Document of FILE COPyThe World Bank

FOR OFFICIAL USE ONLY

Report No. P-2845-PE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF PERU

FOR THE

BAYOVAR PHOSPHATE ENGINEERING

AND

TECHNICAL ASSISTANCE PROJECT

June 9, 1980

This document has a restricted distribution nd may be used by recipients only in the performnce oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

The exchange rate is being adjusted daily roughly in line with thedifference between domestic and international inflation. The exchange rateand currency equivalents in effect on April 30, 1980 were as follows:

CURRENCY UNIT - Sol (S/.)

Calendar 1979 April 30. 1980

US$1 - S/. 224.55 SI. 271.9S/. I - US$0.0045 US$ 0.0037S/. 1,000 - US$4.45 US$ 3.68

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS

CENTROMIN - Empresa Minera del Centro del Peru(Central Mining Company of Peru)

COFIDE - Corporacion Financiera de Desarrollo(Development Finance Corporation)

ENCI - Empresa Nacional de Comercializacion de Insumos(National Inputs Marketing Company)

ERP - Economic Recovery Program

HIERROPERU - Empresa Hierro del Peru(Iron Company of Peru)

INI - Instituto Nacional de Industria(National Industrial Institute of Spain)

MINEROPERU - Empresa Minera del Peru(Mining Company of Peru)

PROBAYOVAR - Empresa Promotora Bayovar(Bayovar Promotional Company)

SPCC - Southern Peru Copper Company

tpy - Metric tons ptr year

FOR OFFICIAL USE ONLYREPUBLIC OF PERU

BAYOVAR PHOSPHATE ENGINEERING ANDTECHNICAL ASSISTANCE PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Peru

Beneficiary: Empresa Promotora Bayovar (PROBAYOVAR) which wouldreceive the proposed loan as a capital contributionfrom the Borrower.

Amount: US$7.5 million

Terms: Repayable in 10 years, including 2 years of grace, at8.25 percent per annum.

Project Description: The objectives of this project would be to determinethe technical and economic viability of developing the600 million ton Sechura Desert phosphate deposits innorthern Peru. The project would include the following:

(i) studies to determine the level of phosphatereserves, optimum mining methods, and themost economic source of sulfuric acid for theproduction of phosphoric acid;

(ii) physical, chemical and acidulation tests toestablish the most economic phosphate rocktreatment process as a basis for plant design;

(iii) studies to determine plant site location, watersupply and other infrastructure requirements;

(iv) preparation of a market analysis and marketingstrategy;

(v) a preliminary study of the feasibility of uraniumrecovery from phosphate processing and exploitationof nearby potash deposits;

(vi) preparation of a feasibility report based on theabove studies; and

(vii) if the feasibility report confirms the technicaland economic viability of the Bayovar investmentproject, preparation of basic engineering andcontract documents, other pre-contracting activi-ties and a study of project organization.

The scope, costs and financing requirements for theBayovar investment project would be determined on thebasis of these studies. Because PROBAYOVAR is a newlycreated entity, it will require assistance in initiatingand coordinating project activities. Technical andmanagement advisory services to provide this supportwould be included in the project.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Estimated Cost:

The estimated cost of the project, exclusive of taxes fromwhich the project is exempt, is as follows:

Local Foreign Total-----(US$ millions)------

Mineral Reserves Study 0.3 0.3 0.6Rock Beneficiation and

Reactivity Testing 0.1 0.4 0.5Infrastructure Study 0.2 0.1 0.3Market Study 0.0 0.2 0.2Uranium and Potash Studies 0.1 0.1 0.2PROBAYOVAR Expenses and

Technical Advisory Services 0.6 1.2 1.8Basic Engineering and ContractPreparation Activities 0.3 4.0 4.3

Project Organization Study 0.0 0.1 0.1

Sub-Total 1.6 6.4 8.0

Physical Contingencies 0.2 0.4 0.6Price Contingencies 0.2 0.7 0.9

Total 2.0 7.5 9.5

Financing Plan: Local Foreign Total-----(US$ millions)------

Bank Loan - 7.5 7.5PROBAYOVAR 2.0 - 2.0

2.0 7.5 9.5

Estimated Disbursements: Bank FY 1981 1982 1983--- (US$ millions)----

Annual 1.7 4.5 1.3Cumulative 1.7 6.2 7.5

Rate of Return: Not applicable.

Appraisal Report: None.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THEPRESIDENT OF THE IBRD

TO THE EXECUTIVE DIRECTORS ON APROPOSED LOAN TO THE REPUBLIC OF PERU FOR THE

BAYOVAR PHOSPHATE ENGINEERING AND TECHNICAL ASSISTANCE PROJECT

X 1. I submit the following report and recommendation on a proposed loanto the Republic of Peru for the equivalent of US$7.5 million to help financethe Bayovar Phosphate Engineering and Technical Assistance Project. The loanwould have a term of 10 years, including 2 years of grace, with interest at8.25 percent per annum. The loan would be provided to the Empresa PromotoraBayovar as a capital contribution.

PART I - THE ECONOMY

2. A basic economic report entitled "Long-Term Development Issues:Peru" (Report No. 2204-PE) was distributed to the Executive Directors onApril 13, 1979. This part is based on the report's findings as well as thoseof more recent economic missions to Peru. Country data sheets are attachedas Annex I.

Resource Endowment

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 where modern economic activity is concen-trated; the mountain region (Sierra), with 44 percent of the country's popula-tion, which encompasses the highlands above 2,000 meters; and the sparselypopulated, tropical rain forests east of the Andes (Selva). The ruggedtopography limits trade between the three 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 and phosphates on the northern Costa. Petroleum resources,particularly in the jungle areas of the North and offshore, are believed tobe substantial but their full extent has not yet been ascertained. Anothermajor natural resource is the large fishing potential in coastal waters,although its magnitude is subject to sharp gyrations. Agricultural land islimited, and most of the soils suitable for intensive agriculture are alreadybeing farmed.

5. As a result of three decades (1930-1960) of rapidly falling mortalityrates, population growth accelerated. In the early 1960's, birth rates starteda gradual fall, mainly caused by the urbanization process and by improvededucation. But with declining death rates, population has continued to growat about 2.8 percent p.a. It is expected that population growth will only

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slightly fall to about 2.6 percent p.a. over the next 20 years, unless aneffective demographic policy is adopted. Given the structure of Peru'spopulation, the labor force is expected to grow in excess of 3 percent peryear during the next 20 years.

6. Crude oil is the dominant source of energy in Peru, supplying approxi-mately 80 percent of Peru's commercial energy requirements. Although Peru's

energy resource base is relatively diverse with scope for expanding hydro andcoal based power generation, petroleum will provide the major part of Peru'senergy requirements throughout the rest of this century. After having beendependent on imported crude oil for many years, domestic oil production

increased almost threefold between 1976 and 1979, enabling Peru to export oilin substantial quantities for the first time since 1958. Despite this encour-aging production trend, domestic consumption is likely to rebound afterseveral years of stagnation so that Peru may once again become a net importerof petroleum in the mid-1980's unless new oil reserves are discovered.

Past Development Policies

7. Since the military came to power in 1968, the Government has followeda development strategy directed at achieving economic growth and at narrowingthe sharp differences in wealth and opportunities among people in differentincome classes and geographical regions. The Government has tried to correctinterpersonal and interregional imbalances by expanding the role of the Statein the economy, changing the pattern of asset ownership, reducing foreignownership of national resources, orienting industry and agriculture towardproducing essential goods for the domestic market, stimulating the deconcentra-tion of economic activity out of Lima, and reforming the educational system tomake it more responsive to local economic and social needs. Through national-ization and creation of new enterprises, the State has taken direct control ofover 150 enterprises in key economic sectors, and its share in total capitalformation has risen from less than one-fourth in 1968-70 to over 40 percent in1974-1979. By imposing complex legislation, the Government has also strictlycontrolled the operations of the private sector.

8. As a result of these actions, the pattern of asset ownership inthe economy has changed drastically. Through nationalization, the shareof foreign-owned assets fell sharply. A sweeping land reform redistri-buted 43 percent of the country's best farmland to workers' cooperativesbenefitting some 25 percent of all rural families. Through other laws,industrial workers were given shares in their employers' firms and, in themining sector, a share in profits. The Government has also given a strongautarkic orientation to its agricultural and industrial sector policiesand strengthened the incentives for industries outside of Lima.

9. The Government's programs have benefitted large numbers of Peruvians,but hardly reached the poorest which continue to live in abject poverty. Itis estimated, for example, that about three quarters of rural families, mostly"minifundistas" (those farming less than 2 ha) and the landless seasonalworkers, have not been reached by social programs. The Government imposedcontrols on prices of a number of domestically produced goods and heavilysubsidized imported petroleum and foodstuffs. Most of the subsidized products,

however, were more important in the consumption basket of high and middle-income Peruvians than in that of the poorest groups. Moreover, artificiallylow prices for some products--such as mutton and cereals--actually hurt thepoor who produced these items, and affected production negatively.

10. In the final account, one of the most significant achievementsof the Government was the promotion of the cultural and political integrationof the country. Owing in great part to the land reform, an important segmentof the rural population has become better organized and is able to communicateits priorities in a more forceful and articulate way. Unfortunately, althoughmany of the policies and structural changes carried out since 1968 were meantto achieve rapid growth and more equality, the cost of these measures provedto be excessive and their implementation inefficient.

The Economic Crisis

11. For ten years, 1968-77, the military Government followed expan-sionary fiscal and credit policies. A rapid increase in expenditures (includ-ing large defense outlays) was not matched by a parallel increase in revenues.Pricing, interest rate, and foreign exchange policies encouraged consumptionand discouraged savings, exports and, sometimes, overall production. As aresult, aggregate demand considerably exceeded aggregate supply. Excessdemand, in turn, led to strong inflationary pressures and widening externalgaps, with a loss of international reserves and a massive build-up of externaldebt.

12. The problems were exacerbated by circumstances beyond the controlof the authorities. Anchovies, the fishing industry's principal resource,virtually disappeared as the annual catch dropped from around ten milliontons in 1968-71 to an average of 2.3 million tons in 1975-78. Furthermore,Peru's terms of trade worsened sharply between 1974 and 1978. Export prices,particularly for copper and sugar (which together accounted for almost one-fourth of merchandise exports), fell from their high 1974 levels at a timewhen import prices soared. Petroleum reserves, which in the early 1970'swere predicted to lead to a quick expansion in export earnings, have takenmuch longer to come on line.

13. Public sector savings dropped steadily in relation to GDP from4.4 percent in 1970 to dissavings of 2.6 percent in 1977. Major causeswere the erosion of the tax base owing to excessive tax incentives, loopholesin the tax system, weak enforcement, rises in the budgetary cost of subsidiesfor foodstuffs and petroleum products, and sharp increases in defense outlays.At the same time, public investment expanded rapidly and was increasinglyconcentrated on capital-intensive projects with long gestation periods andlittle immediate contribution to the growth of output or employment.

14. Inflation accelerated from 5 percent per year in 1970 to 38 percentin 1977. Interest rates, however, remained substantially negative in realterms, discouraging financial savings and stimulating capital flight. Moreover,the exchange rate remained practically constant between 1968 and 1975, thuscontributing to the overall disequilibrium. National savings fell dramaticallyfrom 16 percent of GNP in 1970 to 8 percent in 1977, when they financed only

about one-half of investment. Following a period of rapid expansion in1968-74, during which GDP grew by more than 6 percent per year, the growthrate dropped progressively and became negative in 1977 and 1978.

15. The growing disequilibrium was reflected in the balance of payments.The current account deficit averaged US$1.1 billion per year in 1974-77,equivalent to nearly 9 percent of GNP. To finance this deficit, Peru accum-ulated a massive external debt. Peru's total private and public externaldebt--including short-term indebtedness--stood at almost US$8.3 billion byyear-end 1977, equivalent to two-thirds of GDP and four times exports of goodsand non-factor services. Much of this debt was contracted on fairly shortmaturities with three fourths of the public sector's long-term debt--which isestimated to have totaled US$6.4 billion--scheduled to be repaid over the1978-82 period.

16. Beginning in 1975, several unsuccessful attempts were made tocope with the mounting economic crisis. By mid-1978 the economic crisis hadreached grave proportions, with a drop in real GDP and inflation approaching100 percent. Moreover, the private sector was finding it increasingly diffi-cult to open letters of credit for new imports and the banking system's netinternational reserves had dropped to a negative level of US$800 million.Financial instability had reached the point where practically all economicactivities were adversely affected. The public sector was fast approachingthe point where it would no longer be able to fully service its external debt.Peru was no longer creditworthy.

Stabilization Measures

17. A new economic team was named in May 1978. Since then, the Govern-ment has adopted a number of important measures aimed at strengthening publicfinances, stimulating exports and stemming the loss of international reserves.By means of a crawling peg, the sol was devalued from S/. 130 per U.S. dollarin May 1978 to about SI. 266 at the end of March 1980. Most subsidies wereeliminated, thus closing an important drain on public savings. In addition, anumber of tax measures were adopted and Government expenditures restrained.Interest rates on bank loans were raised from 16 to 31.5 percent per year.Peru reached agreement with foreign commercial banks to reschedule US$185million of principal payments due in the second half of 1978 until January1979. The Government also negotiated a stand-by arrangement with the IMF forSDR 184 million. In July 1979, this stand-by was replaced by a new onefor SDR 285 million, in support of the same financial program. Peru's debtoutstanding to the IMF as of December 31, 1979 amounted to SDR 414 million.

18. The Government's financial stabilization program, supported by thestand-by, has resulted in a dramatic improvement in public sector finances in1979. Public sector current account savings rose from - 0.7 percent ofGDP in 1978 to about 3.6 percent of GDP in 1979 and the overall deficit wasreduced from 6.4 percent of GDP in 1978 to 2.9 percent in 1979. CentralGovernment revenues increased by 23 percent in real terms, while currentoutlays declined by 6 percent. Payments for wages and salaries alone fell bysome 7 percent in real terms, partly as a result of a reduetion In excessivecivil service employment. The eliminatfon of subhsdies on food and petroleum

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products, initiated in mid-1978, also contributed to the control of currentexpenditures. On the revenue side, several measures--including a 10 percentimport surcharge, a higher tax on traditional exports and an increased tax oninterest charged on bank loans--helped to achieve the revenue target. Inspite of good fiscal performance, however, inflationary pressures remainstrong, with consumer price increases of 67 percent in 1979 and over 50 per-cent (on an annual basis) during the first quarter of 1980.

Debt Restructuring

19. Major debt-relief operations carried out in late 1978 enabled Peruto reduce substantially the debt-service burden for 1979 and 1980, postponingrepayment to the 1982-1986 period. In May 1978, the Soviet Union rescheduledthe equivalent of about US$140 million of maturities originally due in 1978-80.These amounts are to be repaid over a 10-year period including three years ofgrace. In November, at a Paris Club meeting, the OECD countries agreed toreschedule 90 percent of principal payments due by the public sector togovernments and guaranteed suppliers in 1979 (US$250 million) and 1980 (US$263million). These amounts are to be repaid over a period of eight years, in-cluding three years of grace. The Paris Club creditors also agreed to re-schedule 90 percent of the principal payments due in 1979 and 1980 on privatesector debt guaranteed or insured in the creditor countries (about US$30million in each year). In addition, Peru has negotiated smaller amounts ofdebt relief with non-OECD countries. At the end of 1979, in view of theimproved balance-of-payments situation (para. 24), the Government decided toforego the Paris Club debt rescheduling option for 1980.

20. As regards the large medium-term public debt to commercial banks,in keeping with an agreement concluded in December 1978, Peru repaidin 1979 the bulk of the US$185 million rolled over from 1978 (para 17 above).The agreement gave the Government the option of refinancing up to 90 percentof the maturities due in 1979 and 1980. The Government, however, decidedearlier this year not to take advantage of the 1979 maturities, thus obtainingslightly better conditions for outstanding debts. It is likely that theoption to refinance 90 percent of the 1980 maturities will be taken.

Social Situation

21. The economic crisis has been reflected in two consecutive years ofnegative growth. Total Gross Domestic Income fell by 0.6 percent in 1977 anda further 4.1 percent in 1978. In this two-year period GDP per capita droppedby over 8 percent. Nearly one half of Peru's labor force is believed to beunemployed or underemployed, i.e., earning less than the minimum wage orworking less than 35 hours a week and wishing to work more. According togovernment estimates, the purchasing power of an average salary had fallen40 percent by 1978 compared to 1970 and that of an average wage by over16 percent. In these circumstances, the social situation has been unavoidablytense, and several general strikes took place during the past year.

22. In July, 1979, the military Government promulgated a new constitution,written by a popularly elected assembly. Elections were held on May 18, 1980,and the transfer of authority to the government of President-elect Fernando

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Belaunde Terry is scheduled to take place on July 28, 1980. While it is tooearly to assess future government policies it is most likely that the BelaundeGovernment -- in line with campaign pledges -- will give high priority to socialand employment problems, particularly through housing and labor-intensive small-scale infrastructure programs.

The Economic Recovery Program

23. With the financial stabilization program and the debt restructuring,the Government has brought the fiscal and external gaps undercontrol. These efforts, however, have not yet helped much in overcoming thedeep economic recession. To this end the Government conceived an EconomicRecovery Program (ERP) which would reverse the decline in GDP and lay a basisfor a financially sound economic recovery. The ERP includes, in addition tothe above-mentioned stabilization actions, measures to open up the economy,stimulate industrial sector efficiency, promote non-traditional exports,strengthen the tax system by broadening its base, and generally improve theefficiency of resource allocation in the private and public sectors. In thisconnection, the Government formulated a Public Sector Investment Program thataims at redirecting public investment towards projects of clear economicpriority and positive effect on production and employment. In support of theERP, the Bank approved a US$115 million program loan in May, 1979. Progressin carrying out the ERP, which is closely monitored by the Bank and periodi-cally discussed with the Authorities, is generally satisfactory with perfor-mance in some critical areas--e.g., export promotion--actually exceedingexpectations.

24. The Government's program led to a strong balance-of-payments perfor-mance in 1979, which is essential for economic recovery, and to restore netinternational reserves. This was achieved by maintaining an export-orientedforeign exchange policy, realistic interest rates, and the promotion ofnon-traditional exports; but it is also the result of low, recession proneimports. In addition, Peru benefitted from substantial price increases forsilver, copper, petroleum, and other commodities. The Government also intendsto improve foreign debt management by, inter alia, making greater use ofassistance from official bilateral and international sources. The short-termdebt, already sharply reduced from US$1.8 billion at year-end 1978 to US$1.1billion at year-end 1979, is expected to be further reduced as the graduallyimproving economic situation permits new trade-related credit lines to beopened. The trade balance is expected to be strengthened by favorable worldprices for minerals, and by the availability of a petroleum surplus for exportamounting to some US$950 million per year over the next few years. Eventhough about one third of the projected gross petroleum exports would leavethe country as profit remittances, this still implies a major improvementover recent years, when Peru was spending in excess of US$200 million peryear on fuel imports.

25. Based on assumptions that are cautiously optimistic, the country isexpected to show a strong balance-of-payments performance through the mid-eighties, with current account surpluses and a build up of foreign exchangereserves in spite of heavy debt repayment obligations. The balance-of-paymentssituation may, however, deteriorate in the second half of the eighties (oreven earlier), when the exportable surplus of oil is expected to decline. Thiswill eventually result in increasing current account deficits, particularly ifimports exceed the level now expected as a result of the recently started

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import liberalization process. Against this background and given Peru'slarge overhang of external indebtedness, there is a continuing need forofficial development assistance. Considering the expected medium-termbalance-of-payments performance and assuming that the authorities continue tocarry out the ERP and to maintain prudent financial policies, Peru is credit-worthy for Bank lending.

PART II - BANK GROUP OPERATIONS IN PERU

26. The Bank has approved 38 loans to Peru for a total amount of US$779.3million, net of cancellations. About 31 percent of the Bank's lending to Peruhas been for transportation (mainly highways and ports), 23 percent foragriculture, 15 percent for the US$115 million May 1979 Program Loan, 15percent for the energy sector, 10 percent for mining and industry and about 6percent for education and urban development.

27. Of the US$332.8 million undisbursed as of April 30, 1980, over50 percent is attributable to five project loans made in the 1976-1977 period.The slow start-up of these projects--only two of which were "repeater"operations--as well as the slow progress of previous operations was due, inlarge part, to weak project execution capacity and to a shortage of counterpartfunds that worsened as the economic situation deteriorated during this period.As a result, disbursements have averaged about US$25 million per year over thepast few years (Annex II contains a summary statement of Bank loans as ofApril 30, 1980, and notes on the execution of on-going projects). In aneffort to improve this situation: (i) the Bank has recently opened a residentmission in Peru; (ii) the Executive Directors have approved modifications inthe Education and the Lima/Amazon Corridor Projects (see Annex II for furtherdetails); (iii) adequate counterpart funds have been provided by the Governmentfor 1979 and 1980; and (iv) the Government has set up a special commission tomonitor loan execution and resolve administrative problems. With theseactions, the pace of disbursement is now increasing; US$32.2 million wasdisbursed on project loans in the first nine months of FY 1980.

28. Program Loan disbursement started slowly because of the unforeseenincrease in foreign exchange availability in Peru as a result of boomingexports and continued depressed import levels, as well as substantial debtrescheduling. In order to accelerate disbursements, the list of eligibleimports has been expanded to include additional high priority industrialinputs. In recent months, Program Loan disbursements have increased markedly.As of May 25, 1980, US$93.3 million had been disbursed.

29. The main objectives of Bank lending to Peru have been to assistin (i) the creation of the physical infrastructure needed to sustain andfoster development; (ii) the expansion of productive capacity in crucialsectors; (iii) the consolidation of structural and institutional changes,particularly land and education reforms; (iv) the strengthening, throughengineering loans and normal lending operations, of local capacity to prepare,

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implement and operate projects effectively; and (v) improving living condi-

tions for the urban and rural poor. In the past, Bank lending concentrated

on infrastructure in the transportation and power sectors. More recently,

the Bank's emphasis has shifted to more directly productive fields -,mining, agriculture and industry -- to aid Peru in surmounting its balanceof payments problems. Lending for social projects has also grown.

30. The next operations that would be ready for the Executive Directors'consideration include a technical assistance loan for the Chimbote steel mill

expansion, a regional airports project, a mining operation, a second indus-

trial credit loan and a highway maintenance project. This program would be

reviewed with the new Government to assure its agreement.

31. It is estimated that bank loans constituted about 4.4 percent ofPeru's total public external debt outstanding and disbursed, at the end of

1979, and absorbed about 2.7 percent of the country's external debt service in1979. Assuming increased recourse to long-term bilateral and multilateral aidby Peru, the Bank's share in the country's outstanding public foreign debt by

1985 could reach about 15 percent and its share of debt-service would bearound 8 percent.

32. IFC commitments to date have been US$29.7 million (including US$15

million to the Southern Peru Copper Corporation for the Cuajone Copper MiningProject) of which US$17.2 million is held by the Corporation. A summary

statement of IFC investments as of April 30, 1980 is presented in Annex II.

33. The other principal official agencies lending to Peru -- IDB andUSAID -- are expected to continue giving special attention to agriculture with

IDB emphasizing agricultural, industrial and mining credit, roads and smallscale irrigation and USAID stressing rural development. Total loan commitmentsas of December 31, 1979 by IDB and USAID were US$646.0 million and US$275.0million, respectively, and their shares of debt service as of end-1979 wereboth estimated at 0.6 percent.

PART III - THE INDUSTRIAL AND PHOSPHATE SECTORS

A. Mining and Manufacturing

34. The industrial sector in Peru (manufacturing and mining, excludingpetroleum) accounted for 32 percent of GDP in 1978 and employed 14 percent of

the labor force. Manufacturing is the largest component of the industrialsector, responsible for about 80 and 90 percent, respectively, of its contribu-

tion to GDP and employment. Mining, however, is critical to Peru's economicdevelopment because it generates 40-50 percent of Peru's foreign exchangeearnings and makes a significant fiscal contribution through exports taxes.

35. Manufacturing. Until recently, the Government followed a policyof import substitution and high tariff protection and trade restrictions for

development of the manufacturing sector. As a result, manufacturing absorbeda substantial amount of foreign exchange, while its exports were insignificant.

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In 1976, imported industrial inputs came to about US$750 million, representing

over a third of merchandise imports and 24 percent of industrial value added.

During the 1971-1976 period, manufactured exports averaged only 6 percent of total

total merchandise exports.

36. This import substitution policy produced an inward oriented indus-

trial sector with little interest and ability to compete in world markets.

At the same time, however, the manufacturing sector in Peru diversified

substantially. The share of traditional consumer goods industries now

accounts for only about 40 percent of total manufacturing output, while

intermediate goods industries have grown in importance. The two largest

such industries, chemicals and basic metals, now represent 17 and 11 percent

of manufacturing output, respectively. The engineering and technical

assistance loan proposed in this report would finance studies to prepare

a possible major new phosphate fertilizer industry for Peru.

37. There has been growing recognition in recent years of the ineffi-

ciency of the domestic manufacturing industry, its vulnerability to the

country's recurrent foreign exchange difficulties as a result of dependence on

imported inputs and its limited contribution to economic development because

of its high net absorption of foreign exchange. The problems of the industrial

sector became particularly evident during the economic crisis of the past few

years. When Peru's economic activity began to slow down in 1975, industrial

growth dropped from an average growth rate of 7 percent per annum during

1960-75 to to 4.2 percent in 1976. As the economic crisis deepened in 1977

and 1978, physical industrial production decreased by 3.9 and 2.4 percent,

respectively. At the same time, the highly protected local market allowed

oligopolistic industries to raise prices indiscriminately, thus fueling the

high inflation of recent years.

38. The overall policy framework towards manufacturing began to change

in mid-1976, with the adoption of a more realistic foreign exchange policy.

In addition, a very generous set of export incentives was established in

mid-1976 and strengthened in late 1978. These actions, together with a

substantial reduction in domestic demand, generated an unprecedented growth in

non-traditional (mainly manufactured) exports. They include textiles, processed

fish for human consumption, and fishing boats. From a low of US$133 million

in 1976 (10 percent of merchandise exports), non-traditional exports increased

to almost US$680 million in 1979. They grew to about 20 percent of merchan-

dise exports that year--not as great an increase as in the overall growth of

non-traditional exports because of the increases in oil and metal exports

in 1979.

39. The other significant policy change designed to improve industrial

efficiency, the trade liberalization element of the ERP (see para. 23),

has proceeded generally according to schedule. In particular, non-tariff

protection to industry through import prohibitions--the main feature of

Peru's industrial policy until 1978--has been dismantled to a large extent

and the process is expected to be completed by mid-1980. A new tariff struc-

ture was approved and has been in operation since last December, most tariff

exemptions and exonerations have been eliminated and the system of export

promotion has been improved. Nevertheless, the trade liberalization program

is far from complete. Considerable efforts will have to be made in the coming

years to achieve the full transformation of Peru's industrial structure.

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40. Mining. Exploitation of Peru's mineral resources goes back to themining of gold, silver and copper by the Incas prior to the Spanish conquest.The growth of the mining sector was particularly impressive during the1950's, when the enactment of a simplified mining code with a clear andfavorable tax regime greatly improved the investment climate and foreigncapital flowed into the sector. Copper production increased sixfold duringthe decade, the output of lead, zinc and silver more than doubled, andexploitation of Peru's iron ore potential began.

41. In contrast, the 1960's were years of relative stagnation in thesector, characterized by decreasing investor confidence and little investment.After the 1968 military coup, the Government began to assume a more activerole within the sector. In 1970 the state-owned Mining Company of Peru(MINEROPERU), was established with the purpose of bringing into operationa series of high-priority mining and metallurgical projects. The Cerro dePasco Corporation, now CENTROMIN, was nationalized in early 1974. The MarconaMining Company, a U.S. firm exploiting Peru's iron ore resources, was national-ized in mid-1975 and became HIERROPERU. The Government also took overall overseas marketing of metals and centralized this function in a newstate enterprise, Mineroperu Comercial.

42. In the public sector, all mining operations including sector planningnow come under the jurisdiction of the Ministry of Energy and Mines, which isalso responsible for the petroleum and power subsectors. The Ministry'sPlanning Department establishes investment priorities but leaves primaryresponsibility for carrying out investment projects to the state miningcompanies.

43. Four companies--CENTROMIN, HIERROPERU, Southern Peru Copper Corpora-tion (SPCC) and MINEROPERU--account for a major part of the country's miningoutput. CENTROMIN has the most diversified production, including copper,silver, zinc, lead and other metals at seven mines in Peru's central Sierra.It accounts for around one-third of the sector's output and employment.CENTROMIN is now expanding the Cobriza copper mine and building a mine watertreatment plant with the assistance of the US$40 million first Bank miningloan (Loan 1281-PE of 1976) and two IDB loans. HIERROPERU operates Peru'smajor iron ore mining complex. SPCC, the only remaining private companyin large-scale mining, is the country's single largest producer and exporterof copper. Since its creation, MINEROPERU has completed a large copperrefinery at Ilo and the Cerro Verde copper mine and it is now constructing theCajamarquilla zinc refinery outside of Lima.

44. Peruvian experience in the planning of major mining developmentprojects is limited since this function had, prior to nationalization, tradi-tionally been performed in the headquarters of the foreign parent companies.CENTROMIN, which inherited the organization and staff of the Cerro de Pascocompany, has some capacity to carry out investment projects and this isbeing strengthened with Bank support. MINEROPERU, however, still has onlylimited project development capability. In the past, some of its projectshave been poorly designed and have lacked strong economic justification.Because it does not have experienced staff, MINEROPERU has relied on jointventures with foreign investors and turnkey contracts for construction of itsprojects.

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45. Given Peru's limited agricultural base and its still small manufac-turing sector, the Government's policy has been to depend heavily on miningfor the foreign exchange earnings needed to maintain economic growth. Becauseof stagnant or declining prices over the last decade, however, there has beenrelatively little new investment or real growth in the value of mining exports,except for the 1976-77 period when the Ilo, Cerro Verde, and SPCC's Cuajonecopper projects came on stream. New investment was also stymied by the weakproject preparation capability of state enterprises.

46. With recently improved prices, Peru's state mining companies havebeen pressing ahead with substantial investment programs for the next decadein order to increase and diversify mining production and they are seekingBank and other foreign assistance to help carry out these programs. Thenext phase of CENTROMIN's investment program will include expansion of threepolymetallic mines. This is expected to cost about US$350 million andCENTROMIN has requested a second Bank loan to help finance this project.MINEROPERU has had responsibility for the development of a variety of projectsincluding the expansions of its Cerro Verde copper mine and Ilo refinery,several large new copper mines (e.g., Tintaya) and the US$700-800 millionBayovar phosphate fertilizer project which is the subject of the proposedengineering and technical assistance project recommended in this report.MINEROPERU has sought the support of possible joint venturers for developmentof a number of these projects.

B. The Phosphate Industry

47. Total world consumption was about 35 million nutrient tons ofphosphate (P205) in 1979. About 87 percent, or more than 30 million nutrienttons, was used for fertilizers and the remaining 13 percent (technicalphosphate) went for other industrial uses; mainly detergents, animal feedand insecticides. The paragraphs below discuss the world production, consump-tion and trade patterns for phosphate rock, intermediates and finished products.

48. World production of phosphate rock in 1979 was about 130 milliontons of which 51 million tons were exported. The two major exporters, Morocco(18.0 million tons) and the USA (13.6 million tons) together accounted forabout 62 percent of the world phosphate rock exports. They were followed bythe USSR, Jordan, Togo and other smaller producers, which accounted for thebalance of world phosphate rock exports. The market is oligopolistic, and, asa result, it is difficult for newcomers to establish themselves quickly asphosphate rock suppliers.

49. Phosphoric acid, an intermediate product in the manufacture ofconcentrate phosphate fertilizers, is mainly produced by reacting phosphaterock and sulfuric acid. World phosphoric acid installed capacity was 28million nutrient tons in 1979 and production was 22 million nutrient tons thatyear, or about 79 percent of installed capacity. Of this, 2.1 million tonswere exported, mostly by the USA (0.7 million tons), South Africa (0.4), andMorocco (0.3) which together accounted for 68 percent of the world phosphoricacid export market.

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50. Phosphate fertilizer is used mainly in the industrialized countriesof Europe (including the USSR), North America and Oceania, which togetheraccount for 83 percent of consumption. The growth rate for phosphavtefertilizers demand has averaged 6.2 percent per annum over the last 20 years.This may level off somewhat to 5.0 percent during the next six years--despiteof rapid demand growth in the USSR, Eastern Europe and the developingcountries, since demand is expected to grow slowly in the USA, Western Europeand Japan. The world supply and demand balances indicate that there issufficient capacity to meet demand into the early 1980's but that the surpluswill gradually diminish and that there will be a supply shortage in themid-1980's unless new capacity is added. In the strengthening market thatwill ensue, prices--which began increasing rapidly after 1973--are likely toincrease further in real terms. Although there is time to build additionalplants in the early 1980's to avoid any shortfall, the margin is narrow. Infact, for some phosphate intermediate and final products (notably phosphoricacid and diammonium phosphate) shortages are already apparent. After 1984,about 1.5 million tons per year (tpy) of new or expanded P905 capacity will berequired each year to meet demand. Any delay in the commissioning of newplants scheduled to come on stream up to 1983 will create shortages earlierthan projected.

51. Changing Phosphate Trade Patterns. During the past 20 years or so,the proportionate share of different phosphate products has changed signifi-cantly. There has been a steady decline in the relative share of simple lowconcentrate products (like rock applied directly, basic slag and single super-phosphate), with a corresponding growth in phosphoric acid based concentratedproducts. Phosphoric acid based fertilizers comprised about 58 percent of thetotal phosphate fertilizer supply in 1979 as compared to about 11 percent in1956. In the future, it is likely that most new phosphate production will bephosphoric acid based, and low concentrate products will show only a relativelysmall increase.

52. Until a few years ago, the phosphate fertilizer needs of developingcountries were met almost entirely by processors in industrialized countrieswhich, with the major exception of the USA, imported phosphate rock at rela-tively low prices. Now, however, it is generally more economic to constructlarge-scale treatment complexes at the phosphate rock source. There is notonly a transport cost advantage but because the large producers maintain ahigh administered price for phosphate rock, processers who are dependent onimported rock are put at a significant cost disadvantage. This will meanincreased trade in phosphate intermediates in the future at the expense ofphosphate rock. Industry sources forecast that by 1984 phosphate intermediateswill comprise about 33 percent of the total phosphate trade as compared to8 percent in 1967 and 25 percent in 1979.

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53. After 1984, about 5-6 new phosphoric acid plants, in addition,to those now being planned, will be required to come on stream every year in

the medium-term to meet forecast demand. Apart from the USA and possibly theUSSR, it is likely that most of these plants will be built in developingcountries with phosphate rock resources. Morocco, with its large deposits,will undoubtedly play a leading role in helping the world meet its phosphaterequirements, but supplies will also be needed from other sources.

54. Prospects for the Peruvian Phosphate Industry. With presentlyestimated reserves of about 600 million tons of phosphate rock, and potentialresources of up to 10 billion tons (about 15 percent of the world's potential

resources), the phosphate deposits of the Sechura Desert could eventually makePeru a major world supplier of phosphate. The Sechura deposits are locatedin a wide depression about 30 km from a proposed port site at Bayovar on thenorthern Peruvian coast. The deposits are sedimentary in origin and areconcentrated in eight beds containing an average of about 20% P 205. Preliminaryanalysis and laboratory tests of the concentrate rock have shown good prospectsfor its conversion into phosphoric acid. In view of the relatively lowphosphate content of the rock as mined, and in view of the good potentialmarkets for phosphoric acid and concentrated phosphate fertilizers, the mostattractive approach to the development of the Sechura Desert deposits would beto process this rock to phosphoric acid and phosphate fertilizers in Peru,primarily for export.

55. Phosphate consumption in Peru was 20,200 nutrient tons in 1979, andis expected to rise to about 40,000 nutrient tons by 1985. Peru's presentphosphate fertilizer production capacity is about 12,000 nutrient tpy.In addition, a pilot plant established at Bayovar produces 20,000 tpy ofphosphate rock concentrate containing about 5,600 nutrient tpy, which is used

in Peru for either direct application or single superphosphate production.

56. An economically sized phosphate fertilizer project would typicallyproduce 400,000-500,000 nutrient tpy, well above Peru's own phosphate fertilizerneeds. It would, therefore, have to be export-oriented. A preliminary reviewof the supply/demand situation for the ANDEAN group and Chilean phosphatefertilizer markets shows a total deficit of about 200,000 nutrient tons by1985. In addition to Latin America, the East and South Asian regions, whichlack local phosphate resources, could become attractive markets for a phosphatefertilizer complex involving production of phosphate rock, phosphoric acid,and finished fertilizer products.

Bank Lending for Industry and Mining

57. Aside from a US$2.5 million loan (Ln. 116-PE of 1955) for develop-ment of a cement plant, which was successfully completed, the Bank's onlyindustrial sector project in Peru was the US$35 million DFC I operation nowin execution (Ln. 1358-PE of 1976). After a slow start as a result of thedomestic recession, commitments have picked up recently and the credit line isover 70 percent committed. Full commitment is expected by December 1980.

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58. The Bank's first mining operation (Ln. 1281-PE of 1976 mentionedin para 43 above) also started slowly because of a lack of local counterpartfunds. With a supplemental IDB loan and support from the Bank's ProgramLoan (Ln. 1693-PE of 1979) the project got underway in 1979. Engineering andprocurement activities are now well-advanced on the Cobriza copper mine com-ponent, while construction of the other major element of the project, the minewater treatment plant is underway.

PART IV - THE PROJECT

Project History

59. The Bayovar phosphate deposits were first discovered in the 1950'sas a result of oil exploration in the Sechura Desert. Several internationalcompanies have been interested in exploiting the deposits but the relativelylow quality of the Bayovar concentrates and anticipated high production costsmade doing so unattractive when compared with projects based on the higherquality rock deposits in the USA or in Morocco. Since 1975, however, theproject's prospects have been significantly enhanced by the growth of thephosphate intermediates trade, higher international prices for phosphate rock,intermediates and final products, as well as by the gradual decline in theaverage P205 content of rock elsewhere in the world. In April 1977, MINEROPERUand the mining research and development subsidiary of the Spanish Governmentholding company Instituto Nacional de Industria (INI), entered into an agree-ment to reexamine the viability of the project and to carry it out on a jointventure basis if it proved economically and technically feasible.

60. In December 1978, the INI group completed its feasibility studybased on production of 880,000 tpy of concentrated ore annually, which was inturn to be used to produce 210,000 nutrient tpy of phosphoric acid for ulti-mate conversion into 350,000 and 200,000 tpy of triple superphosphate anddiammonium phosphate, respectively (high concentrate phosphate fertilizerproducts). The project showed a marginal rate of return of about 10 percent.A Bank review of the proposed project in response to a Government requestindicated that the project's low economic return was primarily due to itsrelatively small size. Bank staff suggested that for the Bayovar project tobe competitive on the international markets, it should include at least a twomillion tpy concentration plant and a 330,000 tpy phosphoric acid plant,with partial or total conversion into phosphate fertilizers. This would beequivalent to 400,000 nutrient tpy. The estimated cost of such a project,including the necessary infrastructure, would be US$700-800 million; however,the project would have a rate of return of about 15 percent. Agreement wasreached in March 1980 between the Government and the INI group that theoptimal project size and product mix should be determined prior to startingthe Bayovar project. The Government also requested the proposed Bank loan tofinance the additional studies necessary to resolve technical, market andeconomic issues.

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61. The proposed engineering and technical assistance project wasappraised by Bank missions to Peru in January 1980 and Spain in March andApril 1980. Negotiations were held May 15-16, 1980. The Peruvian Delegationwas headed by Mr. Luis Guiulfo, President of the Empresa Promotora Bayovar S.A.(PROBAYOVAR), which was created to carry out the project. There is no separateappraisal report for this project. Supplemental data are contained in Annex III.

Prolect Oblectives and Description

62. The objectives of the engineering and technical assistance projectare to determine the technical, economic and financial viability of developingthe Sechura Desert phosphate deposits.

63. The project would consist of two phases as follows:

First Phase:

(i) studies to determine the level of phosphate reserves, optimummining methods and the most economic source of sulfuric acid forthe production of phosphoric acid;

(ii) physical, chemical and acidulation tests to establish the mosteconomic phosphate rock treatment process as a basis for plantdesign;

(iii) studies to determine plant site location, water supply and otherinfrastructure requirements;

(iv) preparation of a market analysis and marketing strategy;

(v) preliminary studies of uranium recovery from phosphateprocessing and exploitation of nearby potash deposits;

(vi) a feasibility study to evaluate the results of the studiesmentioned in (i) - (v) above in order to determine the optimumsize and composition for the Bayovar phosphate project;

Second Phase:

(vii) if the project is determined to be feasible, preparation of basicengineering and contract documents, prequalification of contractorsand evaluation of bids for the Bayovar investment project and astudy of project organization.

First Phase

64. Mineral Reserves. The Sechura Desert phosphate deposits have beenfairly well explored. However, PROBAYOVAR must determine the accuracy ofprevious drilling programs and the precise level of phosphate reserves. Also,the optimum plan for carrying out mining activities must be prepared.

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65. Sulfur is the second major input (after phosphate rock) of anintegrated phosphoric acid plant and there is a need to review alteVn4tivesources of sulfur or sulfuric acid for the project. There are large 4epositsof pyrites (iron and copper sulfides) from which sulfuric acid could beproduced, at Tambo Grande about 180 km north of Bayovar, and explorationwork is underway. The project would include a review of the results of thiswork to determine the technical feasibility of using the pyrites to manufacturesulfuric acid. If the results of this review are positive, the economicmerits of producing sulfuric acid from the Tambo Grande pyrites ratherthan from other local or foreign sources of sulfur would be studied.

66. Rock Tests. A rock testing laboratory would carry out physical andchemical tests to determine the most economic process for concentrating crudeore for phosphoric acid manufacture. This work would provide the basis forthe design of the concentration plant and it would also provide data for thephosphoric acid tests.

67. Because of the limited knowledge of the characteristics of theBayovar rock, a comprehensive program of phosphoric acid reactivity testswill be necessary to establish the design criteria for, and the economicsof, the manufacture of phosphoric acid and phosphate fertilizers.

68. Infrastructure. Depending on the size of the project, fresh waterrequirements will be up to five million cubic meters annually. Consultantswould investigate alternative sources of water supply, including undergroundwater and the possibility of obtaining water from the nearby Chira Piurairrigation system which was originally designed taking into account thedemand for fresh water at Bayovar. The project would also include a determi-nation of the optimum site location for both the concentration plant andphosphoric acid and phosphate fertilizer plants, as well as road, port,servicing and maintenance facility requirements. In addition, there wouldbe a study of the establishment of a new township at Bayovar to accommodateproject workers and employees. Finally, the timing for all construction wouldbe determined.

69. Market Study. Although general market information is available,it should be reviewed in the light of the specific project proposal. Aconsultant would, therefore, (i) review the Peruvian fertilizer marketincluding proposals to increase the use of fertilizers in Peru; and (ii)review the world market and define a marketing strategy for the export ofphosphate rock, phosphoric acid and phosphate fertilizers.

70. Uranium and Potash Studies. Preliminary indications are thaturanium can be economically recovered from Bayovar phosphoric acid. Theproject would include a study to confirm this and determine the technicalrequirements for a uranium recovery unit. Given the limited knowledge avail-able, this study is meant to be exploratory in nature; it is not expected thatany decision on the uranium recovery can be taken before the production ofphosphoric acid has started.

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71. Proven potash reserves near Bayovar amount to 8.3 million tons ofpotassium chloride and such reserves could justify a separate potash project.A brief study would be carried out in order to determine (i) the precise levelof existing potash reserves; (ii) the technologies available to manufacturepotash; and (iii) the economic merits of such investment and what additionalstudies and tests should be undertaken.

72. Feasibility Study. The above studies and tests would be carried outin parallel and are expected to take about 12 months to complete. Together,they would account for about 23 percent of total project costs. Based onthe results of the studies, a technical advisor would prepare a feasibilitystudy. This would take about six months to complete. It would determine theoptimum size and composition for a Bayovar investment project and establishits economic justification. This study, other technical advisory services(see para 75) and the administrative costs of PROBAYOVAR, would account for22 percent of total project costs.

Second Phase

73. The second phase of the project would account for about 55 percentof total project costs and would take about six months to complete. A conditionof disbursement for this phase would be agreement among the Bank, the Governmentand PROBAYOVAR that the results of the feasibility study confirm the technical,economic and financial viability of the Bayovar investment project (Paragraph4 of Schedule 1 to the draft Loan Agreement). The second phase would consistof the basic engineering design to accurately determine project costs andfinancing requirements and a study that would recommend an organizationalstructure, management and operating systems for execution of the Bayovarinvestment project. It might also include preparation of contract documents,prequalification of bidders, evaluation of bids and recommendation for awardingof contracts for the Bayovar investment project; however, the initiation ofthese activities would require Bank approval (Section 2.02(e)(iii) of thedraft Project Agreement).

Project Execution

74. The project would be carried out by PROBAYOVAR, which is owned 60percent by MINEROPERU, 30 percent by the Government's Development FinanceCorporation (COFIDE) and 10 percent by the state-owned National Inputs Market-ing Company (ENCI) which markets fertilizer in Peru. The project would beexecuted in accordance with the terms of a Project Agreement between PROBAYOVARand the Bank, the signing of which would be a condition of loan effectiveness(Section 6.01 (a) of the draft Loan Agreement). In order to complete the legalprocess of establishment of PROBAYOVAR, it must be registered as a corporation.Such registration, as well as the ratification by PROBAYOVAR's shareholders ofcorporate actions (e.g., the contracting of consultants) undertaken beforesuch registration, would be conditions of loan effectiveness (Section 6.01(c)of the draft Loan Agreement). PROBAYOVAR has nominated candidates for itsfour senior staff positions (general manager, economist, mining engineer andchemical engineer). The appointment of these senior staff acceptable to theBank would be a condition of loan effectiveness (Section 6.01(b) of the draftLoan Agreement). Thereafter, for any change in the four senior staff positions,PROBAYOVAR would obtain prior Bank approval with respect to the candidate'squalifications and experience (Section 3.01(b) of the draft Project Agreement).

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75. In order to assist PROBAYOVAR in carrying out the project, oneor more qualified consultants would be contracted to provide technicaladvisory services. In addition to preparation of the feasibility studyreferred to in para. 72, these services would include (i) drafting the termsof reference and the selection of consultants for the tests and studiesto be undertaken; (ii) supervision of their execution; and (iii) reviewing theconclusions of such tests and studies. The appointment of the technicaladvisor(s) would be a condition of loan effectiveness (Section 6.01(c) of thedraft Loan Agreement). Technical advisory services would be contracted priorto the hiring of any other consultant under the project (Section 2.02(b) ofthe draft Project Agreement). The services of only one or two consultingfirms are expected to be required for the execution of the studies and tests.

76. PROBAYOVAR is expected to form the nucleus of the future companywhich would implement and operate the Bayovar investment project. INI isnow considering whether it wishes to participate in PROBAYOVAR but in ordernot to delay the project the Government wishes to initiate the engineering andtechnical assistance project promptly. If INI decides to participate, it isexpected that it would become a shareholder of PROBAYOVAR and finance aportion of the local costs of this project equivalent to its equity interestin the company. Alternatively, it might without making an equity investment,provide technical guidance to PROBAYOVAR in the preparation of the Bayovarinvestment project. In order to ensure that the Bank is in agreement withsignificant future changes in the ownership of PROBAYOVAR, Bank approval wouldbe required for any transfer of more than 15 percent of PROBAYOVAR's capitalstock or the incorporation of new shareholders in PROBAYOVAR (Section 5.01(c)of the draft Loan Agreement).

77. After completion of the second phase and before taking a decision toproceed with the Bayovar investment project, the Government, PROBAYOVAR andits shareholders would afford the Bank a reasonable opportunity to exchangeviews on the proposed project (Sections 3.03(b) and 2.02(e)(iii) of the draftLoan and Project Agreements, respectively).

Project Costs and Financing

78. The total financing required for the engineering and technical assis-tance project is estimated at US$9.5 million (exclusive of taxes, from whichthe project is exempt), of which US$7.5 million represents foreign costs andwould be financed by the proposed loan. The cost estimate is based on early1980 prices. Physical contingencies of 10 percent on all costs (except basicengineering design) have been added. Price contingencies were based on anestimated annual worldwide inflation rate of 10 percent. The proceeds of theloan would be provided by the Government to PROBAYOVAR as a capital contribu-tion (Section 3.01(c) of the draft Loan Agreement). The shareholders inPROBAYOVAR would finance local project costs through their equity contribu-tions. The Government has agreed to ensure that the shareholders' capitalcontributions will be made when due (Sections 3.01(d), and 5.01(b) of thedraft Loan Agreement).

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79. To help assure prompt initiation of the project, up to US$50,000in retroactive financing would be provided to help finance costs incurredafter June 1, 1980 for contracting technical advisory services and startingthe studies mentioned in para 63(i) (Paragraph 4 of Schedule 1 to the draftLoan Agreement).

80. An estimated 200 man-months of foreign consultants and 120 man-monthsof local consultants will be required. The average cost of foreign engineeringand technical and other consultancy services is about US$10,000 per man-month.The cost of local consultants is about US$2,000 per man-month.

Selection of Consultants and Disbursement

81. The qualifications, terms of reference and conditions of employmentof all consultants financed under the loan would be acceptable to the Bank(Section 2.02(a) of the draft Project Agreement). Disbursements of theproposed Bank loan would be made against 75 and 95 percent, respectively, ofthe total cost of the first and second phases of the project, representing theforeign exchange component of the services eligible for Bank financing.

Benefits and Risks

82. On the basis of Bank experience with similar projects in otherphosphate producing countries, there are strong grounds to believe that aneconomic phosphate fertilizer project can be developed at Bayovar. Emergingproduction and trade patterns in the phosphate industry favor large scaleprojects such as the one envisaged in Peru. Ultimately, the Bayovar investmentproject could be a major source of supply to help satisfy the steadily growingworld demand for phosphate fertilizers. The proposed engineering and technicalassistance loan would help assure that the estimated US$700-800 million Bayovarproject, one of the most important that Peru is currently planning to undertakein the next five years, is properly prepared and executed. This responds to theGovernment's objective of trying to ensure the high quality of major newpublic investment projects.

83. Development of the phosphate deposits of the Sechura Desert, whichhave potential reserves of several billion tons, would make a substantialcontribution to Peru's balance of payments, with anticipated annual grossexport earnings and import savings of about US$200 million in 1980 terms.Also, the project would represent a major step in stimulating development ofthe Bayovar region, which could become a new pole of industrial developmentin Northern Peru. Infrastructure in the area would be expanded if thefertilizer project goes forward. In addition to the phosphate project, thereis the possibility that the studies to be carried out on the prospects forexploitation of potash, pyrites and uranium might lead to economically viableprojects.

84. Although the Bayovar investment project would be highly capitalintensive and would create only about 1,500 direct new jobs, a substan-tial work force would be required during its construction. Also, more jobopportunities would be created as the project stimulates additional investmentin the area.

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85. Because PROBAYOVAR is a newly created entity, it will require assistancein initiating and coordinating project activities. For this reason, technicaladvisory services would be contracted to provide supporting management servicesfor the project.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

86. The draft Loan Agreement between the Republic of Peru and the Bank,the draft Project Agreement between PROBAYOVAR and the Bank and the Report ofthe Committee provided for in Article III, Section 4(iii) of the Articles ofAgreement are being distributed to the Executive Directors separately.

87. The draft Loan and Project Agreements conform to the normal patternfor loans for engineering projects except, that at government request, no pro-vision has been made for refinancing the proposed loan. The main features ofthe Loan and Project Agreements are referred to in the text and listed inSection III of Annex III. Special conditions of loan effectiveness would be(i) the execution of the Project Agreement (para 74); (ii) the appointment ofconsultants acceptable to the Bank to provide technical advisory services forthe project (para 75); (iii) the registration of PROBAYOVAR as a corporationand ratification by its shareholders of the actions undertaken on its behalfbefore such registration (para 74); and (iv) the appointment of the foursenior staff of PROBAYOVAR (para 74). A special condition of disbursement forthe second phase of the project would be agreement between the Bank, Governmentand PROBAYOVAR that the results of the feasibility study confirm the technical,economic and financial viability of the Bayovar investment project (para 73).

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

PART VI - RECOMMENDATION

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

Robert S. McNamaraPresident

AttachmentsJune 9, 1980Washington, D.C.

- 21 - AiNEX ITABLE 3A Page 1 of 5

PERU SOCIAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (AD1USTED AylAGESLAND AREA (THOUSAND sQ. KM.) - MOST RECENT EST'NATE) -

TOTAL 1235.2 SAMt SAME 'IEXT HICHtRAGRICULTURAL 2J. 0 MOST RECENT GEOCRAPHtC INCOME INCOME

1960 /b 1970 lb ESTIMATE /b REGION /c GROUP /d GROUP /.

GNP PER CAPITA (US5) 250.0 420.0 7'40.0 1124.4 1097.7 1942.6

ENERGY CONSU?"TION PER CAPITA(KILOGRAMS OF COAL EQUIVALEOT) 445.0 619.0 642.0 943.1 730.7 1646.7

POPATION AND VITAL STATISTICSTopULATION, KID-TEAR (mILLIONS) 10.2 13.5 L6.4URUAN POPULATION (PERCtNT Of TOTAL) 46.3 57.4 62.8 59.3 49.0 51.2

POPULATION PROJECTIONSPOPULATION IN TEAR 2000 (OILLIONS) 29.0STATIONARY POPULATtON (MILLIONS) 55.0YFAR STATIONARY POPUrLATION IS REACHED 2085

POPULATION DENSITYPER SQ. KM. 8.0 11.0 13.0 23.5 44.6 28.2PER SQ. X0. AGrUCULTURAL LAND 33.0 44.0 54.0 80.5 140.7 100.5

POPUATION AGE STRUCTURE (PERCENT)0-14 YRS. 4U.2 45.0 43.9 40.9 41.3 35.4

15-64 YRS. 52.0 51.9 53.0 54.4 55.3 56.365 YIRS. AND ALOVt 3.8 3.1 3.1 3.9 3.5 5.1

POPULATION GROWTH RATE (PEtRCENT)TOTAL 2.6 2.9 2.8 2.4 2.4 1.7URBAN 4.7/& 5.0 4.5 3.7 4.5 3.0

CRuDE BIRTH RATE (P'R THOUSAND) 47.0 42.9 39.0 32.8 31.1 27.5CRUDE DEATH RATE (PER 7HOUSAND) 19.0 14.7 12.0 8.5 9.2 9.1GROSS REPRODUCTION RATE 3.1/h Z.9 2.8 2.4 2.2 1.8FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. .. ..USERS (PERCENT OF ARRIED WOMEN) . . 17.7 34.7

FOOD AND NUTRITIONINDEX OF FOO9 PRODUCTION

PER CAPITA (1969-71-100) 110.0 102.0 90.0 99.4 104.4 102.0

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 97.0 99.0 100.0 107.0 105.0 120.8PROTEINS (GRAMS PER DAY) 50.0 61.5 61.7 60.4 64.4 80.9

OF WHICH ANIMAL AND PULSE 25.0 24.3 25.3 28.3 23.5 31.3

CHILD (AGES 1-4) %IOR.ALITY RATE 28.0 20.0 16.0 6.7 8.6 5.1

NEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 48.0 53.0 55.7 63.6 60.2 65.6INFANT MORTALITY LATE (PERTHOUSAND) . 122.0/f .. 76.1 46.7 45.5

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

rOTAL .. 35.0 47.0 63.4 60.8 69.4URBAN .. 58.0 72.0 79.5 75.7 85.1RURAAL .. 8.0 15.0 38.6 40.0 43.0

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 36.0 .. 58.8 46.0 70.1URBAN .. 52.0 - 77.8 46.0 88.3RURAL *- 16.0 *- 24.5 22.5 33.2

POPULATION PER PHYSICIAN Z200.0/t 1920.0 1580.0 1841.9 2262.4 1343.2POPULATION PER NURSING PERSON 3620.07i 3200.0 .9 933.7 1195.4 765.0POPULATION PER AOS?ITAL BED

TOTAL 490.O0 470.0 500.0 563.4 453.4 197.6URBAN . 410.0 340.0 279.; 253.1 260.2RURAL X 3450.0 13000. 1140.9 2732.4 io55.3

ADMISSIONS PER HOSPITAL BED .. 19.0 .. 25.7 22.1 17.3

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.9 5.5 4.9/1 5.0 5.3 4.7URBAN 4.8 .. 5.1ti 4.8 5.2 4.4RURAL 4.9 .. 4.7/1 5.3 5.4 5.1

AVERAGE NUMSER DF VSRSONS PER ROOM-OTAL 2.3 2.3 1.9/1 1.3 1.9 1.1TRBAN 2.0 .. .771 1.3 1.6 1.2RLRAL 2.7 .. 2-!I 1.3 2.5 1.2

ACCESS TO rLICTCRICI7Y IPERCENrOF DWELLINCS)

'OTAL 26.0 32.1 32.i/1 54.3 50.J 56.0URBAN 50. .. 54.3- 30.1 .1.7 i5.iRURAL ' .2D . . ' .7TE . Z t 7. 14.2.17.0

- 22.-ANNEX I

TASLE 3A Page 2 of 5P-L SOCIALIONDtCAIlORS OATA SZ

MrL'UCE c0ouPs (AOJUST!2 iACEAI- 5OST &ECLNT ZST IAE) -

SANE SME A EXZ 4C0ERYOSt tECr- 20oClUHC ZNCONE LICOtZ

1950 /b 1970 lb ESTVIASZ /b R2EGON /c G71OUP /d OoUP /e

OEDCATIONAD.JUSTED InROLwlw. .05os

?lfARS: O0AL 53.0 107.0 110.0 107.3 102.5 101.7.1ALE 95.0 114.0 116.0 109.1 108.6 110.0FErmLZ 71.0 99.0 107.0 107.4 97.1 92.S

SECONDARt: TOTAL 15.0 30.0 49.0 40.5 33.3 51.2SALE 16.0 54.0 54.0 40.4 38.4 56.4FDlALE 11.0 26.0 44.3 39.0 30.7 43.7

VOCAftONAL 2NWL. (: OF SECOtDAzY) 20.0 17.0 23.0 18.5 11.5 18.3

PI?fltZA0 IAITO _-PMIM! 36.0 40.0 40.0 37.1 35.8 27.1SZCODART 12.0 23.0 23.0 17.9 22.9 25.3

ADLT LITERACT lATE (PUCT) S1.0 *- 72.0 77.4 64.0 36.1

CONSU57 I0N? SSEO40EL CAMS PM IROUSAND

POPATAON 3.0 17.0 17.6 29.1 13.5 53.4RADIO 8LCEIVUS ?a AOUSA

POPULATIO.N 101.0 . 34.0 101.0 172.1 122.7 225.9TV 2IECZIVS P? THOUSAND

P0PULATION 3.0 29.0 32.0 67.9 38.3 102.6n!WSPAP11 ("OAa!Y GENIALXTfEUst") CRCl ATTON PM

ThOUSAND PO?ULATION . 124.0 96.0 76.1 40.0 78.5C7W1tA ANNUAL ATTENDANCE PM CAPITA .. .. .. 4.2 3.7 3.6

LaOR FORCETOTAL LA30R FORCZ (THOUSANDS) 3100.0 4300.0 4600.0

!ZltALE (PECENT) 21.0 20.7 21.9 21.5 25.0 24.5AGRICULTURE (nxCM) 52.5 46.8 40.0 30.2 43.5 28.92MWSRYf(PUCZNT) 19.6 20.1 20.0 23.8 21.5 30.6

P?ATIC?A.TION RATE (PERCENT)LOTAL 31. 29.1 29.2 30.9 33.5 33.8

i4611 49.2 45.8 45.3 47.3 48.0 51.3?DtALE 13.2 12.1 12.8 13.3 16.8 16.3

OCOZ4IC DEP I'NCY ATIO 1.6 1.5 1.6 1.5 1.4 1.3

INCOIZ DISTRISQOtcN-'IRC2NT OF PRIVATE INCOat

_ECEIVED AYRIGDST 5 PUCET Or '9U5EOLDS 39.0/k .. .. 23.7 20.83I1CHST 20 ?'.RC7rNT OF SOusREOLDS 64.47- 61.0/1 . 58.7 52.1 57.6LO4JEST 20 ?ERCEN2T OF H0USEHOLDS 2.5/k 1.9/1 .. 2.9 3.9 3.4."07T 40 ?ZRCEN4T OF ROaSEPOLDS g.o7k 7.07 .. 9.9 12.6 11.0

.OVIRTY !A2CET C2OUPST.IATEOD AB50LUTE ?OvERT INc0

LEVEL (USS P?ER CA2ITA)U8J1AN .. .. 235.0 263.6 270.02URAL *- *- 180.0 185.1 183.3

!ST':-XTEO RELATOVE POVERTY INCONELYVEL (TJSS Pt CAPIT-A)

YN1 .. .. 293.0 396.3 282.5 550.0RUiRAL .. .. 200.0 308.1 248.9 403.4

ISTIN.ATED POPUtATION 3ELO.W POVERTY0NCM!E LtVEIL (PERCENT)

U96AN .. .. S9.0 35.2 20.3RUlliLL .. .. . ~~~~~~~~ ~ ~~~~~~~46.6 35.3 .

.Not AvailableaNot pplicable.

YOTZS

/a he adjusted group averages for each indicator are populac4on- ighttd geometric means, excluding :h. exetrme'l.fias of ::1e indicacor and trhe 50c populated oouitry 'n each jroup. Coverage of :ountries among ;he'ndl-ators oepends on availabliLty of data ard is aot uniform.

/b Unless other'i.se wtaed, data for 1960 refer to any Fear between 1959 and 1?61; for i970, bec,aen ?169and 1971; and !or Aost lecent lstimst., betwen 1974 and 1977.

_'-cn .m.rfc. & Caribbean; d n:rnarmdace 0tddle :000g. (S551-1135 par capia, 1976); ;e Upperwiddla ::acfe (51136-2500 per capita, 1976); /; 1970-75; j 1956-61; /h 1960--S; 9 r6a; L96;k ?ersonan L ncome 4%thin Labor !orce; /1 1972.

"ovt Racenc scsLmaze osf CNP per.captca is for 1978.

Augus.c 979

- 23 -ANnXE I

rmWnMXi OF SMA INIA0 Page 3 of S

Noten: Although the data are drama fra source generally judged the most mothoritativ,en ad elible, it should ales be acted that they may not be intern.-tisselly ocaparable b.c-s of the lack of standardized deriitions end concpts -ed by differeet coutries in collecting the data. lbs data aec, nooatheless,use f.1 to desc.ribe orders of agpitode, indicate treade, sd chsrsoteriae certae major differeeces betweeIn ontris..

The djp4tedgf ~ png or each indicator s- Ppnpltlo-weighted geometric eamas,ecldn the note'se nnes. Of the indicat.c sod the met populated-outry 16lUi IpT . to lack of data, grop Iaweeges of all indicators for Capital Borplon Oil taporters ad of indicators of Motes. to Water and tE-reta

Disposal , Hdosing, Inoom Distribution sod Poverty for other coutry gwopn,.ar popslatioo-eilghted geoatric emOe without eoloina of the eutro value endth mt populated country. 9Sim. the covers.. of countries the in .dictrs lapels a avaailtv of&dta ad be nt elf c. ction mt be teericed

is relatias raveree Of one lrietiot to mnother. Thoes.aeasae mtIs osefo I as v1,f o._-I nindicator at a tins oma the coeto -a refrmapae aruem.

LUMAID a (thounad eq.he.) A.... to tasoreta ipsl(ecn.foenais total. obs,a col 5 - Total nurfc ares oprising lad ares ad inand eaters, miter of peopl (ttal orba,a ofloa)srved by crta dipsA

daiclturs Ntet recent estigat of sgricoltorsl are ..acd teaporeri) peroeotsges of their respective Dpopulti..n. knoreta dispos.1almy inolodor Permeanotly for rope, pawoore, sachet ad blaze garden. or to the col11otioo ad dieposal, silt a without trent-mt, of the n-etel1Ie falow and wete-zater by water-borne elects or the use Of pit privie- adoL si

GNP ER PTA S$)-GlNP per capita ostixate at osrrent sarht price PoaainprPwlin - Population divided by nuber of prsoticing physirisona.wmaed byseae coversion mthod - World Bash Atlaa (1976-78 hbciel jI?l ~ lial school at university Inte...

196o, 1970, ad 19789 data. Peaa nor iorsn Person - P.Delation divided by .. e b of practicing ale

aniSlCUPIIC P88 F CAPITA - de-al consuption of Ocaeroial eoerg a eaegcot oes rciclwe,a ltsincecfoa dLante, petroleum untorl gac sod hydro-, nooea ad gec- Popuation Par Hoepital =ed rto.ta, otrbs. ad rura - Poplation (total, urban,

tb.eral eletricity in kiloernac of coal eqainleotpr.caPita; 19,60, ad -rura) divided bythi renPotv noro hocpitn.l beds noalabirlol1970, sod 1976 data. jobito ad private g.roera ad speviaicd h.ctpitnl ad vehabilitatioonc-t-r

H.epita1s ar ectblie .taet pergahetly etaffed by at leact on pdoywloino.POOtItATIhe ADIl VITAL SATISTICI Establiehaacts providing priecipall costodial cur -hc ot iocladed. Rural

Total Popu1atio', tad-YCeiFLillion .. Ac of July 1; 1970, 1970, nod hospitale, bh-oe, inolde health and eadlcnl ceot-r 000 permanetly ataffvdi977 data. by a phoyeiciae (but by a medical naalntsnt, o-e, midoife, etc.) skich of fo

Urb. Pputlation (pret of total) - Patio of achn to total popontioc; ib-patiet acocbdation ad provide a Iialtd renge of medical ferilitlei.

dIffeen deitie of -orb .aen -Y sTff-t Oomperability of dnta Ainispedoialed - T01otal ber of adeoioi.o. to or diw-hsge fromsmog contis;160, 1979, sod 1975 data. bo tpol divided by the catert of beds.

Population Proj ertioneR7 Itt45 14np~Yter 011 - torrent peolntion proj et.ono or bae 00. dHOUSIG

t5otal pepintion by one sod s wd their mortality sod fertility Avr iov of gHucehold (Poreonc r,h Ihebod) -total, urban seA rurl -rntrs. ProJection 'pavmtrrs f rtscility raten oneprine of threeA h ho.oehold con.sict f agopo n iduals who hor living qaartve end

leveIo noaiog Isfe vopotnoyatbirth looreaing with cootryn. their uint meals. A boarder or lodger my or any not h.ic -lcndrd 10 thpee o-pito inooso 1od, sod femle life wopeotancy atabiliniog at hooccohld for ttiatietla porpeoec.77.5 yearn. The psrmtvro for fertility atr also have three le-ne o!Erege ubro pennnerronattlbrbn o rrl- Aorgc ounbvrannunin deolino io fertility sco-ding to icoelvlsdpn fP,ro pe -ro in nll arba, adtrurl o-osied -~ coooi oa urlsalty olseino perforanore. Eaob ouontry is thieo aeslgnod 000 of thece D-pvtsel Ielinge -oclsdv oa-peraoct otrtoture wd u_ooopicd pos

nine ootioatlnoos f mortality nod fertility trends for projection Aocecs -ttoE hlctriolty (Percentf doellingo) - tot.l. orbn. sod ro-l - Coo

dIntiooy ouaoo Is n _t oaiocory op tosstoonlbweie oo cr...it totni, urbn end -orI d-e1-go trenpeottWiey.01

0c ti bith rte o eeos to tie deth rn, ad als the oneotruoor rsiwcot .Tio isahinv-d conly after fertility rates EDUCAT10H

deoline to te replsoeneo level of-at ot reprod-ction rate, ohe. idAete iroit Oatov:,h geraInofomorpl..ce iteIlf _osty. Th estationary npoP- Prmr ool- total cole wd fen-Idroon- total, coearI nnrenol

Iti00 sine o- -tiaatrd 00 the tanJo of the projeted cha-traoorti-i seinto algeat the princry lcv-I aspretv fvoeto ra

of tbc popolntion In thr pcor 2000, ad the rate of deciinc of fertility oohcol-sg popltloon;InoralIp ccldeo obIildren Igd -lprburate to e-yl-oet ecel. odjooted foe differen.t lengthy of primary ed-otico, foe ontriro 090h

Y-artatioonr popopaticn is roarhed - The yea when etotionn.ey ppolntico uiversl -1doca tiot -- rlleet ow, ..oceed 100 pe-ces ov oepyllocio- h.w beec reahed. are helon - above oth sfficinI school ege.

oe co. ha. - Mid-y-u porolition pe oqunr ksioneiv (100 htectrv) of edoctoneubeit eetfu yerof approord .r...ry lo,usruo.lo;

totalse pir-idee gIeo..ral ticatlon, or teahe %tniciog iontrot.t-. roe popiloPer o. in.-sgrioultuaI lard - Cnwlpted no obo- foe sgrbclt-rl land ucoally of 12 to 17 ic.nr. of ae crepeodeoc -crc ore -- Iecly

only. v-luded.Popalatico Age Strutur (cercet) - Children (0-14 yeas), oorbcng-age vo...tioos.l -oolen proa f eodayM Vocat'icon oo'tit.tioos ics`i

(15~Y--hiya)ln reird b yer d e)e -protwern of oid-yeor tcvbhicsl, lodoetrii oc th pogf m bo prt ldpnet rnpplai;170, i97O, and 177 dais departmeoto of -orodary inotitotions.

Poolntcn rowb Pte(peecont) - total - Annosl proth e-tos of total aid- Pscituircbe-pir.nd n-cdar T otnl otodnntne-oll-Jiyea poelaioo or195-h, 9h-7, od1970-77. '"t- p Ii r iwe ceodr "ileeciiddb sarsotahcc00teor-

Population Grceth Pate pret -a A.- .1un growth rates of odbs npeodingleloPeisla.ti..s for 1991-h0O, 19*0-70, sod 1970-75. Adult lit-eay rate Prevent) - lterte edoiito nble tored sod crite as

C-d irthRat.(p.rth..-d)- Abonul live bietoc pee ihoo-eud of io- a peecI- ge of total adolt popolotioc agd 15 Y_er o cryear pePnticri; 1960, 19707 sod 1977 data.

Crude Death Pate (per thoowand) -_Mnaal deaths per thoooad ol id-yea COI5lrifIcPpepeslstion; 1960, 1970, sod 1977 dnO.tPoegrto(e thossowed oP.ulaioo - Paooreor onri otro

Groso Peprodaotioo Pato - Ao-rge ooeh- of dsoght-r I cod didj tear ora1ting lenhbaeih perooc cld-s weboooI., h-aco 7 lbtrin bee osreal reprd-isc-c pe-sd if sic eope-iroce perseot gcv-velcope_fcfriiyito sol ieya ae -oteding lo 1970. onl Poivr (prtoopp itioo)- -Alil type- of .c.ebvere toe rmAs1970, wd I75 broadonto to geece.hFniptc pe hs d of pepeitt,o; voIodoonsv

Fseily PIisnio -A`ceytoro, AnAlooee ..bo.oo o-bee of -- ce-veeocoutri-o sod in Yeses ob.n eegiottioc ofrsl. st oelacceptors of birth-cotrol devi oeuder aunoooIof oninlfeedly o.ffet; data for reItp ace -ect be coops-allo olor o -soui-iv

pianin progrwet.ailihed I con..ismily Plaing U-Sne . trocen ofersdseoI-rretg f onrild TO Oeoeovcro1 tir hoso peoltsoo) - fT ercei-c for oraoni'gces

eom ofrhil-be ringag (15-ALyas oh oo tirth--tro1 device-elcpetoa ouain elde- snollI-vcd TtVvecoto nil eareled womn i a age g-op. wed icy-o oh- registr,tion of TV se. ..in os ffect.

_________________ eeonrn}ier I ircolation (per ihoocad populotion) - Shots the tisoeroghcoircu-r lgntio-oati.F 201 AND NItrRPIf0 of dail geneal lotrvt nccn1. pnpee df)evd n0pe-iodoco pullcati-

Indeoof fod Prductin perCatO 11979-71 100) -tilde o.fnpe -npits devted prienily to- ecding genera coo. It inoeiderd to bedoilysoolpeodoetiao of al ftc .voditiec. Pr~odto I oisde ace.d wed of it npr-re at leaot floior limo -oke.

fee ad in. on olcdar year bacie. Cmditie cover.. prienr gocdc Cis-na Aonun Atteadwe- per Capita oc -ien -hac so tic nuber of socketo(e.. ongar-r isetead of enge) ebio ar e.ditor sod con. l ootrivot_' sold darn- i er cing ngtr-scct rv-csoeondno,i

(e.g. coffee sod ten ar -oold.d). dggregate p-d-stioc of e-c c.oth- jolts. iioio bh.oed. on tio... nvrcge prodacer price eighto.Per -aitn caoly of caloriec (-eet ofr -ioetn) - Coepshted ft. roAiBOR FORCE

enere eqovalet of et fd ouylic avaioblein cootr pe opi in Tots labor .t forc Oo ssd)- nvoeoclyativ pe--on loolodlg veedprday. Available osypli-ocero d-meti, prodootloc, iep-rte lows forces sd Iemlyd bt e-iuding hoo..ob-e,, wtudeoto, etc. Dof-ito--

opertn., ad oheaco. in stab. Net -uPpliv- -1c lde sosal ford, oceA, in vioroo -wtriee are not -aopnr-ble.qostitico aecd in fordprco me,sd 1i.-se in dist1Itribstio. Peqoire- Fngp14jy-o pt - Fe.-eIs. o force I neI pe-ctsge of Otal1 labor forc

meets wer esimated by rAO ins-d 00 phyoiclogivIrcredo for normalt) - Laboe force in farming, forrtry, hating adutnivity ad heal7th coneiderog voeuetateerue,body o-ghti, fiching so percentage of total labor forceage sod n- ditlbstribsto ..f pepsoltoonI, sd s1owing 10) percet foe Indootry lerpet) - Labor force io aling, -ootrot-o, osiofsotaring %vA-ntenat hos..ebold Iecl -elcotric ity, ater ad gao a pervntge of totni lsbor Corce

Pe .oPit. oupply of ProteIn lsrce Per day) - Protesvotteot ofrv PtcttonAt pre t) -total,1malt,sd fal - PIrticipation or,.Pi t net sopply of food pee doy. Net osyPIp of fao ow door nod activity rteo ar I motd nntotl coe, _d febl onio force as Pe--above. Peqolremets foe all Ic...triec onitbliehed by USDA p-oidr for n ventgos of total, aele ad fenlc peposltion ofoi ro repetivlyeloimo allo_se ofI61 grsn of totsi protebo per day sod 20 gra- of 1960, 1970, sod 1975 data. These or ILD-s putiipatlo s rfetnsoima sd pWIs Pr-tei, of w1hich., iers obould he animal protoin. ze--notract.re of the poplation, sd long tIer tred. A fIn estiat-n

Ths esdarde ore loser tha thon of 75 grea of total protei a. d ar. fc I atona crce..09 gram of aiml Protebo an no avrage for the world, prope..ed by PA0 ~ R Ui - Ratio of poplatio drde 15 ad 65 nod ovr to

'Inthe Third World Food lo-cy. the labor : feifI*ge grop o)f 15-64 yearn.roe-sita orotes noonply from animal ad joulce - rPoteic oupply of food

derived fro animale sod pisee inganpr s. Et D IONS(T1Child leesa 1-So) lartalto sate (arithoso)- bonsai deaths per thosawed Peoetes f rvate In-m (both in ho ad hiod) - Received by richest

In see group 1-I,per, to ohildre_ in thic one grop; f or most de-c- 5 per'oset, rlohest 20 poroent, poorest 20 percet, and pooret 40 peroentoping -outri-o dnt de-i-ed fro life tablee of houeholde.

lieEpcao tBirth (reara A-rAeege nube of year of lIfe Estimated Absoute Poverty I1om Leve (o p. or capta)i - ba n ua

Inadt NorhyPao(e tond A- bool deaths of infahts under on hotr itiomalty adeqate diet Plu ense...tb1 00-faod reqaireots iw notyea ofragepeetosdlv it fodbe

latr of ptopl (ttl rbs. n ua)wt ewsbeacs t oa Rural relaIvepoety tc lelisa-h ird tf Vea pr cptcaeetercpl (incldes treated orface waters or untreated but Person1 albgi Of the vdowtry. Orbs.-lve is derioed fr- the rura leve

onotemleated eater -ho as that from protected brehles, springs, with adjoMetat for highet oto lvn oaraassad sasitary wells) as Perset.os of the ir reepective pnpsLati_oss. Sstiatcd PalatW n esle 1WAbalut Poverty Icm ee Irroen.t) - orbs ad

a ach gara a poblic fountain or etadpost located net mr then Purl rNwet ofpplain(aaa rurl)wh are abolt 'oor200mters from a house my be oooidered as beIng within rseaewssab

mos f than hooe.. In rual _rwa r_aasle ace_s would iolpthat the housewife a Sees of th 0 houhold du not hson to spend aOoii dOca aaPvsdIsproportionate part of the day in fetching the fatty a ae-ed osmoAayi d Proetoa Departmen

Anauet 1979

-- 24- MNEX IPage 4 of 5

OEBD

7CONOMIC DEVELOPYENT DATA

A C T U A L P_1RCLM P R O J C T E D GRO1PT RATE (% p.e.) 1977

1965 1970 5975 1976 1977 1978 1979 1980 1985 1965-76 1976-78 1978-85 'GDP

NATIONAL ACCOUNTS(mirlions of US doladrs at 1977 prices)

.ross Domestic Product 7633.7 9451.1 12329.3 12706.4 12553.9 12328.2 12759.4 13405.3 17870.1 4.7 -1.5 5.4 100.0Gaine from Terms of Trade -81.1 274.3 -59.2 -80.9 O.C -285.7 114.5 168.5 535.5 0

Gross Domestic Incom- 7552.6 9723.4 12270.1 12625.5 12553.9 12042.3 12873.9 13573.9 18405.5 4.8 -2.3 6.2 100.0

Imports 2207.8 2247.2 3343.6 2875.3 2694.1 1795.6 2009.9 2298.9 3426.0 z.4 -21.0 8.7 21.5

Eaports 2081.1 2562.2 1911.5 1989.7 2137.8 2368.0 3006.0 3077.9 3646.3 -0.4 9.1 6.4 17.0

oports, Terms of Tr-do Adjusted 2000.0 2836.5 1852.3 1908.8 2137.6 2082.3 3120.5 3246.4 4181.8 -0.4 4.5 10.5 17.0R.murce. Gp, Tor-e of Trade Adjusted (-:surplus) 207.8 -589.3 1491.3 966.5 556. -286.7 -1110.6 -947.5 -755.7 4.4

Total Consumption 6304.8 7784.7 10942.6 11154.8 11219.2 10106.4 9921.1 10536.3 14695.5 5.3 "4.8 5.5 89.4

I-vest.ent 1455.6 1351.4 2818.8 2437.2 1891.3 1649.2 1842.2 2090.1 2954.3 4.8 -17.7 8.7 15.1

Notiomel Svings 1093.1 1786.2 1116.0 1132.4 965.1 1485.7 2341.1 2436.9 3334.2 0.3 14.5 12.2 7.7

Domestic Saving 1247.8 1940.7 1327.5 1470.7 1334.7 1935.9 2952.7 3037.6 3710.1 1.5 i4.7 9.7 10.6

PRICED IN US DOLLARS(1977 = 100)

Export Price Irdes 37.1 47.3 87.6 87.7 100.1 100.0 134.5 150.4 234.1 8.i 7.2 12.8IDport Prior Codea 38.6 42.7 90.4 91.4 1OO.C 114.6 129.6 142.6 204.1 8.2 12.0 8.6T.rms of Tramd Indec 96.1 110.7 96.9 95.9 10O.C 87.9 103.8 lOS.5 114.7 0.0 -4.3 3.9Arnnal A-eroge Exc-ange Date (Soles per N) 26.8 38.7 40.8 57.4 83.81 156.3 224.6 -- --

OUTPUT, LASOR FORCE AND PRODUCTIVITY IN GNP by Doctor Labor Force GNP per Capita

1970 PRICES In Nil, of 0S Doloaro Percent of Total Growth Nate In TiouTnh d P-roent of Total Grooth Rete in uS Moli,rs atA-er 6F<cth M-te[966 1976 1i9p6 1 1961-76 1961 1976 1961 1976 * 1961-76 1961 71961-76 19 e976 1961-

Agricu7tore 888.9 1138.9 221.1 13.7 1 1708.6 2109.4 52.8 43.4 1.4 521.8 539.9 41.8 31.5 0.2

1.duatry 1465.3 3167.7 36.4 38.o 5., 616.4 1019.1 19.1 21.0 3.4 2377.2 3108.3 190.8 18.1.2 1.8

Serice- 1666. 4030.9 1.4 48.3 6.C 907.0 17316 28.1 2:- 4.4 1837.2 2327.8 1475 135.7 t.6

TotalVAverage 4020.5 8 337.5 100.0 100.0 5.0 3227.0 4060.1 100. 100.0 2.7 1245.9 1715.5 i 100.0 2.2

CENTRAL GOVERNMENT FINANC7j Prelim. Pro-Jeted(an percent of Current GDP) 1965 1970 1975 1976 1977 1978 1979 1980 1961 1962

Current Revecue 15.2 16.1 15.9 14.5 14.6 15.3 17.7 19.3 19.6 19.9Current Ropendit-re 14.3 13.4 16.3 16.0 18.3 17.3 14.9 17.3 18.8 19.3C-rreat 6s-ioge 0.9 2.8 -0.5 -1.5 -3.7 -1.5 2.9 2.0 0.8 0.6Clpital E.pmnditore 4.5 4.1 5.0 4.8 3.8 3.4 4.3 4.9 4.9 4.9

Ecternel Aenist-mo (Net) 1.2 0.6 3.0 2.0 3.3 0.9 -0.2 n.e. a.a. a.

CURRENT EXPENDITURE DE6AILS Actuc D1TACL ON 1977/S2lam Plonm P-an(as percent of total Current Kopend.) 19 1973 1976 1977 PUBLIC SECTOR TtiT

1..oft t1978 INVESTMENT PROGRAM

Educstion 30.6 27.9 22.9 18.1 16.1Health 9.0 6.3 6.2 4.7 6.0 AgrVcilt-re 1262.2 19.6Agricoltrm 3. 6 4.4 . 13 2 3.64 Industry, Touroim sad RIini8 1375.1 21.3other Ec..n.eic Services 3.2 4.0 5.2 5.2 2.7 Enegy 1794.4 27.6

Generel Servicee (ircl. defen.e) 46.4 42.7 46.9 54.i 45. t Tran-part sad Cosmaoicstivc 892.4 13.8IDtereot nn Dobt 5.4 11.3 10.8 15.1 24. Socinl cod local Interest Projeota 1128.3 17.5Other 1.8 3.3 6.2 5.5 2.5TotaL Curreat ERpenditure- 100.0 100.0 100.0 10.0 10676. Totd 6452.4 10.0

MINEY AND CREDIT 1973 1974 1975 1976 1977 1978 1979 (pr-lin.)(Millione of Dolen outatsaiug

At the end of period)

Noney end .i-Yoney 98268 119996 141766 166296 220453 321200 637200Book Credit to Public Sector 27234 26898 49711 101399 198854 287700 223600Demk Crtit to Private Sc-tor 73189 84512 108234 134536 17377Z 239300 387500

Mloney so perce- t of GDP 27.4 26.8 25.5 21.6 21.0 19.2 20.9

Cossmler Price Index in Seine (1977-100) 37-5 43.9 54.3 7 100.0 157.8 264.7

Aicoal perceotego ohenga iA: 38 0

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- 26

ANNEX IIPage 1 of 5

THE STATUS OF BANK GROUP OPERATIONS IN PERU

A. STATEMENT OF BANK tOANS (as at April 30, 1980)--- US$ million ---

AmountLoan (less cancellations)Number Year Borrower Purpose Bank Undisbursed

25 loans fully disbursed 268.2

949 1973 Republic of Peru Education 24.0 12.91025 1974 Republic of Peru Roads 26.0 0.81196 1976 Republic of Peru Transport 76.5 59.01215 1976 Republic of Peru Power 36.0 15.31281 1976 CENTROMIN Mining 39.7 33.41283 1976 Banco Vivienda Urban Dev. 21.6 17.51358 1977 COFIDE Industry 35.0 21.41403 1977 Republic of Peru Agriculture 25.0 24.8S-11 1978 Republic of Peru Preinvestment 8.8 6.01693 1979 Republic of Peru Program Loan 115.0 38.21771 1979 Republic of Peru Irrigation 56.0 56.01806 1/ 1980 Petroleos del Peru Pet. Prod. 32.5 32.51812 1/ 1980 Republic of Peru Rural Dev. 15.0 15.0

Total 779.3 332.8of which has been repaid 149.4

Total now outstanding 629.9

Amount sold 18.3of which has been repaid 18.3 _

Total now held by Bank 629.9

Total undisbursed 332.8

1/ Signed, but not effective.

- 27 -

ANNEX IIPage 2 of 5

B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1980)

Type of Amount in US$ millionYear Obligor Business Loan Equity Total

1960 Industrias Reunidas, S.A. Home Appliances 0.3 0.3

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 2.2 0.2 2.4

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

Total gross commitments 28.0 1.7 29.7less cancellations, terminations,repayments and sales 12.1 0.4 12.5

Total commitments now held by IFC 15.9 1.3 17.2

Total undisbursed 2.7 0.5 3.2

- 28 -ANNEX IIPage 3 of 5

C. PROJECTS IN EXECUTION 1/

Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973;Effective Date: March 5, 1974; Closing Date: June 30, 1981.

The project has experienced serious difficulties and is now about40 months behind schedule. In the first 3-1/2 years after effectiveness,there was little progress owing to delays in establishing and staffing theproject unit, weaknesses in the unit itself and a long delay in adopting theeducational reform which was to determine curricula. This last difficulty wasresolved with the reform's implementation in 1977, but project execution wasstill hampered by weaknesses in the project unit and cumbersome bureau-cratic procedures. In order to resolve these problems, the project has beenmodified to reduce its scope, increase the Bank disbursement percentage,create a revolving fund and improve administrative procedures (see President'smemorandum R79-59 of March 27, 1979). As a result, the pace of projectexecution has improved noticeably in recent months and disbursements now standat about US$10.7 million.

Loan 1025-PE: Sixth Highway Project; US$25.0 million Loan of July 1, 1974;Effective Date: August 21, 1974; Closing Date: June 30, 1980.

Loan 1025-PE finances improvement of the Lima-Pucallpa highway whichconnects the Amazon basin to the Pacific Coast. In view of the unusuallydifficult terrain and limited government implementation capacity, the workswas divided into two stages which are financed by separate loans, 1025-PE and1196-PE (see below). Because of initial delays and substantial cost increases,the scope of the project was reduced in February 1978 (see President's Memo-randum R78-360 of February 17, 1978) and the Closing Date postponed. Construc-tion is now well advanced and should be completed this year; however, theclosing date is now being extended to permit the completion of studies beingdone under the project.

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.

The project's river ports component has progressed slowly becauseof technical problems which delayed completion of design, but it is now underconstruction, although with some cost increases. There have been seriousdelays in contracting for civil works under the road component because ofslow procedures and limited government implementation capacity. Theseproblems now appear to be largely overcome and construction is beginning onmost project components. The project has been modified so as to increase the

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 understand-ing that they do not purport to pr^se* i 1-'l-c- evaluation of strengthsand weaknesses in project execution.

- 29 -

Page 4 of 5

financing for urgently needed road maintenance and eliminate improvement ofthose road sections which cannot be completed within a reasonable time(see President's memorandum R79-88 of April 27, 1979).

Loan 1215-PE: Fifth Power Project; US$36.0 million Loan of September 20, 1979;Effective Date: November 18, 1976; Closing Date: December 31,1981.

The slowdown of demand in ELECTROLIMA's market in the wake of therecent economic difficulties, as well as procurement prcblems, have delayedthe project's power distribution component and completion is expectedabout a year behind schedule. Serious delays were also experienced ingetting the technical assistance program of the loan underway; however, someconsultants have now been retained, and with strong support from the currentstaff in the Ministry of Energy the program has begun to progress normally.Because of the delays, the closing date has been extended.

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, have delayed theproject by about one year. Most design work has now been completed andconstruction of road components is underway. Because of past delays, however,the closing date has been extended.

Loan 1281-PE: CENTROMIN Mining Project; US$40.0 million Loan of December 61976; Effective Date: May 24. 1977: Closing Date: December 31,1982.

Initiation of the copper mining component, which the IDB is co-financing with the Bank and which amounts to about 90 percent of total projectcosts, has been delayed by about two years because of the lack of local counter-part funds. The Government is now proceeding with the project with supportfrom a supplementary IDB loan which will help cover part of the financingshortfall. Engineering and procurment acitvities on this part of theproject are well-advanced. Construction of the mine-water treatmentplant has also experienced some delays but is now advancing satisfactorily.

Loan 1358-PE: Industrial Credit Project; US$35.0 million Loan of Janaury 28,1977; Effective Date: March 30, 1977; Closing Date: June 30,1981.

Peru's economic recession led to a contraction of investmentand to lower than anticipated demand for the loan. In view of this, theBorrower--the National Development Bank (COFIDE)--has agreed to financeprojects identified by commercial banks and other financial institutions,

- 30 -

ANNEX IIPage 5 of 5

which would also guarantee these loans and provide some loan servicing.The initial response has been encouraging and the credit line is nowover 70 percent committed, with full commitment expected by December 1980.

Loan 1403-PE: Irrigation Rehabilitation Project; US$25.0 million Loan ofMay 20, 1977; Effective Date: August 2, 1977; Closing Date:June 30, 1983.

DEPERTC, the executing agency, has completed the design for civilworks in two of the six valleys where irrigation systems are to be improvedand construction has started. The project's implementation is behind schedulebut is expected to catch up over the next 12-18 months as constructionproceeds.

Loan S-11: Water Supply and Power Engineering Project; US$8.8 million Loanof December 22, 1978; Effective Date: June 27, 1979; ClosingDate: December 31, 1981.

Consultant's studies have commenced and are proceeding on schedule.

Loan 1693-PE: Program Loan; US$115 million Loan of May 17, 1979; EffectiveDate: May 24, 1979; Closing Date: July 17, 1980.

The economic recovery program supported by the program loan is pro-ceeding in a generally satisfactory manner. Because of better than expectedexport performance, Peru' foreign exchange constraint has relaxed resulting ina lag in disbursements of the program loan. Disbursements began to pick-upmarkedly in September 1979 and stood at US$93.3 million as of May 25, 1980.

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

Project execution is now getting underway.

Loan 1806-PE: Petroleum Rehabilitation Project; US$32.5 million Loan ofMarch 11, 1980; Effective Date:Closing Date: January 31, 1983.

This loan was signed April 28, 1980. The conditions of effectivenessfor the loan are in the process of being satisfied.

Loan 1812-PE: Puno Rural Development; US$15 million loan of March 18, 1980;Effective Date: ; Closing Date:June 30, 1985.

This loan was signed April 28, 1980. The conditions of effectivenessfor the loan are in the process of being satisfied.

- 31 -

ANNEX IIIPage 1 of 2

PERU

BAYOVAR PHOSPHATE ENGINEERING ANDTECHNICAL ASSISTANCE PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

SECTION I: TIMETABLE OF KEY EVENTS

(a) Time taken by the country to prepare project: One year

(b) Project prepared by: Bank and Government

(c) First presentation to the Bank and first Bank mission to considerproject: March 1979

(d) Departure of Appraisal Missions: January and March 1980

(e) Completion of Negotiations: May 16, 1980

(f) Planned Date of Effectiveness: September 1980

SECTION II: SPECIAL BANK IMPLEMENTATION ACTIONS

None

SECTION III: SPECIAL CONDITIONS

It has been agreed that:

(a) as conditions of loan effectiveness: (i) the Project Agreementwould be executed (para 74); (ii) a consultant or consultantsacceptable to the Bank would be appointed to provide technicaladvisory services for the project (para 75); (iii) PROBAYOVAR wouldbe publicly registered as a corporation and its shareholders wouldratify all corporate actions taken prior thereto (para 74); and(iv) the senior staff of PROBAYOVAR, acceptable to the Bank, wouldbe appointed (para 74);

(b) a condition of disbursement for the second phase of the projectwould be agreement among the Bank, the Government and PROBAYOVARthat the results of the feasibility study confirm the technicaland economic viability of the Bayovar investment project (para 73);

(c) the qualifications, terms of reference and conditions of employmentof all consultants would be acceptable to the Bank and the consul-tant(s) providing technical advisory services would be contractedprior to the hiring of any other consultant (paras 74-75);

(d) any changes in the senior staff of PROBAYOVAR would require priorBank approval (para 74);

- 32 -

ANNEX IIIPage 2 of 2

(e) after completion of the second phase, the Government and PROBAYOVARwould exchange views with the Bank prior to taking a decision toproceed with a Bayovar investment project (para 77);

(f) the loan funds would be transfered to PROBAYOVAR by the Govern-ment as a capital contribution and the Government would cause theshareholders of PROBAYOVAR--MINEROPERU, COFIDE and ENCI--to makethe necessary local counterpart funds available through equitycontributions to the company (para 78);

(g) any transfer of more than 15 percent of PROBAYOVAR's capitalstock or the incorporation of new shareholders in PROBAYOVARwould require prior Bank approval (para 76); and

(h) the undertaking of pre-contracting activities would require priorBank approval (para 73).

IBRD 15062A,r 8 80-30 p :,,cz eo- 79-30 MAY 1980

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Provincial boundaries

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