others

Caterpillar 60 28 88Allis Chalmers 10 20 30Oliver 20 6 26John Deere 8 2 10Avery - 1 1Ferguson 5 1 6International 10 4 14Case 1 - I

Total 114 62 176

Distribution of Tractors over Pools

Commercial Pools Demonstration Pools

Arequipa 3 tractors Ayacucho 3 tractorsBagua 10 " Cajamarca 1 "Camrana 6 " Cuzco 3Casma-Santa 14 *ihuancayo 10Chiclayo 16 " Huaraz 1Chincha 26 " Juliaca 2 "

Ica 26 "Lima 18 " Total 20 tractorsPacasmayo 8Piura 16 "

Total 1L3 tractors

TABLE II

SCIPA' s REQUEST FOR A SECOND LOAN

Preliminary List of Goods

PriceItem Quantity c.i.f. Calao

1. Tractors, CaterDillar Mod. D-7 7)4" tread(81.00 HP) or equal equipped with hydrauliccontrol 20 $ 313,710.00

2. Tractors, Caterpillar Ivlod. D-6 744" tread(65.OO EP) or equal equipped with hydrauliccontrol 257,50000

3. Tractors, Caterpillar Mlod. D-4 60" tread(4)4.00 HP) or equal 35 286,000.00

4. Bulldozers, Caterpillar angular blade M4od. 7-A74" or equal 20 70,830.00

5. Bulldozers, Caterpillar angular blade Iiod. 6-A744" or equal 25 60,000.00

6. Scrapers Caterpillar sItod. 70 with hydrauliccontrol or equal for use with D-7 tractor orsimilars 3 i6,740.00

7. Motor Graders Caterpillar Lod. No. 12 of 100 HPor equal equipped with scarifier and hydraulicbuster in the steering system 4 66,ooo.oo

8. Plows Disc 6 and 7 discs 28" and Mliold Board plowsIMiodel to be selected 30 36j500.00

9. Combination PlowT and Harrow for use with D-4 orD-6 tractors 5 7,500.00

10. Disc Harrows, Standard Disc or equal 28 disc 26"disc for use with D-4 tractors 15 18,0oo.00

11. Borderers "Brown" or equal 4 4h,000,00

12. Threshers stationary "Case" or equal, capacity200 sacks per day minimum 6 14,4oo.6i0

13. Threshers Peanut-Picker type Lor threshing beans"Turner" or equal 4 5,°°°.O0

PriceItem Quantity c.i..f. Calao

14. Sub-soilers "Killifer'i or equal 5 teeth for usewith D-4 or D-6 tractors 10 $ 10,000.00

15. Borderers "Killifer" for use with item 14 4 1,200.00

16. Drag lines "Hyster" or equal for use with D-7 orequal 4 44,220.00

17. Sub-soiler cable control for use with D-7 typetractor 3 9,900.00

18. Trailers low bed level deck 20 tons capacity 3 13,500.00

19. Truck tractors G1C or equal for use withitem 18 3 19,500.00

20. Truck Heavy Duty 15-tons carrying capacityGMC or equal 5 30,000.00

21. Pick-up trucks 3/4 tons, L forward speed GlkCor equal 14 28,000.00

22. Pick-up trucks 1/2 ton capacity 3 forward speedGMC or equal 4 7,200.00

23. Trucks 1 ton capacity 4-wheel drive "Dodge"Power Wagon or equal 8 28,000.00

24. Jeeps standard Universal 4-wheel drive or equal 2 4,000.00

25. Trailers tilt bed, 10 to 12 tons capacity formoving tractors in the field 10 25,000.00

26. Repair parts and shop tools 15%o 206,400.00

27. Contingencies 116,4oo.00

TOTAL $1,700,000.00