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No. L-170-

RESTRICTED

This report is restricted to use within the Bank

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

FILE COPY

TECHNICAL REPORT

an the

AGRICULTURAL MACHINERY PROJECT

for

PERU

June 27, 1952

Loan Department

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Rates of exchange used in this report

$1 15 Soles

I Sole 6.7 cents

I mnillon Soles $66,667

TECHNICAL REPORTon the

AGRICULTURAL MACHINERY PROJECTfor

P E R U

I. Purpose and Scope of this Report

The purpose of this report is to present a description and technicalJustification of a project for importing agricultural equipment andmachinery at a cost of 01.3 million over a period of 12 months, to enlargethe equipment pools operated by SCIPA (Servicio Cooperativo Inter-Americanode Produccion de Alimentos).

The information contained herein was obtained from the writer's two-month stay in Peru and is based on records kept by SCIPA as well as obser-vation and discussions during field trips to locations where work wasbeing performed by tractor units of SCIPA.

II. Background Information

A. Agriculture in Peru

Agriculture has been, and continues to be, the principal enterpriseof the Peruvian people, in which two-thirds of the working population areoccupied. Nevertheless, Peru has to import such foodstuffs as wheat, meatand milk. Cotton and sugar exports, on the other hand, account for 5O0% ofPeru's foreign exchange income.

Peru is divided into four widely different agricultural regions:

1. The Costa, where production is concentrated in some fiftysmall river valleys and which is dependent on irrigation.About one-third of the cultivated land consists of largeestates, some of which are operated by modern methods. Themost important crops are cotton, sugar and rice.

2. The Sierra, a region of high plains with a seasonal rainfallof relative sufficiency. In this area, food crops are pro-duced in the valleys, and the upper lands are used for grazing.However, the food crops (wheat, barley, corn, and potatoes)are raised on small landholdings by primitive means and simplysuffice to supply the rural Indian population with theirlimited requirements. About one-half of the total populationof Peru lives in this area.

3. The Montana, a tropical rainfall region on the eastern slopesof the Andes, with conditions favorable to the growing oftropical and sub-tropical products, but lacking the means oftransportation and the necessary labor force,

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4. The Selva, an area of flat tropical jungle land, east of the1'lontana, without communications except by river.

Food production over the last fifteen years has increased by some 20%.Nevertheless, it is lagging far behind the increase in population which hasexpanded by about 30% in this period. Cotton and sugar production hasfluctuated considerably, but steadily increasing domestic consumption iscausing a downward trend in exports of these commodities. The problem ofincreasing agricultural production in Peru can be approached on two fronts:

1. by enlarging the cultivated area;

2. by improving the output of land already under cultivation.

On the coastal plain, the former necessitates a program of irrigation worksfor rehabilitating land and bringing new land under cultivation, and on theTontana a program of highway construction and colonization. On the otherhand, on the Sierra a substantial increase in food production could be broughtabout by introducing more modern methods of production.

B. SCIPA

SCIPA originated in a request from the Peruvian Covernment to theinstitute of Inter-American Affairs of the United States for assistance inthe development of a program w^rhich would both increase production of foodduring the war period and at the same time lay the foundation of long-rangeagricultural improvements. It operates as a semi-autonoInous agency (Reparticionpof the Ministry of Agriculture, aided by a technical agricultural field staffcomposed of agricultural and administrative personnel provided by the Institute.

Since the beginning of its operations in llay 1943, SCIPA has proved anorganization of unusual effectiveness and is a remarkable instance of a littlegoing a long raTy. All its activities from the time of its inception to June1951 have been carried on for the equivalent of a little over $6 million, ofwhich the United States has contributed 26%, the Peruvian Government 44%, theremaining 30% being income earned from its own operations.

SCIPA's activities fall into two main categories, namely: (a) the non-reimbursable, whichi consist of technical asssiftme to farmers largely in theform of extension services for which the recipient of the service makes nopayment; and (b) the reimbursable, those in which SCIPA provides services andmaterials for wfhich it is paid 1y the recipient of the services.

The extension services in Peru are carried on by a country-wide systemof over 40 field offices which perform such varied functions as education inthe techniques of control of insects and plant disease, improved agriculturalpractices, planning of crop adjustment programs, establishment of commoditycenters and the conducting of dietary and nutritional studies.

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SCIPA's reimbursable functions consist of the contractual operationof agricultural machinery and equipment, the provision of materials to improveagricultural production, and the development of new land by promoting coloni-zation and new irrigation projects.

One of the most important reimbursable activities is the operation ofpools of tractors and power equipment for the purpose of assisting farmers inpreparing and seeding their lands, harvesting their crops and operations forrehabilitating old and developing new lands, such as clearing, levelling,draining and irrigating, SCIPA trains and employs operators for all of thismachinery, and crewrs for maintaining and repairing it. This training forms avital adjunct of the project.

Farmers have to enter into a written contract with SCIPA for these"custom!' services, and are charged a fee, payable in advance, which covers thecost of rendering the services including depreciation of the equipment.

Although the number and location varies from season to season, thereare generally some 18 machinery pools in operation on the Costa . There aretwo groups of machinery pools in this region, one to the north of Lima, andone to the south, each with an over-all supervisor who is in charge of dis-persing the machines in his area to coincide most effectively with the cropseason. Recently, four demonstration pools have been started on the Sierra.

As of December 31, 1951, the equipment in use in the various pools vmscarried on the books of SCIkA at a nominal value of about V300,000. Themachinery consists of:

79 tractors . . . . . . . . . . . , 3180,00037 threshers ,. . . . . .. . . . 20,00064 other equipment including plows. 100,000

Total $300O000

The schedule of charges for the various services is based on the costof operating the pools and the amortization of the machinery over a period offive years or less. It is not SCIPIA's objective to make profits over and abovethese costs. However, as shown by the following table, costs on this basishave been more than covered every year since June 1948.

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FINANCIAL SUMDiRY OF SCIPA iU4CHI=ERY POOLS

JULY 19L7 THROTJGH. 1951

Ycrr Costs Earnings Returns(including Profit Lossdepreciation)

Total 31.7,939,710.14 S/.8,259,819.21 S/.320,10G.07 S/.

1947(2ndhalf) 493,578.00 455,540.35 - 38,037.65

1948 1,380,771.25 1,416,733.65 35,962.40 -

1949 1,539,822.04 1,540,686.05 864.01

1950 1,907,739.58 1,937,916.71 30,177.13 -

1951 2,617,799.27 2,908,942.45 291,143.18

III. Dc-;crintion of the Proiect

SCIPA's machinery pools need to be increased so that the valuable worknow being undertaken by SCIPA in this field may be further developed. 3-scussionswith iir. John N-e.l, te head of SOTPA, and 11r. Luis Dibos, iMlinister of A ricslture,and field -tudies made by Bank representatives, indicated that these pools willbe most effecti.vely augmented by new machinery and equipment to perform thefollowing functions:

A., Reclamation of old and opening up of new land.

B. Rehabilitating and constructing irrigation ditches.

C. Seeding and tillage.

D. Harvesting and threshing of crops.

E. Constructing farm feeder roads.

The list of agricultural machinery i4hich can be absorbed by SCIPA overa period of 12 months is attached as mnnex A.

For the lmost part, this machinery wAll be used to expand SCIPA's work onthe Costa but it ill also aid in the pioneer *rork which SCIPA has just startedon the Sierra and iontana. With further help from the Peruvian Government, SCIPAplans to extend its work on the Sierra and iMontana in about 18 months and at thattime intends to approach the Bank for another small loan for agricultural machinezyto be used in these areas.

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IVU Estimate of Costs and Earnings

Based on operations over the last five years, SCIPA has estimated theannual rate of depreciation on each machipe to be purchased with the proceeds ofthe loan, which s:lows that an amount of m i en to 2700oCbe available each year to apply towards the service of the q oan. The detaile lfigures are attached as Annex B. The number of hours worked each year has beenconservatively estiraated and it is probable that most machines will be depreciatedin a shorter time, in which case even larger amounts would be available to SCIPAfor use in servicing the loan.

lir. YTeale estimates that a period of about six months will be required,once funds have become available, to purchase and put the machinery into opera-tion. Thereafter, earnings will start to accrue imraediately.

V. Justification of Project

All Peru has insufficient animal power to maintain the volulme of agriculturalproduction necessary to feed her increasing population and produce the industrialcrops which constitute the bulk of her foreign exchange earnings. Small farmoperators leaving the land have disposed of their work oxen and an estimatedminimum of 20,000 teams of oxen had disappeared from the coastal farms since 1943.The cost of obtaining a team of oxen has risen markedly, In any event, it ischeaper to work the land wdth tractors than with oxen. SCIPA estimates that ittakes a team of oxen six days to work a hectare of land which, at current prices,would cost a mininum of 360 soles. The cost of doing a hectare of land by tractorwould be less than half this figure and the work would be done in one day.^gricultural labor is in short supply and seasonal peaks (planting anc harvesting)can only be met with difficulty. Industrial development and mining are increas-ingly drawing farm workers away from agriculture. The machinery to be importedunder this program would supplement tlhe i.minishing reserves of animal and manpower as well as increase efficiency of production.

B. Most of the machinery listed in Annex A will be used on the Costa. Herean estimated 50,000-75,000 hectares of once productive crop land could be re-claimed with suitable equipment. Irrigation water is available but because of un-checked erosion and careless land use, levelling operations are now required wthichare beyond the capacity either of men using shovels or of animals. The cheapestand most effective way of bringing this land into cultivation is by the use ofmachines for land levelling, drainage, relocation of farms, irrigation canals andIlaterals.

As an illustration, Villa farm, immiediately south of Lima, has reclaimedduring the four years 1947-50, more than 500 hectares (1,250 acres) of excellentcrop lands, used in earlier days but of no agricultural productive use for morethan fifty years past, This work was first laid out by SCIPA's engineers, begunby SCIPA machines anc later corapleted by more adequate equipment acquired by thefarm owners. (SCIPA has not had enoug;h machines of the type required for much ofthis work.)

C. In addition to the land referred to in B above, areas of land on the Costaare under cultivation which use irrigation water wastefully. Such misuse resultsin substantial economic loss, not only because wasted water might be used to

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enlarge irrigated areas but also because wasteful use reduces crop yields byincreasing insect damage and destroying soil fertility. These facts are recog-nized by farmers but wasteful processes cannot be controlled without the use ofmachines needed for levelling, contouring and terracing. lany farmers in Peruhave the cash or credit to pay for such work if done by SCIPA but cannot eitherpurchase or operate the heavy machinery required.

For example, on one farm in the Piura Department SCIPA machines contouredand terraced 500 hectares of rice lands to achieve a net increase of more than13% in cropped area with a substantial increase in output. This wvas accompaniedby a decrease in the amount of vwater required and in production costs.

D. Each additional hectare of land introduced into cultivation on the Costashould be capable of producing crops worth approximately 4,000 soles (estimatedon the basis of the 1951 national average gross income per hectare). As ageneral rule, additional production in this area will either increase Peruvianexports or decrease imports. Allowing for processing and transportation cost,each hectare, on the average, should contribute to Peru's foreign exchangeposition by an amount equivalent to abQut $200. ilith the machinery listed inAnnex A SCIPA would be able to bring into cultivation land of the type referredto in B above at the rate of at least 5,000 hectares a year. This operationalone should contribute to Peru's foreign exchange position at the rate of theequivalent of <l million per annum. In addition, the machinery which will beused to prepare the soil for cultivation, to increase the efficiency of the useof water and to harvest the crops will make substantial contributions toagricultural output.

E. SCIPA estima-tes that the equipment to be filranced by the Bank willpermit tillage pools to aork over an area of about 20,000 hectares (50,000 acres).One of the most important features of these tillage pool operations is theircumulative effect on the economy of the country. Past operations have shownthat once farmers have learned the advantages to be gained from modern methodsof cultivation and have thereby been able to increase their earnings, marypurchase the necessary agricultural machinery and operate on their ovTn account.For example, SCIPA started a pool in the Huacho Valley in 1947. SCIPA has nowbeen able to remove the pool of tillage tractors to other parts of the country,since farmers in this district are now sufficiently supplied wlith agriculturalmachinery which they have bought for themselves. Four demonstration pools havenow gone into operation in the Sierra where the principal crops are wheat, barley,corn and potatoes. Some of the machines listed in Annex A can be used to expandoperations in this part of Peru. The work of these tillage and threshing poolsshould result in a substantial increase in the production of these foodstuffs.

F. Lacking passable roads, a large amount of present agricultural productionis isolated and uneconomic, and extensive exploitation of many new areas is notfeasible. SCIPA is aiding communities and farmers to develop feeder roads buttheir operations are very limited because of lack of equipment. The equipmentlisted in Annex A can be used for building such roads 4

G. 1Uith SCIPA running this project, the Bank wXill be assured of good andefficient management, as operations over the past five years have proved. It

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has technical personnel - mechanical engineers, civil engineers, agronomistsand other essential tecmnicians - experienced administrative personnel, trainedtractor drivers, machine operators, mechanics and repairmen, and experiencedagricultural agents throughout the counitry. It has the cooperation and confidenceof farmers, business people and government officials of Peru. Its accountings-stem has been standardized and is in excellent shape. Itemized records aremaintained showing the earnings and cost of each machine for every hour of work.

SCIPh now conCucts a going concern of the kind which can be expanded togood advantage by the equipment provided for in this loan. It is possibly thebest and most efficient organization in the field cf mechanized power in agri-culture of any underdeveloped country in the world.

The original agreement between the Peruvian Government and the Govern-ment of the United States, whichl created SCIPA, was for one year only but hassince been renewed several times. The present contract runs until 1955. Evenshould the contribution of the IIAA eventually cease, the Peruvian Governmentplans to continue the organization.

VI. Conclusions and Recommendations

It is the considered opinion and conclusion of the uriter that thisproject is technically soune and financially self-liquidating, and is w4orthy ofconsideration for the Bank's participation in the financing of the foreign ex-change cost of this project.

J.T'homsen LundAgriculturalist

June 23, 1952

AQTGFXA

LIST OF AGRICULTURAL MACHINERY TO BEFINANCED UNDER THE LOAN

IT14 QUANTITY DESCRIPTION UNIT COST TOTALCIF OALLAO

1 50 CATERPILLAR Tractors, 43 H.P. in the dra.w-bar,crawler type, Model D4 4411 gauge $6,406.67 $320,333.50

2 25 CATERPILLAR Bulldozers, Model 4-A, Hydrauliccontrol, angling blade, for use with tractor D44" 2,360.60 59,015.00

3 10 CATERPILLAR Scrapers, Model CAT 40 Hydraulicallyoperated, for use with tractor D4-44"1 4,770.59 47,705.90

4 10 CATERPILIAR Tool-Bars, for use with D4 tractors.Hydraulically operated and tools as Sub-soiler,Ditcher, Spring shank cultivator bars, depth gaugewheels 2,447,10 24,471.00

5 3 CATERPILLAR Tractor, Model D-7 with 85 H.P. inthe draw-bar, 74" gauge, with extra equipment 16,700.53 50,101.59

6 3 HYSTER Equipment, for use with the D-7 tractor,Drag Line Equipment and Boom or Clam shellEquipment 10,056.20 30,168.60

7 2 CATERPILLAR Motor grader, Model 112. With 70H.P. Engine and 121 blade, plus extra Tquipment 13,358.73 26,717.46

8 20 TURIIER Economy threshers, with Wisconsin engines2 cylinder and clutch 8.6, to 13.3 H.P. 1,483.00 29,660.00

- 2- ANNEX A

ITEM ,UAN1ITY DESCRIPTIO14 UNIT COST TOTALCIC' CALLAO

9 20 OLIVER Row Crop Diesel Tractors, Model 88 Wheel Tyne $3,905.60 $78,112.00

10 20 OLIVER Dis;c Plow. Model 144, 4 disc of 2811 825.25 16,505.00

l-1 25 OLIVEL Dis,c Rlow. Model 166, 6 discof 28t 1,030.85 25,771.25

12 10 OLIVER Planters and Cultivators, Model Peru, frontand rear gang, Groups Nos. 1, 2, 3, 4, 6. Hydrau-lically operated. For Cotton and Corn 1,758.20 17,582.00

4 EVERSMAN LandLevel.ers Model 289 Hydraulicallyoperated, plus Hydraulic pump and hose 1,000.00 4,000.00

14 2 Concrete Mixers. Powered 1/2 yard 2,000.00 4,000.00

1-5 15 STAiThARD Disc Harrow off set tyne. 28 disc of 26"1 1,100.00 16,500.00

it 2 DITCHERS. Jack for control of the operation 1,000.00 2,000.00

4 TURNER Thresher. Peanut Model 3,000.00 12,000.00

-1-8 10 DODGE Four wheel drive Power Wagon, Capacity 1 ton 2,875.00 28,750.00

19 3 G.M.C. Trucks Model 635. Caoacity Ap. 9 tons 5,000.00 15,000.00

C 1 FLECO Root Rake, for use with the D4 Caterpillartractor, 8 tooth 837.10 837.10

-3-ANNE A

ITEMC QUANTITY DESCRIPTION UNIT COST TOTALCIF CALLAO

21 1 Air ccmpr4ssor with gunnite machine (Jack Hammers) $13,000.00 $13o00O.OO

22 IC Allis Chalmers HD 5, 40.5 H.P. in the draw-bar.Crawler type. 6 911.50 69,11.5.00

23 2 Allis Chalmers tool bars for use with the HD5.Hydraulically operated and Tocls as Sub-soiler,buck scraper, spring, cultivator, etc. 2,583.90 5,167.80

24 3 Bulldozer, HD 5. 2,583.90 7,751.70

25 10 JOHN DEERE Tractors, Model MC, Gasoline EnginesHydraulic control system. 2,595.26 25,952.60

26 10 JOHN DEERE AND OLIVER Equipment for John Deere MCTractor including Tool Carrier, Bulldocer, DiscFlow Sub-soiler, Spring cultivator and reardozer 920.11 9,201,10

27 1 Stationary Unit UD-14 3,500.00 3,500.00

28 1 Bullgrader & Rooter TD 14 5,000.00 5,000.00

29 Spare parts for above items and machinery actuallyin use 200,000.00 200,000.00

1,147,918,60Plus 5% for shop equipment 57,395.93Plus Contingencies 94,685.47

TOTAL, $1,300,000.00

PER ANNUM ACCUMULATIONS OF RES7RVES FOR DEPPRECIATION BY TYPE OF MACHINE

These are conservative estimates based upon actual SCIPA operating practice and experience since May bf 1947.

TOTAL HOURS DEPRECIATION TOTAL P?,R ANNUMQUANTITY DESCRIPTION OPERATION PER HOUR

PER ANINUM OPFRkT1ON 12MR11110TATION

50 CATEPILLAR Tractors, 43 H.P. in the draw-bar,crawler type, Model D4, 44" gauge. 100,000 S|.12.00 S/.1,200,000.00

25 CATERPILLAR Bulldozers, Model 4-A, Hydrauliccontrol, angling blade, for use with tractorD4-44"1 50,000 5.00 250,000.00

10 CATERPILLAR Scrapers, Model CAT 40 Hydraulicallyoperated, for use with tractor D4-44" 10,000 18.00 180,000.00

10 CATERPLILAR Tool-Bars, for use with D4 tractors.Hydraulically operated and tools as Sub-soiler,Ditcher, Spring shank cultivator bars, depthgauge wheels 10,000 5.00 50,000.00

3 CATERPILLAR Tractor, Model D-7 with 85 H.P. inthe draw-bar, 7411 gauge, with extra equipment 4,500 25.00 112,500.00

3 HYSTER Equipment, for use with the D-7 Tractor.Drag line Equipment and Boom or Clam shell Equip-ment 4,500 20.00 90,000.00

2 CATERPILLAR Motor gWader, Model 112. With 70H.P. Engine and 121 blade, plus extra Equipment. 3,000 30.00 90,000.00

20 TURNER Economy threshers, with Wisconsin engines2 cylinder and clutch 8.6, to 13.3 H.P. 6,000 8.00 078,O00.00

- 2- ANNEX B

TOTAL HOURS DEPRECIATION T014AL PER ANNUMfQUANTITY DESCRIPTION OPERATION PER HOUR

PER ANNUM OPEIRATION DEPRECIATION

20 OLIVER Row Crop Diesel Tractors, Model 88 WheelType. 24,000 10.00 240,000.00

20 OLIVER Disb Plow. Model 144. 4 disc of 281 16,000 3.00 48,ooo.00

25 OLIVER Disc Plow. Model 166. 6 disc. of 2 8H 20,000 4.00 80,000.00

10 OLIVER Planters and Cultivators, Model Peru,front and rear gang, Groups Nos. 1,2,3,4,6.Hydraulically operated. For Cotton and Corn. 5,000 10.00 50,000.00

4 EVERSi4A1' LaniLevelersModel 289 ±Iydraulicallyoperated, plus Hydraulic pump and hose. 2,400 8.0o 19,200.00

2 Concrete- M1txs-.. Powered 1/2 yard. 1,500 10.00 15,000.00

15 STAhDARD Disc Harrow off set type. 28 disc of26". 9,000 6.oo 54,000.00

2 DITCHERS. Jack for control of the operation. 1,000 6.oo 6,ooo.oo

4 TURNER Thresher. Peanut Model 2,000 15.00 30,000.00

10 DODGE Four wheel drive Power Wagon. Capacity *

1 Ton. 125,ool 0.70 87,500.60

3 G.M.C. Trucks Model 635. Capacity Ap. 9 Tons 4 5 ,0001t 1.00 45,000.00

1 PLECO Root Bake, for use with the D4 Cater-pillar tractor, 8 tooth 850 3.00 2,550.00

iI Total kilometres per annum* Depreciation per kilometre

_ 3 - ANNWEX B

TOTAL HOURS DEPRECIATION TOTAL PER ANIUMI(,UANTITY DESCRIPTION OPERATION PER HOUR

PER ANYJM OPERATION DEPRECIATION

1 Air Compressor with gunnite machine. (Jack Hammers) 1,000 45.00 45,000.00

10 Allis Chalmers HD5. 40.5 H.P. in the draw-barCrawler type. 20,000 12.00 240,000.00

2 Allis Chalmers tool bars for use with the HD5.Hydraulically operated and Tcols as Sub-soiler,buck scraper, spring, cultivator, etc. 2,000 6.oo 12,000.00

3 Bulldozer, HD5. 6,ooo 5.00 30,000.00

10 JOhN DEERE Tractors, Model MC. Gasoline Engines 12,000 7.00 84,000.00hydraulic control system.

10 JOHN DEERE AND OLIVER Eouipment for John DeereMC Tractor including Tool Carrier, Bulldozer,Disc Flow Sub-soiler, Spring cultivator andrear dozer. 12,000 2.50 30,000.00

1 Bullgrader & Rcoter TD 14 1,000 15.00 15,000.00

1 Stationary Unit UD-14 2,500 5.00 12,500.00

Spare parts for above items and machineryactually in use. 750,000.00

Shop equipment 150,000.00

TOTAL: s/. L,c66,250.O0