============================================================================== RED CIENTIFICA PERUANA ============================================================================== This section is from the document '/PIC/pid/pid/perpa109.txt'. Project Name Peru-Irrigation Subsector Project Region Latin America Caribbean Sector Irrigation Project ID 6PERPA109 Implementing Agency Government of Peru Ministry of Agriculture Dr. Chirinos Av. Salaverry s/n Espalda Edificio Ministerio de Trabajo Lima, Peru Date Prepared January 11, 1994 Projected Board Date January 5, 1995 1. Background. After many years of economic decline, financial instability, high inflation, and arrears on external debt, the Peruvian Government is now committed to a strong stabilization program and a structural reform aimed at controlling inflation and improving economic efficiency. It has also reached a debt-workout arrangement with Peru's bilateral and multilateral creditors. Far-reaching reforms in trade, privatization, agriculture (including irrigation), the financial sector and labor markets have improved the efficiency of the economy and have set up the basis for sustained economic growth. 2. Although the agricultural sector generates only about 6 percent of GDP at current prices, it employs about one-third of the labor force. During the past decade, agricultural GDP increased at an average rate below that of population growth, mainly due to scarce private investment, price controls, natural calamities, terrorism-related violence and most importantly, the distorting effects of erratic public policy. 3. Irrigated areas are estimated to account for more than two- thirds of agricultural output. Except for a few modern irrigation schemes, most of the irrigation infrastructure is old, inefficient and in need of extensive repair or virtually obsolete. Due to inadequate pricing policies and inappropriate administrative and tenurial arrangements, water was used wastefully in most of the irrigated areas and only a few schemes have secure regulated water. Moreover, many large irrigation schemes introduced in the coastal region of Peru since the early 1960's were economically inviable. In addition, too many projects were undertaken in relation to the fiscal resources available. Thus some of the projects that were begun in the 1960's are still under construction while most completed projects suffer from inadequate funding for O&M expenditures. 4. Recent agricultural reforms, if extended and implemented, would lead to improved O&M activities and more efficient agricultural production. The Government has introduced legislation to strengthen water user organizations (Juntas de Usuarios, JU), giving them legal rights and responsibilities. The JUs are legally entitled to collect tariffs, establish O&M plans, administer the district's own funds, and contract loans to carry out works and studies. Currently, at least one JU exists in each of the 97 irrigation districts in Peru. Another agricultural investment law removed restrictions on the sale, lease or use of agricultural land as collateral and liberalized rules for private investment in irrigation. The land legislation is being accompanied by efforts to extend titling and registration to rural areas. Complementary policies liberalizing marketing and trade policies and eliminating credit subsidies promise to result in more efficient agricultural production. More recently, MAG is preparing the legislation required to move from a traditional water allocation system based on government priorities established by law toward a market-based system based on a well-defined water tradable property rights. 5. It is estimated that at least one-half of the 1.3 million ha of irrigated land in Peru requires some rehabilitation and modernization, with some 250,000 hectares in urgent need. Based on an average cost of about US$ 1500/hectare, estimated demand for irrigation rehabilitation could be as high as US$375 million. 6. Project Objectives. The proposed project is in line with the objectives of the Bank's agriculture strategy in Peru of reducing poverty and improving natural resource management. The project aims to help reduce poverty by promoting broad-based growth in incomes and employment by: (a) supporting agricultural policies that help sustain and accelerate the stabilization and adjustment program; (b) encouraging private sector development; and (c) supporting policies and programs to rehabilitate and improve the management and sustainability of irrigation infrastructure. More specifically, the project aims to raise agricultural production and productivity by enhancing the sustainability of existing irrigation projects, changing the role of the public sector in irrigation, and strengthening the private sector through the water users' organizations. The project also aims to develop a more coherent policy and institutional framework for more efficient management of water resources, involving full recovery of investments, transferring responsibility for O&M to farmers, privatization of large hydraulic projects, and progress toward development of a market in water rights. 7. Project Description. There will be six components to the project: (a) support to the development of a tradable water rights system, including the preparation of the regulatory framework, and the elaboration of engineering designs for 20 other irrigated areas ; (b) rehabilitation works of about 40 irrigation schemes, estimated to cover an area of over 200,000 ha and reach over 50,000 families ; (c) institutional development and strengthening of water users' organizations at a national level ; (d) incentives for technological innovation, including a training program for private technicians and farmers and a pilot incentive program to encourage adoption of modern irrigation technology ; (e) monitoring of the environmental operations plans prepared for the existing irrigation systems ; and (f) project administration and monitoring. 8. An innovative feature of the rehabilitation component is that JUs would be responsible for the definition of investment priorities for the design of schemes, and for their implementation and operation. GOP would provide support to the JUs in the preparation and execution of the investments on the basis of the criteria previously agreed between the Bank and the Government. Only those irrigation projects where the users can organize themselves and demonstrate that they are able and willing to repay the incremental costs of the project will be financed. This should ensure that schemes to be financed will have adequate financial (as well as economic) rates of return. Such schemes are likely to be found in the Costa. The smaller schemes in the Sierra, which may not be financially profitable, could be eligible for financing through the Government's targeted poverty alleviation program that gives grants to small communities for small scale infrastructure of social service projects. 9. Project Implementation. It is proposed that the project would be implemented under the aegis of a newly created Irrigation Development Committee (IDC) comprising the Ministry of Agriculture, the Ministry of Economy and representatives of the National Users' Organization. The General Water Directorate, under MAG, will be the executing agency for the water markets component. Initial screening of rehabilitation requests would be done by a projects' executive unit (PEU) that is proposed to be created during project preparation. Final approval would come from the IDC after which an agreement between the JU and the Government would be signed. Rehabilitation works would be implemented directly by the JU. Feasibility studies and detailed engineering designs for 10 rehabilitation schemes, that will be initiated during the two first years of the project, are being prepared by a MA/FAO technical team. Preparation of other project components was begun in June 1993, supported by the Japan Policy and Human Resources Development Fund. The Government would establish a Rehabilitation Fund to finance the costs of the rehabilitation works described in paragraph 10 (b), and a Special Incentive Fund would be created with precise selection criteria and loan terms and guarantees, to finance the pilot program under paragraph 10 (d). Studies, technical assistance, and management support to JUs would be provided by qualified NGOs and private consultants. 10. Lessons from Previous Bank Involvement. The project would be the fifth irrigation project supported by the Bank. The first two loans (Ln. 114-PE of 1955 and Ln. 418-PE of 1965) financed irrigation works and land settlement in the San Lorenzo Area. A third one in 1986 (Loan 1403-PE) helped to rehabilitate/reclaim 40,000 ha in four coastal valleys; and the fourth, the Lower Piura Irrigation Rehabilitation Project (Loan 1771-PE), supported irrigation rehabilitation works in 34,000 ha in 1987 (credit suspended in 1987 for non-payment of arrears). The proposed project would move Bank lending in irrigation away from project- specific operations toward a sector-wide investment approach. Problems with project sustainability found in past projects are unlikely to occur given the strong commitment to the project as shown by willingness to undertake collateralized loans for financing 100 percent of the rehabilitation works. 11. Rationale for Bank Involvement. In addition to its financing role, the Bank will play an important role in helping the Government to develop and adhere to policies related to steps leading to a possible water market, to expenditures on large irrigation schemes, and to their possible privatization. It will also help in the institutional development efforts of the water user groups and public agencies involved in the project. Finally, it will help in ensuring that environmental aspects are adequately addressed. 12. Issues and Actions to be Agreed. The main issues to be addressed on the rehabilitation component during preparation relate to (i) the mechanism for fund operation; (ii) loan terms; (iii) cost recovery arrangements and collateral issues; (iv) financing of on-farm investments; (v) O&M standards; (vi) adequacy of agricultural support services; and (vii) environmental issues. On the policy side, an agreement needs to be reached on expenditures for the large irrigation schemes and for policies related to the privatization of large schemes, where feasible, and for steps leading to the possible development of a water market. 13. Environmental Aspects. During preparation a nation-wide assessment would be carried out to evaluate the potential impact of irrigation development on the environment. This should provide specific criteria for screening future investments in the subsector, as well as for monitoring any adverse environmental effects. 14. Benefits. The main benefits would be: (a) increased agricultural productivity and production; (b) increased and more stable incomes of beneficiaries; (c) social cohesion in the rural areas; and (d) improved conservation and management of water resources. 15. Risks. The demand for irrigation rehabilitation depends on the success of the Government's stabilization program. Many of the additional investments in irrigation could only be justified if the Sol continues to depreciate to a realistic level and if real interest rates continue to fall to reasonable levels. Another project risk could arise if there are additional delays in implementing the land titling and registration program. A third risk stems from the institutional and technical capabilities of the JUs to organize themselves to identify and implement the irrigation schemes. To minimize this risk, technical assistance will be provided to strengthen the JUs and public agencies involved in project designs and implementation. To avoid delays in project execution, final designs for first- year investments will be completed prior to appraisal. Contact Point - Public Information Centre The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 ________ Note: This is information on an evolving project. Certain components may not necessarily be included in the final project.  .