Document of

The World Bank

FOR OFFICIAL USE ONLY FILE COPY

Report No. P-3075-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

EMPRESA DE ELECTRICIDAD DEL PERU, S.A.

WITH THE GUARANTEE OF THE

REPUBLIC OF PERU

FOR A

POWER ENGINEERING PROJECT

June 1, 1981

This document has a restricted distribution and may be used by recipients only in the performance oftheir ofAicial duties. Its contents may not otherwise be disclosed witbout World Bank authorizstion.

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CURRENCY EQUIVALENTS

The exchange rate is being adjusted daily roughly in line with the differentialbetween domestic and international inflation. The exchange rate and currencyequivalents in 1980 and as of April 30,1981 were as follows:

Currency Unit = Sol (SI.)

Calendar 1980 April 30, 1981

US$1 S I/. 288.65 S/.404.86S/.1 = US$ 0.0035 US$0.0025S/. 1,000 = US$ 3.46 US$2.47

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS

CENTROMIN Empresa Minera del Centro del Peru, S.A.(Central Peru Mining Company)

COFIDE Corporacion Financiera de Desarrollo(State Development Finance Corporation)

DGE Direccion General de Electricidad(General Directorate of Electricity of the Ministry of

Energy and Mines)

ELECTROLIMA Lima Power company

ELECTROPERU Empresa Publica de Electricidad del Peru, S.A.(National power company)

ERP Economic Recovery Program

GW Gigawatt (1000 MW)

HIDRANDINA Energia Hidroelectrica Andina, S.A.(Andean Hydroelectric Energy Company)

IDB Inter-American Development Bank

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

MW Megawatt (1000 KW)

PPAR Project Performance Audit Report

PETROPERU Petroleos del Peru, S.A.(National petroleum company)

UNDP United Nations Development Program

USAID United States Agency for International Development

FOR OFFICIAL USE ONLY

REPUBLIC OF PERU

POWER ENGINEERING PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Empresa de Electricidad del Peru, S.A.(ELECTROPERU).

Guarantor: Republic of Peru.

Beneficiaries: ELECTROLIMA, Empresa Minera del Centro del

Peru, S.A. (CENTROMIN) and Energia Hidroelectrica

Andina, S.A. (HIDRANDINA) would, in addition toELECTROPERU, carry out studies under the project.

Relending Terms: ELECTROPERU would on-lend part of the proceedsof the loan to CENTROMIN (US$3.0 million),HIDRANDINA (US$2.6 million) and ELECTROLIMA(US$0.9 million) on the same terms and conditionsas those of the proposed loan.

Amount: US$25.0 million, equivalent.

Terms: Repayable in 17 years, including 4 years of graceat 9.6 percent interest per annum.

Project Description: The objectives of this operation are: (i) toassure the adequate and timely preparation of powerprojects (mostly hydro), whose construction mustbegin within the next two to four years to meetaccelerating power demand in Peru with a minimumof dependence on thermal generation; and (ii) tostrengthen power sector planning capacity. Theseobjectives would be accomplished through:

(a) the preparation of prefeasibility and feas-ibility studies as well as bidding documentsand final design, as required, for 12hydroelectric projects. The feasibility of theproposed Olmos power/irrigation project wouldalso be reviewed;

(b) the completion of the feasibility study andpreparation of bidding documents for a trans-mission line serving northern Peru and prepara-tion of a feasibility study and bidding docu-ments for an oil-fired thermal generatingplant of up to 200 MW for Lima; and

(c) technical assistance to improve the planningcapability of the principal sector entity -ELECTROPERU.

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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This project involves no special technical risksbut its prompt execution does depend on thesuccess of measures now being taken by theGovernment to improve the technical and managementcapacity of ELECTROPERU. Government efforts willbe supplemented by technical assistance to beprovided under the proposed Project.

Estimated Cost: The estimated cost of the project, exclusive oftaxes and duties, from which the project would beexempt, is as follows:

Local Foreign Total--------US$ millions…--------

ELECTROPERU 8.5 14.0 22.5Hydroelectric project studies 7.5 8.3 15.8Oil fired thermal plant 0.5 4.0 4.5Transmission line 0.5 1.0 1.5Technical assistance - 0.7 0.7

ELECTROLIMA 0.5 0.7 1.2Hydroelectric project studies 0.5 0.7 1.2

HIDRANDINA 2.4 2.0 4.4Hydroelectric project studies 2.4 2.0 4.4

CENTROMIN 0.5 2.5 3.0Hydroelectric project final design 0.5 2.5 3.0

Baseline costs 11.9 19.2 31.1Physical contingencies 1.2 1.9 3.1Price contingencies 2.6 3.9 6.5

Total costs 15.7 25.0 40.7

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

Bank -- 25.0 25.0Utility Companies 15.7 -- 15.7

15.7 25.0 40.7

Estimated Disbursements: Bank FY 1982 1983 1984 1985---------US$ mil ion--------

Annual 9.4 11.2 3.5 0.9Cumulative 9.4 20.6 24.1 25.0

Rate of Return: Not applicable.

Appraisal Report: None.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

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

TO THE EMPRESA DE ELECTRICIDAD DEL PERU, S.A. (ELECTROPERU)WITH THE GUARANTEE OF THE REPUBLIC OF PERU FOR A

POWER ENGINEERING PROJECT

1. I submit the following report and recommendation on a proposed loanto the Empresa de Electricidad del Peru, S.A. (ELECTROPERU) with the guaranteeof the Republic of Peru for the equivalent of US$25.0 million to help finance

a power engineering project. The proposed loan would have a term of 17 years,including 4 years of grace, with interest at 9.6 percent per annum. US$6.5million of the proceeds of the proposed loan would be relent by ELECTROPERUon the same terms and conditions as the Bank loan to three other companiescarrying out studies under the project.

PART I - THE ECONOMY 1/

2. An economic report entitled "Peru-Major Development Policy Issuesand Recommendations" (Report No. 3438-PE) was distributed to the ExecutiveDirectors on May 4, 1981. This part is based on the report's findings andon those of more recent economic missions to Peru. Country data sheets areattached as Annex I.

Natural and Human Resources

3. Peru, the fourth largest country in Latin America, is divided bythe Andes mountains into three distinct regions: the coastal region (Costa),with 46 percent of the population and where modern economic activity is concen-trated; the mountain region (Sierra) with 44 percent of the country's popula-tion; and the sparsely populated tropical rain forests east of the Andes(Selva). The country's rugged topography limits trade between the threeregions.

4. Peru's natural resources include large deposits of minerals--particularly copper, iron, silver, and zinc--located mainly in the Sierraand the southern Costa. There are also large phosphate deposits, located inthe northern Costa. Petroleum resources found in the jungle areas andoffshore are also substantial, but their full extent has not yet been ascer-tained. Another major natural resource is the large fishing potential incoastal waters, although the magnitude of the catch is subject to sharpfluctuations. Agricultural land is limited, and most of the soils suitablefor intensive agriculture are already being farmed.

1/ This part is substantially unchanged from the Second Industrial CreditProject President's Report of March 19, 1981 (Report No. P-2995-PE);however, minor changes have been introduced in paras. 23 and 24.

5. Crude oil is the dominant source of energy in Peru, supplyingapproximately 80 percent of Peru's commercial energy requirements. AlthoughPeru's energy resource base is relatively diverse, with scope for expandinghydro and coal based power generation, petroleum is expected to be the majorenergy source in Peru through the rest of this century. After having beendependent on imported crude oil for many years, domestic oil productionincreased almost threefold between 1976 and 1979 to about 200,000 barrels perday, enabling Peru to export oil in substantial quantities (about 70,000barrels per day). Despite this encouraging production trend, domesticconsumption is rebounding after several years of stagnation, and Peru mayonce again become a net importer of petroleum in the mid-1980s unless newoil reserves are discovered and rational pricing policies adopted to containdemand growth. The Government has begun to address the problem vigorously.Prices for domestically consumed petroleum products were steeply increased,and new legislation was enacted offering special tax incentives to investors.Response to the tax incentives has been positive.

6. As a result of three decades of rapidly falling mortality rates,Peru's population growth accelerated during the 1930-1960 period. In theearly 1960s, however, birth rates started a gradual fall, mainly caused by theurbanization process and by improved education. But with declining deathrates, population has continued to grow at about 2.7 percent p.a. and iscurrently estimated at about 17 million. It is expected that populationgrowth will fall only slightly to about 2.6 percent p.a. over the next 20years, unless an effective demographic policy is adopted. The Government isconscious of the need to slow down Peru's demographic growth rate and is nowdeveloping a primary health care program which would contain a family planningcomponent. The urban population is increasing at 4.5 percent p.a., and over4 million people are concentrated in Lima. Given the structure of Peru'spopulation, the labor force is expected to grow in excess of 3 percent peryear during the next 20 years.

Past Development Policies and Performance (1968-78)

7. The military Government, in office from October 1968 until July 1980,followed a development strategy aimed at promoting economic growth and improv-ing distribution of income and wealth, not only on the individual level butalso between regions. To achieve these goals, the Government expanded therole of the State in the economy, changed the pattern of asset ownership,reduced foreign ownership of national resources, oriented industry and agri-culture toward production of essential goods for the domestic market, stimu-lated regional deconcentration, and reformed the educational system. Throughnationalization and creation of new enterprises, the State took direct controlof key economic sectors. Moreover, the Government imposed complex legislationto control the operations of the private sector.

8. The pattern of asset ownership in the economy changed drastically.Through nationalization, the share of foreign-owned assets fell sharply. Asweeping land reform redistributed 49 percent of the country's best farmlandto workers' cooperatives benefitting some 30 percent of all rural families.Through other laws, industrial workers were given shares in their employers'firms and, in the mining sector, a share in profits. While these actionsbenefitted large numbers of Peruvians, they barely reached the poorest groups,which continue to live in abject poverty. It is estimated, for example, thatalmost three quarters of rural families--mostly "minifundistas" (those farmingless than 2 ha) and landless seasonal workers--were not reached by social

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programs. Moreover, subsidies were given to products that were more importantin the consumption basket of high and middle-income groups than in that of thepoorest groups. Artificially low prices for some products--such as muttonand cereals--actually hurt the poor who produced these items, and affectedproduction negatively. Although many of the policies and structural changescarried out after 1968 were meant to achieve rapid growth and more equality,the cost of these measures proved to be excessive and their implementationinefficient.

* 9. Between 1968 and 1977, the Government followed expansionary fiscaland credit policies. A rapid increase in expenditures was not matched by aparallel increase in revenues. Public sector savings dropped steadily inrelation to GDP from 4.4 percent in 1970 to dissavings of 2.6 percent in 1977.Major causes were the erosion of the tax base owing to excessive tax incentives,loopholes, weak enforcement, rising budgetary cost of subsidies for foodstuffsand petroleum products, and sharp increases in defense outlays. At the sametime, public investment expanded rapidly and was increasingly concentrated oncapital-intensive projects with long gestation periods and little immediatecontribution to the growth of output or employment.

10. Pricing, interest rate and foreign exchange policies encouragedconsumption and discouraged savings, exports and sometimes overall production.The problems were exacerbated by circumstances beyond the control of theauthorities such as the sharp drop in the catch of anchovies, the fishingindustry's mainstay, and the sharp deterioration in Peru's terms of tradebetween 1974 and 1978. As a result, aggregate demand considerably exceededaggregate supply. Excess demand, in turn, led to strong inflationary pressuresand widening external gaps.

11. 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 dramatic-ally from 16 percent of GNP in 1970 to 8 percent in 1977, when they financedonly about one-half of investment.

12. 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. At year-end 1977, Peru's total private andpublic external debt--including short-term indebtedness--stood at almostUS$8.3 billion, equivalent to two-thirds of GDP and almost four times exportsof goods and non-factor services. Much of this debt was contracted on fairlyshort maturities. Three-fourths of the US$6.4 billion long-term public sectordebt (including undisbursed) was scheduled to be repaid over the 1978-82period.

13. Following the 1968-74 period of rapid expansion during which GDPgrew by more than 6 percent per year, the growth rate dropped progressivelyand became negative in 1977 and 1978. GDP (at constant 1973 prices) fell by0.1 percent in 1977 and a further 0.7 percent in 1978. In this two-year

period, GDP per capita dropped by over 6 percent and unemployment or under-employment is believed to have risen to almost 60 percent of the labor force,up from less than 50 percent during the early 1970s. According to Governmentestimates, the purchasing power of an average salary had fallen 40 percent by1978 compared to 1970 and that of an average wage by over 16 percent.

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

14. From 1975 on, several unsuccessful attempts were made to copewith Peru's deteriorating economic situation. By mid-1978 the economiccrisis had reached grave proportions, with a drop in real GDP and inflationapproaching 100 percent. Moreover, the private sector was finding it increas-ingly difficult to open letters of credit for new imports and the bankingsystem's net international reserves had dropped to a negative level of US$800million. Financial instability had reached the point where practically alleconomic activities were adversely affected. The public sector was fastapproaching the point where it would no longer be able to fully service itsexternal debt. Peru was no longer creditworthy.

15. Beginning in May 1978, the Government adopted a number of importantmeasures aimed at strengthening public finances, improving the balance ofpayments and curbing inflation. It also reached an agreement with foreigncommercial banks to reschedule US$185 million of principal payments due in thesecond half of 1978 until January 1979. Moreover, the Government negotiated astand-by arrangement with the IMF for SDR 184 million. In July 1979, thisstand-by was replaced by a new one for SDR 285 million in support of the samefinancial program. Peru's debt outstanding to the IMF as of January 31, 1981amounted to SDR 617.5 million.

16. Major debt-relief operations carried out in late 1978 enabled Peruto reduce the debt-service burden for 1979 and 1980 by postponing repayment tothe 1982-1986 period. In May 1978, the Soviet Union rescheduled the equivalentof about US$140 million of maturities originally due in 1978-80. These amountsare to be repaid over a 10-year period including three years of grace. InNovember 1978, at a Paris Club meeting, the OECD countries agreed to reschedule90 percent of principal payments due by the public sector to governments andguaranteed suppliers in 1979 (US$250 million) and 1980 (US$263 million).These amounts were to be repaid over a period of eight years, including threeyears of grace. The Paris Club creditors also agreed to reschedule 90 percentof the principal payments due in 1979 and 1980 on private sector debt guaran-teed or insured in the creditor countries (about US$30 million in each year).In addition, Peru negotiated smaller amounts of debt relief with non-OECDcountries. At the end of 1979, however, in view of the improved balance ofpayments situation, the Government decided to forego the Paris Club debtrescheduling option for 1980.

17. 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 15 above).The agreement gave the Government the option of refinancing up to 90 percentof the maturities due in 1979 and 1980. Again, in view of the strong balanceof payments performance, the Government decided not to take advantage of therescheduling of 1979 maturities, thus obtaining slightly better terms on therefinancing of 90 percent of the 1980 maturities.

18. To overcome the economic recession, the Government adopted a morecomprehensive Economic Recovery Program (ERP), which, in addition to theabove-mentioned stabilization actions, included measures to open up theeconomy, promote non-traditional exports, strengthen the tax system by broad-ening its base, and generally improve the efficiency of resource allocationin the private and public sectors. Import liberalization was the most im-portant element of the ERP and is expected to have salutary long-term effectson the economy. The Government also drew up a public sector investment programthat aimed at redirecting investment towards projects of clear economicpriority and with positive effects on production and employment. In supportof the ERP, the Bank approved a US$115 million program loan in May 1979.Progress in carrying out the ERP has generally been satisfactory. Performancein some critical areas--e.g., export promotion and import liberalization--exceeded expectations. In other areas--e.g., improvements in the quality ofpublic investment and in raising interest rates--progress was more modest.

19. The Government's stabilization-cum-economic recovery programresulted in a strong improvement in public sector finances 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 reduction in excessivecivil service employment. Public sector current account savings rose from -0.7 percent of GDP in 1978 to about 3.6 percent of GDP in 1979, and the overalldeficit was reduced from 6.4 percent of GDP in 1978 to 2.9 percent in 1979.In spite of the good fiscal performance, however, inflationary pressures haveremained strong, with consumer price increases of 67 percent in 1979 and ofabout 60 percent in 1980.

20. The implementation of stabilization measures and of the ERP hada positive impact on the balance of payments. Moreover, an increase inpetroleum exports, substantial price increases for silver, copper, petroleum,and other commodities, as well as the relatively low level of imports becauseof the recession led to high overall surpluses of the balance of payments in1979 and 1980. At year-end 1980, the net reserve position was estimated atabout US$1.8 billion, equivalent to over 5 months of imports. Peru also madegreater use of assistance from official bilateral and international sourcesthus improving the structure of its external debt. The short-term debt ofless than one year, already sharply reduced from US$1.8 billion at year-end1978 to US$1.1 billion at year-end 1979, is expected to be further reduced asthe gradually improving economic situation permits new medium-term creditlines to be opened. Real GDP growth in 1979 was 3.5 percent. Growth of some3 percent is estimated in 1980 owing, in part, to a drought which affected theagricultural sector.

Outlook

21. In July 1979, the military Government promulgated a new constitution,written by a popularly elected constituent assembly. Elections were held inMay 1980, and the transfer of authority to the Government of President FernandoBelaunde took place on July 28, 1980. The new Government faces a challengingeconomic and social situation. Although the stabilization-cum-economic recoveryprogram (1978-80) has resulted in an improved financial situation and has laid

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the ground for more efficient resource use, the present economic situation ischaracterized by a number of acute problems such as persistent high inflation,high un- and underemployment, stagnating agricultural and petroleum production,a deteriorated pattern of income distribution, food and petroleum subsidies,and an inherited rigid structure of Government expenditures with relativelylow expenditures for economic and social purposes and high outlays for interestpayments and defense. Peru also faces severe long-term problems like wide-spread poverty, poor state of health and nutrition, rapid population growth,severe water and land resource constraints, rapidly expanding demand forenergy and potable water, and the low degree of integration between thedifferent parts of the country. These problems call for urgent correctivemeasures. Tackling them all will be difficult given overall resource scarcityand particularly the very limited public sector resource availabilities.

22. The new Government has a capable economic team which is committed toeconomic efficiency, decontrol, promotion of the private sector, and policiesconducive to a more equitable sharing of the benefits of development. Duringthe first few months in office, the Government took important economic policymeasures such as the elimination of import licenses, tariff cuts, major upwardprice adjustments--particularly for domestically consumed petroleum, power,and food items--adoption of higher interest rates, a new agricultural promotionlaw, and others. Moreover, it enacted a new petroleum law giving tax incentivesto promote new petroleum exploration, and it is preparing programs to improvethe situation in health, housing, and transport. Important efforts have alsobeen made to work out a five-year public investment program that responds tothe country's needs and resource availabilities. In this context, the creationin November 1980 of PROINVERSION, a committee attached to the Prime Minister'soffice and in charge of coordinating all efforts related to public investmentincluding foreign financing, is an important initiative to improve the effi-ciency of resource use.

23. To tackle the most difficult short-term problems, inflation (runningat over 60 percent per year) and the precarious public finance situation (withan overall public sector deficit equivalent to some 6 percent of GDP in 1980),the Government is following a restrictive financial program for 1981 withtight credit ceilings and limits to foreign indebtedness.

24. Based on cautiously optimistic assumptions with regard to economicmanagement and commodity prices, the country is expected to have economicgrowth of about 5 percent per year and a manageable balance of paymentssituation during the next two years. The balance of payments situationcould, however, become precarious, if the exportable surplus of oil declinesand if imports further accelerate as a result of the import liberalizationand economic recovery process. While measures are being undertaken to speedup petroleum exploration and to increase manufactured exports, these may notlead to the expected results in time to countervail the potential foreignexchange shortfalls. Against this background, there is a continuing needfor official development assistance. Considering the above, a debt serviceratio hovering around the 30 percent mark and assuming that the authoritiescontinue the initiated course of economic policies, Peru is creditworthy forBank lending.

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PART II - BANK GROUP OPERATIONS IN PERU

25. The Bank has approved 42 loans to Peru for a total amount of US$909.8

million, net of cancellations. About 31 percent of the Bank's lending to Peruhas been for transportation (mainly highways and ports), 20 percent foragriculture, 15.4 percent for the energy sector, 16 percent for mining andindustry, about 5 percent for education and urban development, and 12.6

percent for the US$115 million program loan of May 1979.

26. As of April 30, 1981, US$368.7 million was undisbursed on Bank

loans currently in execution. (Annex II contains a summary statement of Bankloans as of April 30, 1981, and notes on the execution of on-going projects.)Disbursements on Bank financed projects moved slowly in the late 1970s,

primarily because of weak project execution capacity and a shortage of counter-part funds that worsened as the economy deteriorated during this period. In

an effort to improve disbursements: (i) the Bank opened a resident mission inPeru; (ii) the Executive Directors approved modifications in the Education and

the Lima/Amazon Corridor Projects (see Annex II for further details); (iii) theGovernment provided adequate counterpart funds in 1979 and 1980; and (iv) theGovernment also set up a special commission to monitor loan execution and

resolve administrative problems. With these actions, the pace of disbursementis now increasing; about US$44.0 million was disbursed on project loans inFY1980 and US$47.5 million during the first three quarters of FY1981. This

compares with average yearly disbursements of US$27.5 million during FY1977-79.

27. The main objectives of Bank lending to Peru have been to assistin (i) the creation of the physical infrastructure needed to sustain andfoster economic development; (ii) the expansion of productive capacity incrucial sectors; (iii) the consolidation of structural and institutionalchanges, particularly land and education reforms; (iv) the strengthening,through technical assistance loans and regular operations, of local capacityto prepare, implement and operate projects effectively; and (v) the improve-ment of living conditions for the urban and rural poor. In the past, Banklending concentrated on infrastructure in the transportation and power sectors.More recently, the Bank's emphasis has shifted to more directly productivefields -- mining, agriculture and industry -- to help Peru to strengthen its

balance of payments. Lending for social projects has also grown. As part ofits assistance strategy, the Bank convened a Consultative Group Meeting forPeru on May 25-26, 1981 to help the Government arrange financing for its

public investment program.

28. The next operations that would be ready for the Executive Directors'consideration include projects in road improvement and rehabilitation,small-scale industry, urban development, and health. This program hasbeen reviewed with the Government and is in line with its priorities.

29. Bank loans constituted an estimated 4.0 percent of Peru's totalpublic external debt outstanding and disbursed at the end of 1979, and absorbedabout 3.3 percent of the country's external debt service in 1979. Assuming

increased recourse to long-term bilateral and multilateral aid by Peru, theBank's share in the country's outstanding public foreign debt by 1985 couldreach about 10 percent, and its share of debt-service would be around 4.5

percent.

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30. IFC commitments as of April 30, 1981 were US$29.7 million (includingUS$15 million to the Southern Peru Copper Corporation for the Cuajone CopperMining Project) of which US$15.4 million is held by the Corporation. A summarystatement of IFC investments as of April 30, 1981 is presented in Annex II.

31. The other principal lending agencies active in Peru are the Inter-American Development Bank (IDB) and the United States Agency for InternationalDevelopment (USAID). IDB is expected to emphasize lending for agriculture,industry, mining, roads, and small scale irrigation. In its future lending,USAID is expected to stress rural development and health. Total loan commitmentsas of December 31, 1980 by IDB and USAID were US$652.4 million and US$348.6million, respectively, and their shares of debt service as of end-1979 were bothestimated at 0.6 percent.

PART III - THE ENERGY SECTOR

Energy Balance and Resource Base

32. Peru's energy resource base is large and diverse, but relativelyunexploited. Oil currently provides about 80 percent of the country's commer-cial energy requirements and 54 percent of total energy requirements. Known(proved and probable) oil reserves total about one billion barrels andestimates of undiscovered reserves range from two to twenty billion barrels.There is no reliable estimate of coal reserves, which are currently almostcompletely unutilized. Gas reserves are estimated at only one to two trillioncubic feet. Warm and boiling springs exist in many parts of the country butthe magnitude of geothermal resources is unknown.

33. Despite Peru's heavy dependence on oil, its most significant poten-tial sources of primary energy are its hydropower and forest resources. Arecent survey of Peru's hydroelectric potential enumerated about 100 tech-nically feasible hydroelectric projects with a combined output of 200 GW,about 85 percent of which is in the country's Atlantic watershed. Econo-mically exploitable hydro resources total about 60,000 MW, of which only1,654 MW are presently being used. Peru's forests have a primary energypotential much greater than total national energy consumption and, if properlymanaged, could supply an increased percentage of energy requirements.

34. According to a 1978 UNDP study, Peru's 1976 gross energy balance wasas follows:

Primary energy source % share End use 1/ % share

Oil 54.4 Residential and commercial 33.6Firewood and dung 29.6 Industry and mining 25.8Hydropower 5.9 Transportation 20.9Natural gas 5.5 Agriculture and fishing 9.2Bagasse 4.2 Other 10.5Coal 0.4

100.0 100.0

I/ Total energy consumption amounted to ten million tons of oil equivalentin 1976.

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35. Until recently, the Pacific watershed's hydro potential and thenorthern coastal oil reserves were sufficient to satisfy demand for power inurban areas. These sources are no longer adequate, however, and in the futurehydroelectric, oil and biomass resources of the Atlantic watershed will increas-ingly have to be tapped. Since these are far from the demand centers and moredifficult to develop, energy will become more expensive.

36. Oil. Peru is one of the world's oldest oil producing countries andwas self-sufficient in petroleum for many years. During the 1950s, however,with domestic prices for petroleum products as well as producers' margins atlow levels, domestic consumption began to outstrip lagging production.As a result, Peru became increasingly dependent on crude oil imports in the1960s and 1970s. In the late 1970s, following the discovery of oil in Peru'sjungle, oil output began to increase substantially. By mid-1978 Peru was onceagain self-sufficient in oil and production had climbed to 207,000 barrels perday in 1980, 37 percent of which was exported. Domestic demand, however, islikely to increase as the economy recovers from the severe recession of thelate 1970s and the country could again become an oil importer by the mid-1980s.If this is to be avoided, new oil reserves must be discovered and developed,production of existing fields must be maintained and domestic petroleum pricesmust be increased to discourage wasteful consumption. To spur explorationefforts, the Government has taken measures, including improved tax incentives,to attract foreign oil companies to Peru. A contract has been signed with onefirm and negotiations are underway with a number of others. Moreover, tosupport the development of Peru's petroleum sector, the Bank made a loan ofUS$32.5 million in February 1980 to PETROPERU, the State-owned nationalpetroleum company, to help finance rehabilitation of existing producing wells,reactivation of temporarily abandoned wells and development of new productionpotential (Ln. 1806-PE).

37. The Government has been making an effort to achieve reasonabledomestic prices for petroleum products with quarterly increases, but prices inreal terms are still below international levels (84 octane gasoline retails forabout US$0.90 per gallon). The Government has announced its intention to continueregular price increases in order to achieve a regular gasoline price of US$1.20!gallon by end-1981.

38. Coal. The last year that coal was mined in Peru was 1973. The mainreasons for the cessation of coal production were the rising costs of miningand competition from oil, whose domestic price was subsidized. Initial studiesindicate that coal deposits are generally of low quality and range from ligniteto anthracite. Most deposits are considerably less than a meter thick, althoughthicker coal beds with some economic potential are found in central and northernPeru. There is no detailed study of the size or quality of coal reserves andthe Bank is now exploring with the Government the possibility of a technicalassistance loan to further examine Peru's coal potential.

39. The coal field that has received most attention is Alto Chicama, whereproven and probable reserves total about 60 million metric tons and possiblereserves are estimated at about 210 million metric tons. The State-owned

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national power company, ELECTROPERU, has carried out preliminary studies onthe use of Alto Chicama coal to fire a possible 480 MW power plant. Currentknowledge of the Alto Chicama coal reserves is, however, insufficient to firmup plans for such a plant and further studies are required to determine thetechnical and economic feasibility of the project.

40. Other Sources. Sixty percent of Peru's land surface is coveredby natural and cultivated forests (99 percent in the Selva region), which area major source of energy--particularly in rural areas--where charcoal andfirewood are the principal fuels. Depletion of wood resources in the Sierrais a growing problem, however, and charcoal production has been prohibited bylaw, although some still takes place. While the Government is consideringreforestation projects for the Sierra, it has not yet adopted any formalpolicy on the development of wood and other biomass energy sources. Ithas also not adopted policies on the development and use of renewable energytechnologies. Some experiments have been mounted, however, particularly withwind turbines for water pumping, solar distillation and drying, solar waterheaters and cookers and mini-hydro plants. Most of the effort has focussed onminihydro technology and several projects are under way. Finally, the PeruvianInstitute of Nuclear Energy is conducting research on nuclear energy using asmall reactor. Argentina is providing Peru with a larger research facility,including a 10 MW reactor, but Peru's 1981-85 public investment program doesnot envisage construction of a commercial nuclear power plant.

Sector Organization

41. The Ministry of Energy and Mines (MEM) has responsibility forcoordinating all energy planning activities and for setting prices in theenergy sector. Operational responsibility is divided among various publicenterprises under MEM's aegis. PETROPERU is responsible for all phases of pro-duction and distribution of petroleum products, although several foreign oilcompanies are currently carrying out petroleum exploration and developmentactivities under contract to PETROPERU. In the electric power subsector, thetwo most important operating entities are ELECTROPERU, which is charged withdeveloping power generation projects, and ELECTROLIMA, the State-owned electriccompany which serves the Lima metropolitan area (accounting for about 60 percentof the market).

42. In recent years MEM has received an appreciable amount of technicalassistance in the energy planning field. This assistance has included anenergy balance study (completed in 1976 by the UNDP)and an assessment of re-sources and planning (done in 1979 by the US Government). The German Governmentfinanced a survey of hydroelectric potential in 1979 and has, together with theBank under the Fifth Power Loan (Ln 1215-PE of 1976), financed a power sectormaster plan, completed in 1980, in order to develop a least cost investmentprogram for the sector. MEM thus has sufficient knowledge of the country'senergy situation -- except in the areas of coal resources and geothermalpotential -- to develop a comprehensive resource development program. Theaims of such a program should be to minimize the consumption of oil throughconservation measures and the substitution of oil use by hudroelectric powerand coal where possible. The Government is now considering creation of anational energy council to develop and coordinate sector policies.

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The Electric Power Subsector

43. Electric Power Facilities. Despite its hydroelectric potential,national electric energy production remained at a fairly constant 70/30hydro-thermal ratio throughout the 1970s. As the national system is extendedto isolated regions and to mining companies where thermal generation nowpredominates, the hydroelectric component is expected to increase.

44. Public power companies meet about 70 percent of Peru's totalelectric energy demand. The remainder is supplied by captive plants servingindustrial and mining installations. The country's principal power gridis the Central-North interconnected system, which comprises about 1,500 MWof hydroelectric and 300 MW of thermal generating capacity. It represents63 percent of the total 2,860 MW of generating capacity in Peru and80-90 percent of the public service system. The latest extension of theCentral-North system consists of a 220-kV transmission line, which wascompleted in early 1981, linking Lima with Chimbote and Trujillo, twoimportant cities on Peru's northern coast. This system will be extendedas far north as Piura during this decade, incorporating in the process thehydro installations of CENTROMIN, a State-owned mining company, by 1982 andvarious cities in the northern coastal zone by 1987. By 1990, the only largesystems that would remain outside the main power grid would be those servingthe southwest (Arequipa-Tacna), the southeast (Cuzco), and the major citiesof the Selva (e.g., Iquitos and Pucallpa).

45. Electric Power Demand. Because of Peru's economic difficultiesin the late 1970s, power demand dropped from the normal growth level of eightpercent p.a. registered in the early-and mid-seventies to 4 percent. Based ona recent market study financed by the Bank under Loan 1215-PE and trends overthe past 12-18 months, demand is projected to rebound and grow at eight percentp.a. through 1990. Because of the weakness of sector institutions (see paras.47-48 below), however, insufficient work has been done on preparing hydroelectricprojects and Peru now faces the need to develop such projects on an acceleratedbasis if it is to avoid the large-scale installation of thermal plants to meetresurgent demand.

46. Principal Entities. Prior to 1972, the public utility portion ofthe subsector was composed of private, municipal and State entities servingconcession zones or regions; no national sector planning or coordinationexisted. Captive plants serving large mining and industrial installations,which accounted for about 40 percent of total electricity generation, weregenerally not interconnected with public-service systems.

47. The Electricity Law of 1972 made the State the principal authorityin the sector. Under this Law, MEM was given responsibility for power sectorpolicy formulation, for the authorization of investments, and for regulation andtariff setting. The Ministry's General Directorate of Electricity (DGE) carriesout these functions. Through most of the 1970s, DGE was a weak entity. Itexperienced excessive turnover of high-level personnel because of low salariesand thus did not exert a leadership role in the sector. The power sector masterplan (see para. 42 above), for which DGE was responsible, was not completed untillate 1980, in part because of DGE's lack of technical and administrativecapacity and is only now being adopted by MEM and the principal utility companies.

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48. The 1972 Electricity Law also created ELECTROPERU, provided forState participation in existing private utilities (by far the largest ofwhich was the predecessor company to ELECTROLIMA) and provided for intercon-nection of power systems. The law gave ELECTROPERU responsibility for planning,engineering, construction and operation of all new generating facilitieslarger than 10 MW and for the development and construction of the transmissionnetwork. Despite the Law's provisions, ELECTROPERU has not been able to dischargeeffectively many of the responsibilities assigned to it because, as a State enter-prise subject to salary limitations and cumbersome administrative procedures, ithas had difficulty in attracting and retaining highly qualified and motivatedpersonnel. The DGE has remained responsible for planning -- including the recentlycompleted master plan -- and major investment decisions have been taken by theGovernment.

49. Several steps are under way to clarify sectoral responsibilities andto improve ELECTROPERU's operations. Legislation was, for example, recentlyenacted placing ELECTROPERU under the law governing private corporations,as is the case for most other power sector public utilities. This givesELECTROPERU the autonomy it needs to raise salaries and begin resolving itsstaffing and managerial problems. To further strengthen the company, fiveindividuals -- probably expatriates -- would be financed by an IDB loan to serveas advisers and deputies to ELECTROPERU's general manager for several years andprovide on-the-job training to the titular deputy managers. Finally, the Bankloan proposed in this report would provide training and support for ELECTROPERU'splanning unit.

50. ELECTROLIMA is the distribution company for metropolitan Lima andoperates a number of generating facilities, some of which were financed byprevious Bank loans to Peru. HIDRANDINA, which is still about 10 percentowned by private interests, owns and operates two of the hydroelectric plantsserving the ELECTROLIMA system. CENTROMIN has developed an electric powersystem as an adjunct to its mining operations. All three companies arecapable and have qualified personnel. Small power companies, owned by theState since the mid-1970s, serve Peru's smaller cities.

Subsector Reorganization

51. Subsector organization studies were carried out in 1979 and 1980,financed by the Bank under Loan 1215-PE and by the IDB. With the input fromthese studies, the Government is preparing a reorganization of the electricpower sector, which would make it more effective. Under this proposedreorganization, which has been preliminarily reviewed by the Bank and foundto be satisfactory, ELECTROPERU is expected to continue running its existinggenerating plants but would also become a holding company for regional generation/distribution entities responsible for constructing and operating new generatingplants.

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Subsector Finances

52. Based on the net income-to-equity ratio traditionally used in Peru,or on the return-on-net assets test generally used in most Latin Americancountries to measure financial performance of electric utilities, the powersector's results have not been satisfactory. In recent years earnings havebeen lower than necessary to provide the resources to finance the largeinvestment program the country must undertake. In the 1975-78 period, thereturn on equity of all sector entities, except one small distribution company,did not exceed four percent per annum in real terms. In 1979 ELECTROPERU andELECTROLIMA, which account for most of the sector, earned about 4.5 percent and8.5 percent, respectively, on average revalued net assets, which was equivalentto three to four percent on equity in each case (ELECTROLIMA had higher interestcharges). For 1980, the power sector's net income was negligible. This contrastswith an 11 percent return on equity permitted by the 1955 electric industry law,which, although still applicable, has not been followed since 1972. WhileELECTROLIMA's contribution to expansion was adequate in 1978-1979 because of itslimited investment program, ELECTROPERU --which is the principal investor in thesector-- contributed only three and ten percent, respectively, in those yearsand has required Government contributions to pay for its large expansion program.Financial statements and key financial ratios for 1978-79 for ELECTROPERU,ELECTROLIMA and HIDRANDINA are included as Annex IV.

53. The Government is attempting to improve this situation. Sincethe beginning of 1981, it has put into effect tariff increases of about 10percent in real terms. Its goal for the power sector is to continue to raisetariffs on a quarterly basis sufficiently to permit sector institutions to makea 30 percent contribution to expansion from net internal cash generation byend-1983. If, as is currently expected, the Bank is requested to help financesome of the major hudroelectric projects to be prepared under the proposed pre-investment studies project and initiated next year, the Bank would at that timereview the power sector's financial situation and seek to reach agreement onsatisfactory financial goals in connection with a possible Bank loan.

ELECTROPERU's Finances

54. Despite low levels of earnings in the past (averaging less than onepercent per annum on equity in 1975-78 and about four percent in 1979), ELECTRO-PERU's financial position is now strong. At year-end 1979, its ratio of long-term debt to equity was 26/74 and its debt-service coverage ratio was 1.4/1.The main reason for this strength, however, is that the Government has assumedresponsibility for all debt incurred for the construction of ELECTROPERU's majorinvestments in the past. Under current policy the Government will not assume anyfurther ELECTROPERU debt. An adequate policy on tariffs will be required, there-fore, if ELECTROPERU's debt service coverage ratio is to remain at a satisfactorylevel and if it is to be in a position to self-finance 30 percent of its invest-ment program by end-1983. A more complete analysis of the past financialperformance of ELECTROPERU, as well as of ELECTROLIMA, CENTROMIN and HIDRANDINAis contained in Annex IV.

Previous Bank Lending for Energy

55. The Bank has made five loans amounting to US$102.5 million for powerdevelopment in Peru. Three loans, totaling US$56.5 million, were for hydroelectric

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projects for the Lima area and two, totaling US$46.0 million were for expansionof the Lima distribution system. ELECTROLIMA and its predecessor company,Empresas Electricas Asociadas, were the beneficiaries of all the loans. In1980, the Bank made its first petroleum loan to Peru (see para. 36).

56. Execution of the first four power projects was generally satisfac-tory. A Project Performance Audit Report (PPAR) has only been done for theFourth Project (Ln. 511-PE of 1967). This Report (SecM 75-682 of September23, 1975) indicates that the project was completed about a year late and witha large cost overrun. The delay was caused by Empresas Electricas Asociadas'financial problems and the 1968 change in Government. The cost overrun wasthe result of higher than expected price increases during the period. Onceproject execution got underway, however, performance was good. The project'srate of return was above the 12 percent expected, primarily because of theincrease in oil prices in 1973.

57. The Bank's most recent power loan to Peru, the US$36 million FifthPower Project for expansion of Lima's distribution system (Ln. 1215-PE of1976), initially moved more slowly than expected because of a sharp decline inthe growth of power demand in the late 1970s because of the country's seriouseconomic problems. Demand picked up in 1980 and the project is now expectedto be completed by mid-1982.

58. The Fifth Power loan was to finance several studies, including oneof the structure of power tariffs to be carried out by MEM. Current tariffstructures are seriously in need of revision as inflation and tariff increases,which have been applied unequally to the various customer classes, have createddistortions. In addition, there is a need to investigate the role tariffs mayplay in any energy conservation policy to be adopted by MEM. Terms of referencefor this study were agreed with the Bank in May 1980. A firm has now beenselected and contract negotiations are underway.

PART IV - THE PROJECT

Background

59. A review of the status of power sector development in Peru, takinginto account the initial results of the master plan referred to in paragraph42, has confirmed that the preparation and development of hydroelectric projectshas been seriously delayed. Consequently, in spite of its enormous hydroelectricpotential, Peru may need to install a substantial amount of thermal generationcapacity in the mid- to late-1980s in order to meet growing demand. This failureto identify, prepare and initiate projects on a timely basis is a result of thepoor sectoral organization and lack of planning mentioned in Part III.

60. The amount of thermal capacity that might have to be installed inthe Central-North Interconnected System in the mid- to late-1980s can bereduced significantly if a crash program to prepare hydroelectric projects isundertaken now. The principal purpose of the proposed power engineering project,

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therefore, is to accelerate studies of hydroelectric projects so as to

minimize the need for significant new thermal generating capacity in Peru.

Another objective is to continue efforts begun under Loan 1215-PE to

strengthen the electric power subsector and ELECTROPERU.

61. The project was prepared by MEM and appraised in December 1980.

Negotiations were held from May 8 to 11, 1981. The Peruvian Delegation was

headed by Mr. Luis Ampuero, Manager of ELECTROPERU. There is no separateappraisal report for this project. Supplementary project data are contained

in Annex II.

Project Description

62. The power project studies included for financing under the proposed

loan were selected on the basis of the master plan least cost program, which

has been reviewed and found satisfactory by the Bank. The project would

consist of:

(i) the preparation of prefeasibility and feasibility studies as

well as final design and bidding documents, as required, for 12

hydroelectric projects with a total generating capacity of about

1,100 MW and a brief review of the feasibility study of the Olmos

power/irrigation project;

(ii) the preparation of feasibility studies and bidding documentsfor a fuel-fired generating station of up to 200 MW needed for

Lima by 1986 and completion of the feasibility study and prepara-

tion of bidding documents for a transmission line for northern

Peru (Trujillo-Piura); and

(iii) staffing and equipping of a planning group in ELECTROPERU.

Hydroelectric Project Studies

63. Hydro project preinvestment studies would account for 78 percent of

total project costs. Nine of the 12 hydroelectric projects to be studied, with

a generating capacity of about 800 MW, would serve the Central-North system.

Two, Molloco (200-300 MW) and the Rio Chili reinforcement, would serve the

southwest and Quishuarani (30 MW) is located in the southeast.

64. Final design and bidding documents would be completed for CENTROMIN's

120 MW Yuncan project and ELECTROPERU's 150 MW El Chorro project. Feasibility

studies and bidding documents would be prepared for HIDRANDINA's Cahua

reinforcement, ELECTROLIMA's 50 MW Matucana and Yuracuayo hydro extensions

and ELECTROPERU's 14 MW Rio Santa and Quishuarani projects. A prefeasibilitystudy would be done for ELECTROPERU's 339 MW Rio Huaura hydro development.

The remaining projects, ELECTROPERU's Molloco, Platanal (81 MW) and Rio Chiliprojects and the 40 MW second stage of the Cahua project would be studied to

the feasibility level. A feasibility study has been completed for the Olmos

project but further work, which would be financed under the proposed loan,

would determine whether the project is economically and technically justified.

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Thermal Plant and Transmission Line Studies

65. Currently, the only way to meet the projected eight percent annualincrease in power demand for the Central-North system in the mid-1980s wouldbe through installation of a 200 MW thermal plant. The study of this unitwould determine the most economic fuel source (e.g., coal, gas or oil). It ispossible, however, that if the preinvestment studies of other hydro projects tobe financed under the proposed loan can be accelerated and those projectsinitiated on a timely basis, the size of this unit might be reduced somewhat.Every effort will be made to accomplish this. The thermal plant feasibilitystudy to be undertaken by ELECTROPERU, including the preparation of biddingdocuments, would account for 14.5 percent of project costs.

66. ELECTROPERU's 620 km Trujillo-Piura transmission line would completethe interconnection of the Central-North system by 1987. Under the project, thetransmission line's feasibility study would be completed and bidding documentswould be prepared. This transmission line component would account for five percentof project costs.

Planning and Project Implementation Technical Assistance

67. The project would include additional equipment, training and anadvisor to assist in the establishment and operation of a master planning unitwithin ELECTROPERU's Planning Department. This component would account for 2.5 per-cent of project costs. MEM would transfer to ELECTROPERU responsibility for powersector planning by June 30, 1982 and would transfer all its planning staff, equip-ment and materials to ELECTROPERU by December 31, 1982 (Section 3.02(a) and (b) ofthe draft Guarantee Agreement). In order to ensure that ELECTROPERU promptly initi-ates and follows through on power sector planning in the future, it has been agreedthat, by June 30, 1982, ELECTROPERU would establish the planning unit under anorganizational structure and with operating guidelines satisfactory to the Bankand agree with the Bank on the equipment to be financed by the proposed loan(Section 3.03(ii) of the draft Loan Agreement). By December 31, 1982, ELECTROPERUwould complete the purchase of equipment and staffing of the unit in accordancewith the agreed upon organizational structure and operating guidelines and wouldsubmit for Bank approval a training program for the unit's staff, which it wouldthereafter carry out (Section 3.03(iii) of the draft Loan Agreement). UntilDecember 31, 1982, when the planning unit would be fully established in ELECTROPERU,MEM and ELECTROPERU would collaborate closely to carry out planning activities(Sections 3.03(i) and 3.02(b) of the draft Loan and Guarantee Agreements,respectively). ELECTROPERU would, thereafter, update the master plan at leastevery six months through 1983 and at least once a year thereafter (Section 4.05of the draft Loan Agreement). The greater initial frequency of the revision isdesirable for training purposes.

Project Execution

68. ELECTROPERU, ELECTROLIMA, CENTROMIN and HIDRANDINA would each beresponsible for executing those studies related to the projects which eachagency would subsequently expect to carry out. ELECTROLIMA, CENTROMIN andHIDRANDINA would make available the conclusions of their studies to ELECTROPERUas inputs into ELECTROPERU's sectoral planning activities. The staffs of each

- 17 -

of the participating agencies, except CENTROMIN, would prepare some of thestudies to be financed under the proposed loan with the assistance ofspecialized consultants. All other studies would be fully contracted out toconsulting firms. The consultants selected under this project would besatisfactory to the Bank and would be hired under terms of reference andconditions acceptable to the Bank (Sections 3.02(a) and 2.02 (a), (b) and (c)of the draft Loan and Project Agreements, respectively). The technical assistanceto be provided to ELECTROPERU's planning unit, which will assist ELECTROPERU'sstudies unit in carrying out the project, would help assure its timelyexecution. The other three companies are capable of executing their components.A project execution schedule is contained in Annex V. The project would takeabout 3-1/2 years to complete.

Project Cost and Financing

69. Total project costs, exclusive of taxes and duties, are estimated atUS$40.7 million, of which US$25 million, or 61 percent, represents foreign costsand would be financed by the proposed loan. Local costs would be financed by thefour companies undertaking the studies. The project's principal *foreign-costcomponent consists of about 1,600 staff-months of consultant services, almost allof which are expected to be provided by foreign consultants whose cost is estimatedat US$12,000 per consultant-month. This would not include contingencies but wouldcover salaries, overhead, fees, allowances and international travel.

70. The cost estimate is based on December 1980 price levels. Physicalcontingencies of 10 percent have been added to provide for unforeseen changes inscope. Price contingencies were based on projected annual worldwide inflationrates of 9 percent in 1981, 8.5 percent in 1982 and 7.5 percent per annum in the1983-85 period. The cost estimate is based on the utilities' recent experienceand is in line with costs for similar studies in other Bank-financed projects.The total cost of the power preinvestment studies to be financed under thisproject is less than two percent of the estimated cost of the related investmentprojects.

Relending Terms

71. The Bank loan would be made to ELECTROPERU, with the guarantee ofthe Republic of Peru. Including contingencies, ELECTROPERU would use US$18.5million of the proposed loan to help finance its studies and would on-lend theremaining proceeds of the loan to ELECTROLIMA, CENTROMIN and HIDRANDINA on thesame terms and conditions of the proposed Bank loan. ELECTROLIMA would receiveUS$0.9 million in loan funds, CENTROMIN would get US$3.0 million and HIDRANDINAwould receive the remaining US$2.6 million. To establish the terms andconditions governing their participation in the project, the three entitieswould enter into a project agreement with the Bank and subsidiary loan contractssatisfactory to the Bank with ELECTROPERU (Section 3.01(b) of the draft LoanAgreement). Execution of each subsidiary loan contract would be a condition ofdisbursement for the proceeds to be on-lent thereunder (paragraph 4(b), (c)and (d) of Schedule 1 to the draft Loan Agreement).

72. To permit prompt initiation of the studies of hydro projects soas to minimize the amount of thermal generation needed in the future, retro-active financing of foreign exchange expenditures incurred after December 31,1980 would be permitted, up to a limit of US$2.2 million.

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Procurement and Disbursement

73. Selection of consultants would be in accordance with Peruvianprocedures, which require a competition on the substantive aspects of theconsultants' proposals. The procedures are acceptable to the Bank.The small amount (up to US$300,000 in a variety of procurement packages)of materials and equipment required for strengthening ELECTROPERU'splanning unit makes international competitive bidding for these itemsimpracticable. They would, therefore, be procured through internationalshopping.

74. The proposed loan would be disbursed against 100 percent of the foreigncost and 90 percent of the local cost of consultants' services and 100 percent ofthe foreign cost of materials, equipment and related services for the trainingprogram.

Benefits and Risks

75. Because of a failure to prepare hydroelectric projects in the past,Peru now faces the need to install thermal generation plants to meet growingdemand for power. The proposed preinvestment studies loan would help financethe quick preparation of projects, most of which entail hydro generation, andwould enable Peru to reduce investments in thermal generation during the 1980s.This would, in turn, curtail the use of expensive petrolelum derivatives forelectricity generation. By strengthening ELECTROPERU's planning capability,the project would also support an important institution building activity,which would help head off a repetition of the present situation where the lackof well-prepared hydroelectric projects will necessitate making costly thermalplant investments. The principal risk is that ELECTROPERU will not be able toimplement organizational and managerial improvements quickly enough to overseeexecution of the power engineering project in a timely manner. The Governmenthas already laid the basis for strengthening ELECTROPERU by making it a State-owned commercial enterprise, which would be able to pay better salaries. Boththe IDB and the Bank (under the proposed loan) would be providing technicalassistance to ELECTROPERU to help increase its capacity to carry out itsresponsibilities, thus reducing this risk to acceptable levels.

76. This project poses no environmental risks. All studies wouldinclude environmental impact statements.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

77. The (i) draft Loan Agreement between ELECTROPERU, COFIDE (which underPeruvian law must be a party to all agreements providing for external loans forpublic enterprises) and the Bank; (ii) the draft Project Agreements betweenHIDRANDINA and the Bank; (iii) the draft Guarantee Agreement between the RepublicELECTROLIMA, CENTROMIN and of Peru and the Bank; and, (iv) the Report and Recom-mendations of the Committee provided for in Article III, Section 4(iii) of theBank's Articles of Agreement are being distributed to the Executive Directorsseparately.

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78. These draft agreements conform to the normal pattern for loans forengineering projects. The main features of the draft Loan, Guarantee andProject Agreements are referred to in the text of this report and are listedin Section III of Annex III. A condition of disbursement for the portionsof the project to be carried out by ELECTROLIMA, CENTROMIN and HIDRANDINAwould be the signing of their respective subsidiary loan contracts (eachsatisfactory to the Bank) with ELECTROPERU.

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

PART VI - RECOMMENDATION

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

Robert S. McNamaraPresident

AttachmentsJune 1, 1981Washington, D.C.

- 20 - MNNa IPage 1 of 5

TABLE 3APERU - SOCIAL INDICA7ORS DATA SHEET

PERU REFERENCE GROUPS (liEIGHTED AVEEACFSLAND AREA (THOUSAND SQ. KM.) - HOST RECENT ESTIMATE)_

TOTAI 1285. 2

AGRICULTURAL 305.5 MOST RECENT MIDDLE INCOME MIDDLE INCOME1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAli EUROPE

CNP PER CAPITA (USi) 230.0 410.0 730.0 1562.9 2149.5

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 445.0 619.0 649.0 1055.9 1641.4

POPULATION AND VITAL STATISTICSTOPnLATION, MID-YEAR (MILLIONS) 10.2 13.5 16.8URBAN POPULATION (PERCENT OF TOTAL) 46.3 57.4 65.6 63.4 53.9

POPULATION PROJECTIONS

POPULATION IN YEAR 2000 (MILLIONS) 29.0STATIONARY POPULATION (MILLIONS) 57.0YEAR STATIONARY POPULATION IS REACHED 2090

POPULATION DENSITYPER SQ. 101. 8.0 11.0 13.0 28.1 77. 2PER SQ. 1M. AGRICULTURAL LAND 33.0 44.0 55.0 RI. 7 129.5

POPULATION AGE STRUCTURE (vrRCrST)0-14 YRS. 44.2 45.0 42.9 41.4 30.6

15-64 YRS. 52.0 51.9 53.4 54.7 61.165 YRS. AND ABOVE 3.8 3. 1 3. 7 3.9 8.2

POPULATION GROWTH RATE (PERCENT)TOTAL 2.6 2.8 2. 7 2.7 1.6URBAN 4. 7/c 5.0 4.5 4. 1 3. 3

CRRUDE BIRTH RATE (PER THOUSAND) 47.0 43.0 39.0 34.8 22.PCRUDE DEATH RATE (PER THOUSAND) 19.0 15.0 12.0 8.9 8 9GROSS REPRODUCTION RATE 3.1/d 2.9 2.8 2.5 i.5FAMILY PLANNING

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

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71-100) 96.0 102.0 85.0 106.9 113.1

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIR10IENTS) 95.0 99.0 97.0 107.4 125. 3PROTEINS (GRAMS PER DAY) 62.0 61.0 59.0 65.6 91.D

OF WHICH ANTMAL AND PULSE 27.0 25.0 24.0 33.7 39.6

CHILD (AGES 1-4) MORTALITY RATE 28.0 20.0 16.0 8.4 4.3

HEALTHLIFE EXPECTANCY AT BIRTS (YEARS) 48.0 53.0 56.0 63. 1 67.8INFANT MORTALITY RATE (PERTHOUSAND) .. 122. S0/ .. 66.5 55.9

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL .. 35.0 47.0 65.9URBAN .. 58.0 72.0 80.4RURAL .. 8.0 15.0 44.0

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL * 36.0 .. 62.3URBAN .. 52.0 .. 79.4RURAL .. 16.0 .. 29.6

POPULATION PER PHYSICIAN 2251. 0/f 1859.0 1556.0 1849.2 1030.1POPULATION PER NURSING PERSON 2205.0/f 738.0 745.0 1227.5 929.4POPULATION PER HOSPITAL BED

TOTAL 424- 01S 470.0 547.0 480.3 289.7

URBAN * 425.0RURAL .. 3144.0

ADMISSIONS PER HOSPITAL BED .. 19.n .. .. 17.0

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.9 4.9/hURBAN 4. 8 5.1/hRURAL 4.9 4.7/ ...

AVERAGE NUMBER OF PERSONS PER ROQlMTOTAL 2.3 1.9/hURBAN 2.0 1. 7/h .RURAL 2. 7 2. 4L ..h

ACCESS TO ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL 26.0 32.1/hURBAN 50. 7 54. 3 ..hRURAL 4. 0 2. 7/h

- 21 -ANNEX I

TABLE 3A Page 2 of 5PERtl - SOCIAL INDICATORS DATA SHEET

PERU REFERENCE GROUPS (WEIGIITED AVERA5ES- !OST RECENT ESTIMATI) -

MOST RECENT MIDDLE INCOME MIDDLE INCOME1960 /b 1970 /b ESTIMATE /b LATIN AMERICA 6 CARIBBEAN EUROPE

EDUCATIONADJUSTED ENROLLMENT RATIOS

FRIMARY: TOTAL 83.0 107.0 110.0 99.7 105.9MALE 95.0 114.0 115.0 101.0 109.3FEMtALE 71.0 99.0 106.0 99.4 103.0

SECONDARY: TOTAL 1.0 30.0 52.0 34.4 64.0MALE L8.0 34.0 56.0 33. 5 71. 1FEMALE 13.0 26.0 48.0 34.7 56.9

VOCATIONAL ENROL. (7 OF SECONDARY) 20.0 17.0 23.0 38.2 28.8

PUPIL-rEACHER RATIOPRtMARY 34.0 40.0 40.0 30.5 29.4SECONDARY 12.0 23.0 23.0 14.5 26.1

ADULT LITERACY RATE (PERCENT) 61.0 .. 72.0 76.3

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 8.0 17.0 18.4 43.0 84.6RADIO RECEIVERS PER THOUSAND

POPULATION 110.0 137.0 131.0 245.3 192..2TV RECEIVERS PER TROUSAND

POPULATION 3.0 30.0 38.0 84.2 118.5NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION .. 124.0 96.0 63.3 93.0CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. .. 5.7

LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 3187.8 3909.3 4980.4

FEMALE (PERCENIT) 21.0 20. 7 23.9 22.2 30.4AGRICULTURE (PERCENT) 53.0 45.0 39.0 37.1 37.0INDUSTRY (PERCENT) 19.0 20.0 21.0 23.5 29.3

PARTICIPATION RATE (PERCENT)TOTAL 31.3 29.1 29.2 31.5 40.9MALE 49.2 45.8 45. 3 48.9 55.9FEMALE 13.2 12.1 12.8 14.0 26.2

ECONOMIC DEPENDENCY RATIO 1.5 1. 7 1.6 1.4 1.0

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 39.01iHIGHEST 20 PERCENT OF HOUSEHOLDS 64.4/i 61.0/hLOREST 20 PERCENT OF HOUSEHOLDS 2. 5/i 1.9/hLOWEST 40 PERCENT OF HOUSEHOLDS 8.0/i 7.0/h

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. 235.0RURAL .. .. 180.0 190.8

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 293.0 474.0RURAL .. .. 200.0 332.5 385.8

ESTIMATED POPULATION BELOU POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 49.0

RURAL ..

Not availableNot applicable.

NOTES

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

lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971: and for Host Recent Estimate, between 1974 and 1978.

/c 1956-61; Ld 1960-65; /e 1970-75; /f 1964; /x 1962; /h 1972; /i Personal income vithin laborforce.

Most recent estimate of GNP per capita is for 1979, all other data are as of April, 1980.

October, 1980

- 22 - ANNEXI-Page 3 of 5

tIiEfIITIONt hi fSOCto INDICATORO

hence Although thedat - dros from sobe en.f ugltees ototeteadrlal,i hadas he-nd that they may to he fa-r-

onooni-ly -nnpanable becus of the lank of II-andardleddfenosand con-ets used by differenttcni. tie in tohltetiog the data. iht data are, nose-bthe-s, -sfub te descrbe orders c sagnitude, indictet trends, atdohaaeeeeoeoit ssfor diifros betwee

The ref-seeo gropy are (1) the same on-try gro-y of the snh)eot Io...rry and (2) Atosr Iaot oAnhc Igaavrge tom than the on-try grantof thsoIcor. cotnry fecpe for 'Carata1 Sorelna 0il topertera steo where 'ftdeinoehah fiaad tt'd'dletaEt7 fe ober- hb-s- at at-ag-

doe ind Isntlto,n tnct "'' hacamtc te ratetg a..nc nig. ofne tedLnate to acotthe These anerage tee onty ..meni ha onparhig the e-hac

ni nsa indintor atenm ace.n oonyad eet -e ony..

LAND dAtEA (th-netd sq.km.) ron.atanon par Phystotas- fecPta-1- dsndeg by nomas II pr-ttOntag phy-

fe T otal -nrto area .. sprietre hand area and inl and eaer. ttas nai ted free. a. meta ath-- at netn-rafty tenet.nArtontoorti hatiteat at aer-ton ..naa II areausd tmperarh an percratty Pauhnta e. trsaccaer acaane dietded by rneehe at pesattatag

on o.o... yasnI s.meker and hioangrdens or to lits fatten; ti77 data. aha end feeageadnas caress,.P ".ra....aI .as .. .taats "s caressPepetttisone tarceaitat fed - tett.er= c ead carat - PepaItafir (tetat,

herP yinCAIiyiA (iS$) - nor per Oaritt a-tsaotra at onee aket caoe, a- srbaa,..cd -se1) dtntdmd by theta e-p-etis sabee of heiteat badeocleted by sint Ino m tthmbd as Woeald sash Anita (19ff-hg bests); ith0, aeha Le inPnttI and pinnate gecea, .t ad ep-italied hasPital and ne-

1970, act fL99detn. ftebfilltatitaOsnnts, inspitals are estblishm.eats asmest tffed

INER COMS~~7TPTCN'PER C~.%ITA It -. IgY (It.1 by at1 leat ac phystetan. Estbli.shents previdisog pafacicatly asenedialtafth tfltf'Ttt ttCOPiA- tncl tcsaptenef eseroalenegyfagt atear ran inolded, hrat. hespitala,hee, isatade health end mditac

end igitete cetann._ tnnas Ia esd hydee-,. ... es anIg- btml te-norcst Permcenty3 staffed by apyitn(c yamdataseetntoitny) to kitbogram of coa eqinalent yea .. chn.; ifhi i970 an 9fans,mdif,at)ob fe in-tesecaedtnmdprnda

dasa. thetan~~~~~~~~... .drng f. hadgoa ff-eitie .tcrirstee a, d cties and e heepi-d-I lini~~~~~~~~~~~~~~~~~~td. Inehad odff a cinetl gee .lad acetti_lneed .haetl, sat mcpcf

PocCIdlIot0000 thintinihifit has 0 ttet lanai atraret hasItaeAnd -ptest ed hacptaror enters.1

Total cepcleni-s ff0-fete lantili.nna - he of JohY 1; 196i, 1970, aed 19ff Aoditst... car Heactitel had - Tatal somber at adehestee ta es di.ehacegee

date. teem h.scPitsl dittid. b-y the camber oi beds.

Orba0 tc'tine .ca..... n f "tonal - ttt nf baebe ne natal enpmlathon;differ..ss dfib tnf -aa ofrhan areas say afttet oInp...bility ef dton ggUSINGasngoenstricIS; 19Eo 1970ti, And 197 8 data. deereac ties af gHnahni reet aeeoe d) - tent.l nehac sad nest-

tecaLasie treeotat A hn,.ehe. enit aia fma L. tei'h i she sba lining qacetete

caaithe n ea I t Crrntcaotnesprjatiseer eet n f it sa h.n sahnmat. sad r n ldgar naor may set be terdadd is

total encalatter by kg. sad - tad their mealtely And ferthility asse, th hooseboidfesnttilcopescon) -tiayaaetn far marthitsy rates ofcesea thassI.. 1 -imelseason- traemban ofrten rntoe nan b"u'c sad .... l - A.en... s-log fife ety-nany at btrth inno....tog athb -eetey'ee p ca..pt.a taae he iynss e Iss a l nrba, sad rec arapied nageectiessl

teet ad Teat fieasetanay -beilistng at f. 5 yas The car- dsias ecoisy geiageold rnperann sn"cte a

esters a for.Tui.ty" rte else have thes tenets esaming declita te41i, ''il.Wlin..Id'-a,a.-fertility -oorditg heton i evsl sa,I d camt famity yta-Jar cpeatnaIrce.. no.n.e etIaof t A.k...~~~~~~~~~~~~~enssr t.nE-ttiaitc )trareat of dwIlithsm etal. orbas, sag rot -Bteh .. o-try isteL ssgedaeef t... he as shcs aebi-enfae ef natteihty tsnner-ess .. Iw sgaith IlonIteitv .In lite. tameness as pereeiageend fertility trends The etaheoti_e cP..?eI. ef tonal, nabsa, and renard1 tl rgstspe-ti-ey.

ircttnay preulatiaa-ioaetatios..ay yepntmnten share tagso genth shetethe hbith cane it equal te the death ease, and also the ae aeture as- EDCiAiTIO

...c catna. hibisLa achnind oly after fsrslltny rates deohina to afsmficlamtcco

abs reict -1 ec of unit net repnadnctie cane, when ... h gersto yh.ys.ot-toa,mIm and famei - trees tntal, male sand femal

of "a a eIIta tel nol.The "t'oPt sctta afre- as nnl t at sit ages at tha pritnay te1a-1 eetaga seeae-snimasa en the baste of the pr0) cte.d theacnsertsYi'tio ef nhaiencehasien pratmr oba-gapptthn;gaal ecam eids age hi-

to the Ys-e2h0t, and the rate Ef dectiar of frtitljty rate ta reclate- yea.rsyu deae e dhffacegasPplngtm atIl enacts. etneetims far-1

Itet has: been rarhtt

Y-np tltion - L eced-T.y-ha .i.l pipeshty hmanada.ansche -itoe-1 mal act timaa temynnad.. as shede;setasdsec

fat e. Mu.-aid-year yaceltitte yea aqaae kiltemte (if i heo-e) af ynrnd.. ge ar t noon..a. at teach at.I fcaiata dntctt-a fat-earth

fee to a. ag 1atee -ed - teacand co-aon fo a, mact1 land osedlty a it fyaaedae.eesedsecors r eeat

O5il inattaal rcnim"n ( acktrtf s...ne) ictim...l i.tist.tiattfnreatin Ageisactar innceat - htildem (i-ic years), anengae aiode tmchsicati eath.n te er-se athecb ace.tat iedefte

ft isare), nd nerteed hi yacee ad onc). a peretatges of mid-year enen- det no asIcrmrne eodr nttnnslentos; 196h, 1970, and if97f dens. daanitalye ondIn-t- htec, cad sendary i-titotseet salth

innnta cot_at nrts)-pee - nA-asl grot h rates of tesel aid- -eneyan mcsaay l-eLa dinidad by nembers at-nehens he she

Ym- yaroIetl... f. me9i0-hi, 1f60-70, and 19f0i7f. nnts -rfg sd.teRRoLette tr th bare famacen) - arhee - Ann-e taoh rates ef ether inch- Adoltt ifnatyr rata (Peecent) _-Lis-rat stair fahla en read sad -ift.)

fattens toe 195f-h0. 1960-70, and 1f70-78. Ispereanago of issa1 adolt yaolt ge ii years end anna.

Crude i tth iata fre Ihe...ed) - A-..I tIne births p etc h-sed of mhd-ya..

yccc--1iath; 1960, 197i, and 1978 date. CONSattIONfCrde heath Sola tier athonused) -A A.e.. deaths cPe theosed t cid-year P...a.Cr.tm tnso cclena fasget tate omaytam. anIa

pcoyntalta; l9ft, f1T7t, and 19ff dmt. noes seaing lest that i egt Iynes; enctdes ahte he. oerass.sdtres fecadenhntosAnmesgo nuber of e-ghentraoeI antil bear inLlrr nthls

her roaca reernd-ti-n yeaisd if a. be ecemiencs Ptsnt gs-apeo. fi .ta- RIdan eacecir (cc thnoa..nd ns...tatia) - All ye tPatfI. ae -fer or mc AdJ

atIIIy rates; uoI .. hy fin-y-m a-rges coding to 1960i 1910, n eaost ognr)Aolccrtond d19f7nctanon;saldesfsalt-I.." tnoe-Acnnr, Onoa (hrsafa - eAnosl cambo of acosensee ca-sd-tsoetnee-aoooepblia i yearslll soe cegI nastos of. thnse

of hirnh--tnnol de-ioms orde t-phoe- of aathoc1 feaily plenoing progre. ass inetfeon; date foe recent yann ney non be c-ncehi siaa masttetyfaaoshanfrmeso meteRedons -Itonstrat of mencgd cantomsahhiod ihom...tin.

anme of thild-bearcng age (ti-t44ens ohm ose htat-tntco dZee t itoanr (pe a noacod ei-ns)-lirceesforbsdatn

af ietld anaci he sas age Pen. gs-to1 pcbhIc pan eh-ased papelacios; n-lide- anl;coaad iTVroem

horennhaaandisyearshk -beeiht-tan osf iTV msat wa is effec..FtOD cIN itiTLIO th;csaa helne nrtesoad 2poelatise ha the nerege cears--

inden of coed P-ednotina err Cepita (1969-f71it)-10 tic.s.e cct ase nonf "dtiiy geeal ritatrt acsae" afhe seyatdclpb

yhdnctie- of a11ft nd c-mdhita- craduete acdesIa-d and f cod end Iitnetto denend cri-may tI ..... ading geneaf mews.ft is In...hdered

LIs or calendar year ba.ste Coseo-ditiss c pom ineatygad (g. saeshe to ha dety'"t racena i reatIf-otma ek

iheneod nf sogar) eb1ich sac odibl.An tad .nmtala nntin.te )rg. neff me .. Ciem o Atatneodante ye Cayf o ye iee-ease:d a the caber nftea ae saiuda). Aeaseas cad-otien of each roonry ha baed 5tiktssd docing thn year, ict,idhg eeesoate datn-ta nIsama

stiona anoag pooe pates weights; l9ot-f5. if70, end 1fi8 dat. d .i.- ooc seIc of oire feRec-t e aormna Cemented fcnadmbtents

noargycqofealees of ear foed aecelihe -nelahle ira cneatry Pec eapite LhiOR ORiCEerr day. Anatisbie scepp scILI issdaneain phadoctin, LOePrO less Tatal Labor Fe-c (thnomsmda) - conco-cait attir eaeos 1ftdiag

syrt, acd oheane ha set..k Net sopplima nrinde ecica feed, sedt, rnad tenro and 1, oe yhyd hot sachadieg hoasefes * staItea Itt,,qaeotitias need in foand erne...aag, and I..... to distatbntins. tequtte- -tefita.ntie tonrineI _soaare ac to. .te rhs;190 i97f and

cet ee s.fte-d by t At base d es ehysieleginel aede fee s--me act- ff78 dare.c hiedbethb o-ridering moinemco-tal teapanantca, body n_ights, age aae(eoa)-cet ao nocs ara co oa ao et

and en di orhts f coeelatJ... and a11ias 9e 10 perce..t for easte en Iniser nret so oceh oig aany ote n

bncaonid tnal; 0ff-h, if t, an iffydets. fishing a yecotg f itotl labor fame; if60 1t9f0 and 197f data.

te Io ttasuely st -earaf (grams 2cr dent - fePth or aten P', ymrtst faemcj (ecot - Labor fnaoa is. statef, tnsaatta -maetetennets I,l of font yea day, fist syptly of feed is dci hsd as shone he- and elettrhtiy;,eaten and gases. yprc-tnge of sotal haher foe...; 196i

cecso _e n alt corthe betlithed by USDA p-aide fee minimu mt 170 eaIhacocn ofb6ft gram eft total eroott L eca day and hi greesni anmI e fatchotattd 19t (pret3 otl am edfmi detti ica

colsa yantrer, of anach li grace sheald he astiash eresein, Ihea sta-d Parthinyto. Rtoear pmyntd as natal, ache, and tnmae laretArsa

arda on Itte thee he,. of 75 grams ef teta1 Preteha end 23 grac eftk~ o .:asictyathaa A nargI to the aeId, eroersd by t±At na the Thr 'occer ftt2,meeedtml naeIeoftegaeseshtyesrld Pond ,,ee,Y; 1ff i-hi, if970 and 1911 data, 19hi, 1ff0, tad if9l5 date. ih-se arefi' IO part-ithytha rates naflert1ag

enlace d~~~-ay; tfdft-hi, P tef , en iff data toeaci timeendey ta'tie Pataio of yrltnendan LS cad fi and boer

rfosenehp yer,t otdere to thi ae rae;far -ea danalniogn-o-

EAtPlfi emeIntceas of fanP tae(eht sbeace) - i-raed by rttbtlifetoratee, s tirh (oara - eeras echatat oanaet ife emaciog 0 enac. rheee ft peaet, y.asrast2 Pte...teat anod fintest 40 pecsa

athbl; l6hi, 19fi sod 1f78 date.tetont M-ontahty Ratofor s Aeca) - atc deaths a offetnaeacyar cii aiatth

5meber of Panda (_oe,sbs andreal oenhreaemhiecea to eafs ntnfielydo ede teasett em-food eiarmsn heomt

ase beety(none trestsa aefeoc ca.ret or astr..eatd bat sesatemisated afferdatie.. l dqIt tp.toeatr ea O tattin retetm bnaete, prnt st satey att) ssatedteieae enrs fame tne (otre aets) dbs bt atl

cetmnge e heo seetiataeeatas,T t aba raE.eblttar)ritn enrytitigtnth PeI,te oPnl aeeg yeaoetIfonaro thmcet ftoto-ted notmre han cn ocet teaoossma Ih yasattaeo h esr.the ee adena a h a

haes oot fen t-ias ...eattiarea c...i emoat I. e-rat onbac andlicame tl. -oitr of dpeap (natald I, ashen and. reed -rme by- reh...et

dhsaae a eceaeao efhi thir teepsetfee eoeattface tactra at- Ens n,i etafnl hate1- fite theisa .

daset say harPade she itot p-tiotsa diparti ofth. dar sinhast crescet, enmnfcyt n .olrope,los teans

p-ityafinte -an .d euela fmes..Ie-lcnoiens,i. -uan .ar .b.It

_ 23 -

ANNEX IPage of

PERU

ECONOMIC DEVELOPMENT DATA

A C T U A L ESTIMATED PROJECTED _ 00RWTR 4ATE (9' p..) 1977________ A~~~~~~~~~~~~~~ of

1965 1970 1975 1976 1977 1978 L/ 1979 B/ 1980 1985 1965-76 1976-78 1978-85 GDP

NATIONAL ACCOUNTS_

(sill-ons of -U dollere et 1977 prices)

.ro.. Oosestio Prodnct 9046.7 10759.9 13403.2 13718.9 13639.6 13795.6 14247.6 14685.5 18695.9 3.9 0.3 4.4 100.0

Gnioc f-oa Terse of Trods -610.9 130.0 -246.9 -179.4 0.0 -186.3 467.9 804.4 501.2 , 0

Grooe Dom-stic Iaoone (4DY) 8435.8 10889.9 13156.5 13539.5 13639.6 13609.3 14715.5 15489.9 19197.1 4.4 0.3 5.0 100.0

Ieports 1840.2 2190.1 2985.4 2697.7 2706.8 1868.3 2135.4 2742.2 4240.8 3.5 -16.8 12.4 19.8

Exporte 2314.3 2616.8 1906.9 1908.8 2129.5 2355.1 2846.8 2655.3 3126.9 -1.7 11.1 4.2 15.6

Export, Terms of Trade Adjoeted 1703.4 2746.8 166o.o 1729.4 2129.5 2168.8 3314.6 3459.7 3638.1 0.1 12.0 7.7 15.6

ROoore- Gsp,Tera- of Trade Adjnetsd (-:=saplno) 136.8 -556.7 1325.4 968.3 577.3 -300.5 -1179.2 -717.5 -602.7 ' 2

Total Co=or.ption 6605.5 8735.3 11339.7 11766.6 12172.2 11505.3 11588.3 12392.3 15183.5 5.4 -1.1 4.0 89.2

loeseteent 1967.1 1597.9 3142.0 2741.2 2044.7 1803.5 1947.9 2380.1 3410.9 3.1 -18.9 9.5 15.0

Do-estl S-aviogc 1830.3 2154.6 1826.6 1772.9 1467.4 2104.0 3127.2 3097.6 4013.6 -0.3 8.9 9.7 10.8

/ prelimiosry

PRICES IN US DOLLARS

(1977 = 100)

Roport Price Ilden 52.9 46.5 87.4 90.6 100.0 101.3 14Z.4

IDport Price Indea 44.7 44.3 100.4 95.7 100.0 110.0 122.3

Tereo f Trade Index 73.6 105.0 87.1 94.7 100.0 92.1 116.4

A-onAl Avsrage EsoisnMe Rate (Soles per N) Z6.8 38.7 40.8 57.4 83.81 156.3 224.6

OUTPUT, LABOR POROE AND PRODUCTIVITY IN GNP by Sectr Labor Force Labor Producti'ity

1970 PRICES IO MAl. of uS Dollor- Percent of Total 7r-thRot On lc nds Pero-ot of Tctl GOroth Rats in US Dollars 19 of Avera GroWoth Rate

17199 17 2210-91970 1979 1970 1979 1970-79 1970 199 197-0 1979 1970-7

Agriocltore 1534.2 1536.6 17.3 13.Q 0 2011.9 2222.4 40.0 40.8 1.1 762.6 691.4 36.1 31.9 -1.1

Iod.otry 3226.3 4476.5 36.5 38.0 3.7 769.1 1005.3 18.4 18.5 3.0 4194.9 4452.9 198.6 205.4 0.7

S-rcice- 4084.8 5780.6 46.Z 49.0 3.9 1407.6 2Z12.9 33.6 40.7 5.2 Z90Z.0 2612.2 137.4 120.5 -1.2

Tote1/A-er-ge 8849.3 11793.7 100.0 100.0 3.2 944016 10 100.0 2.9 2111.8 2167.7 OO.O 10.0 0.3

CE0NTRAL GOVENMENT FINANCE Pro,ectrd

(a6 percent of Curreot GLP) 1965 .7Q 1975 1976 1977 i976 1979 1980 92

Curreot Rev-nue 15.2 i4.6 14.0 13.4 13.5 14.5 16.6 19.4 19.4 19.5

Correot Expeodit-re 12.4 02.1 14.4 14.8 16.9 15.7 14.0 16.o 16.7 17.2

Current S-ingo o.8 2.5 -0.4 -1.4 -3.4 -1.2 2.6 3.4 2.7 2.3

Copital Eopeoditore 3.9 3.7 4.5 4.5 3.5 3.1 3.9 3.9 3.9 3.9

External Resiotanne (Net) 1.0 0.5 2.3 1.8 3.0 0.4 -0.2 3.4 n.a. n.e.

CUERENT EABENDITURE DETAILcI Actonl DETAIL ON 1977/2 -eveioept Plan

(a8 percent of Octal Correot E-xpend.) 1968 1973 1976 1977 1978 PURLIC SECTOR OS NMi97 iAooWX660

INNEBIMIT PROGRAM

Educotion 30.6 27.9 10.9 18.1 16.1

050100 9.0 6.3 6.2 4.7 6.0 Agriooltcre 1262.2 19.6

Agricultur- 3.6 4.4 1.8 1.3 3.4 Induotry, Toriom 06d Mbinig 1375.1 21.3

Otior Eoono=ic Servic-a 3.2 4.0 5.2 3.2 2.7 -nery 1794.4 27.8

Osneral Seroiceo (inc. dofenc.) 46.4 42.7 46.9 54.1 45.2 Transport ad C-omanasation 892.4 13.8

Intera-t on DAbt 5.4 11.3 io.8 15.1 24.1 Socic1 asd Lecal Intereet Projec-t 1128.3 17.5

Oth-r 1.8 3.3 6.2 2.5

Tottl Current Ecpendit-rea 17Q.0 100.0 100.0 100.0 100.0 T.t.1 6452 7oo.o

MONEY AND CRE0IT 922 1974 1975 1976 1977 1978 2979

(Millions of Soles cctntsndiog

at the end at period)

Money -nd .uasi-Money 98268 119996 141766 166296 220453 321200 615699

Bani Credit to Public Sector 27234 26898 49710 101399 198854 087700 20229

BDnk Credit to Privte Seotor 73089 84512 108234 134536 173772 239300 339509

Money co percent of GDP 25.0 24.3 22 6 20 19 3 17.1 180.

Ocoannor Price Index no 2Rleo (1977=100) 37.5 43.9 54.3 72.4 100.0 157.8 264.7

Acni-- peroentogs chisne iA:

COonceer Price Ilden in Roles 9.5 16.9 23.7 33.5 38.0 57.8 67.7

hn-k C-rdit to Pbl-o Sector 53.7 -1.2 84.8 104.0 96.1 44.7 -26.3

Rook Credit to Priv-te Sector 27.7 15.5 28.1 24.3 29.2 37.7 58.6

Ecy 0901

Page 9 of 5

P100

A 0 02 001.03401 OF P6060006 1972 1973 1~~~~~ ~~97'. 1975 1976 1-9-77 -19q76 - 0979 6980 1965 6990

Laoro 1.odA6c ,PN) 1152.9 1367.2 1979.2 1674.6 1769.6 2137.6 2399.9 4066.6 645.1. 6704.4 62949.4Imports (icccdici 471F') 1602.9 1460.0 2662.3 3022.0 2626.0 2694.4 2070.1 2619.2 5917.6 7865.2 07985.4--- orc - Boo, (deficit-) 5.0 - 57.6 4634.6 .134c7.9 -883.4 -556.6 529.0 1c47.2 591.3 619.2 -1036.9

N., Pocic Serice Ilcc -120.9 -160.9 -216.5 -240.5 -366.4 -426.4 -577.7 -877.3 -793.6 -1211.7 -1871.1Nac Iccer-t r ~.p.et - 76.2 -160.5 .175.8 .214.0 -524.0o 37. -5166.3 -4633. 407-o. 14.

Of etich cc poOlOc 04645 lace. - ~~~~~52.0 93.1 -613.2 -106.6 .190.) 24. -31.29c5.3 c75 -6. 12

Nl reot Occcctlr. 67 -02 -a. 26.53 4. 54.5 - 61.4 .264.0 -307.9 -576.7 - 729.7c0 orc facfr 39.2 42.1 95.1 19.9 57.9 56.6 56.0 96.0 622.3 149.2 219.2

-occ c ore Acotot 3 5.7 -191.6 4805.5 -1536.6 -6291.9 -926.2 -191.9 663.9 7-7.0 -203.5 -2666.9

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tcaloocOmOF 08a60 ~~~~~ ~~~~~ ~~~~197-2 163 17 9?5 1976 /977 1976 1979 1960 19 7 197-76 17-6 174 95 0

75.1 61. 96.6 165.5 219.3 103.4 162.9 096.0 274.1 666.7 50.7 -15. 223 6. 6.5006er -c.lc oade. 15.9 63.5 61.4 84.5 6264 14-5.1 90.1 057.7 193.6 4.5.6 67.9 -156 2. 5451etae.- -rd. cod eric-tice 37.3 t7.i 99.4 267.4 26. 26. 50 000 6. .65. .4 :4. 0

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1dcc -et ct l-soctar &tid 151.7 1996.0 636.5 160.1 265 07.1 52.36. 6.5606 932.6 1. 76 1.Oltal oohet (a.a.o.1 662~~~~~~~~al.0 1032.9 1908.9 2390.1 2160.0 264. 6060.5 2052.7 3035.8 6464.6 26.0 62.7 22.1 6a. 6.0

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riaheeal 209.5 137.7 201~~~~~~~~~~~~~~~~~3.6 o553 177. 170.0 091.6 237. 16.86. . . 5.6 6.6 3.3Ocffte 49.1 63.6 3i4.6 53.2 100.0 196.3 106.2 244.0 163.4 266.'o 19.6 - 29.0 6.6 9.2 3.0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~6 1 : : 16 11:

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lOiter 61.2 79.3 090.9 146.5 145.1 172.5 206.9 569.2 3 567.6 662.6 24.6 19. 22.6 719.

Otarocal7643 92.0 262.9 203 166 355.7 296. 6Ol.0 603.475.6 039 -3.51. 0..l6trleo, col.acdcercatata61.5 00 7. 75 53 5. 7. 665. 797.0 8562.80 60.2 63.7455 24 acacocoocortd

0oola - 32.7 65.2 156.5 105.2 133.0~~~~~4 22.7 501 17. 7. 0609. 32.557. 26. 60.3 21.4

Sot-i tcc60 ~~~~~~ ~~~~~~~ ~~945. 0131.6 15032 9 290.6 3135.5 1372.6 69606 37.36.3 56.09.1.3 21. 60. 66.69toc-caccor taroicca 207.9 255.4 525.0 563.5 565.0 617.2 459.3 591.6 630.6 1166.4 06.7 9,2 14.3 19.3 13.4~~~4.3 . 57.6 3-9 3 5 14. l5 .

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Other eeolttlctaoal 0 i6~~~~~~~~~~~~~~1.6 7589 42.0 113.4 42.1 35.5 73.443-ocoooec 326.1 356.5 561.5 366.7 645365.1 276.2 525.6 Tota Det00 001: 66 0

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T.ccocia g tttlota 061.2 6561~ 5660. 436974 06 16446 2199.9 6639.19 0106 4o66 ebr64536. 2556.1 543.6 402.2 555.2 1965.63 729 76.

Otol 04440 Tacc 19670 in7. 1516. 567.6 1966. 1110. 50.0 109. loeea

Ochr 4tIfLaae 004 eoco1O( - - -0S . - 52. - 913. - --- 113.2 166.5 199.0 -26. 375 9 3.

(0000860. 6140l- Oiobcreoo a4,)00600606044 (04616c Debt

2-.i 35:5 5413h7 386 03 645 eeoeo5.23.4.4 7.530 6. 63 .Ochar Ncl4jloearal 96.6 i.6~~~~~~~~~~~~~~~6. 6 "'

Ocp itt. 3-027ti1.6 lot. e_td1 Totldai/fc 0b.065 5. . 5.4 5.3 5.93 793.4

fecol 3.003c 6040 De6c 55~~~~~~~1 65.i 51.51 160.9 790 00401630011 d0 620 05541 3 480 2If916? : 9 .Otter 615SO 0 .rte.00i. Nb o-rt c 1.60 25.4 478.7 43.63.63.9 46240.7 45- 33 72 8 42.

gt~~l -T 1 44617 1297.4 1318.2 947.6 186a.7 lua-6 501.8 l95-.3 0.4-rt.c./ret9a3rcoo 3.14. 603.2 602 6.9 lg 49.7 , 1.0 47.5

0600 60e./odcae06.6. 35 1 2.5 03.6 1.6 26.6 2.5 3.0 52.5

iENS ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~la ropla.Ora 14 3.5 1.3 03 .4 2. .2 2.5 3. 5.~~~34.? ~ ~ ~ ~ ~ ~ ~ ~ bl60 60-0./6-01 R 62.5 9.29 34.49 4.6 43.0 5.6 43.4 6.0'

h- 96.6~~~~~~~~~~~~~~~~~~~~~~~~~lokOOr606612392 5 ~ 66 . . . .

1660 T- DetOrl/Db Lervjce 6.65. 4.0 6.2 6. 5. 6 - 3,.6 3.32488.8 l?~~~~~~~~06Oro 46 ec/ethee .64. 4.08194.2, 12.3 13.4 3.6 3.3

60.0 W.2 48 9 49 7 1~0- 1901 5

- 25 -ANNEX IIPage 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN PERU

A. STATEMENT OF BANK LOANS (as at April 30, 1981)--- US$ million ---

Amount

Loan (less cancellations)Number Year Borrower Purpose Bank Undisbursed

26 loans fully disbursed 383.2

949 1973 Republic of Peru Education 24.0 6.5

1025 1974 Republic of Peru Roads 26.0 0.7

1196 1976 Republic of Peru Transport 76.5 44.8

1215 1976 Republic of Peru Power 36.0 9.9

1281 1976 CENTROMIN Mining 39.7 20.3

1283 1976 Banco Vivienda Urban Dev. 21.6 12.6

1358 1977 COFIDE Industry 35.0 13.7

1403 1977 Republic of Peru Agriculture 25.0 23.4S-ll 1978 Republic of Peru Preinvestment 8.8 3.7

1771 1980 Republic of Peru Irrigation 56.0 56.0

1806 1980 Petroleos del Peru Petroleum Prod. 32.5 31.61812 1/ 1980 Republic of Peru Rural Dev. 15.0 15.0

1888 1980 Republic of Peru Preinvestment 7.5 7.5

S-19 1980 SIDERPERU Technical Asst. 5.0 5.01963 2/ 1981 CORPAC Aviation 58.0 58.0

1968 2/ 1981 COFIDE Industry 60.0 60.0

Total 909.8 368.7of which has been repaid 165.4

Total now outstanding 744.4

Amount sold 18.3of which has been repaid 18.3 -

Total now held by Bank 744.4

Total undisbursed 368.7

1/ Not yet effective.

2/ Not yet signed.

- 26 -

ANNEX IIPage 2 of 6

B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1981)

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 13.9 0.4 14.3

Total commitments now held by IFC 14.1 1.3 15.4

Total undisbursed 2.2 _ 2.2

- 27 -

ANNEX IIPage 3 of 6

C. PROJECTS IN EXECUTION 1/

Loan 949-PE: Education Project; USS24.0 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$17.5 million. Still, an extension of the Loan's Closing Dateto December 31, 1981 is now being considered.

Loan 1025-PE: Sixth Highway Project; US$25.0 million Loan of July 1, 1974;Effective Date: August 21, 1974; Closing Date: June 30, 1981

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 were 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 has been completed and studies are being finished up. Since the loan isalmost fully disbursed, the Bank does not anticipate any extension of the ClosingDate.

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

Construction of the project's river ports component is almost completed,although with some cost increases because of start-up difficulties. There wereserious delays in contracting for civil works under the road component becauseof slow procedures and limited Government implementation capacity. Theseproblems now appear to be largely overcome and construction is now underwayon all project components. The project has been modified so as to increase

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 present a balanced evaluation of strengthsand weaknesses in project execution.

- 28 -

ANNEX IIPage 4 of 6

the financing for urgently needed road maintenance and eliminate improvementof those 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, 1976;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 problems, 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,most consultants have now been retained, and with strong support from thecurrent staff in the Ministry of Energy and Mines the program has begun toprogress normally. Because of the delays, the Closing Date has been extendedto end-1981.

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, was delayed by about two years because of the lack of local counterpartfunds owing to the recession of the late 1970s. CENTROMIN is now proceedingwith the project with support from a supplementary IDB loan, which will helpcover part of the financing shortfall. Engineering, procurement and minedevelopment activities on this part of the project are well-advanced.Construction of the mine-water treatment plant is now almost completed.

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

Administrative difficulties, particularly the need to reconcilePeruvian procedures with Bank guidelines for procurement, delayed theproject by about one year. All components are now moving ahead well anddisbursements stand at US$9 million. Because of past delays, however, theClosing Date has been extended to end- 1982.

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

Peru's economic recession led to a contraction of investment and tolower than anticipated demand for the loan in the late 1970s. In view ofthis, the Borrower--the National Development Bank (COFIDE)--agreed to financeprojects identified by commercial banks and other financial institutions,

- 29 -ANNEX IIPage 5 of 6

which would also guarantee these loans and provide some loan servicing.With this action and improving economic conditions over the past twoyears, demand for the credit line has increased and it is now almost fullycommitted.

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

Because of the weakness of the project unit, there was a long delayin completing the designs for civil works in the six valleys where irrigationsystems are to be improved. The unit has been substantially strengthenedover the past few years, the design phase is now complete and constructionhas started. The project, however, is now several years behind schedule.

Loan S-li: 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 are proceeding on schedule.

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 ofApril 28, 1980; Effective Date: September 30, 1980;Closing Date: January 31, 1983.

The project got underway more slowly than expected because of theweak implementation capacity of PETROPERU. All project components, however,have now begun and execution should improve in the coming months.

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

Initial project activities have begun but there have been delaysin satisfying the condition of loan effectiveness in regard to naming ofa project director and approval of the bylaws for the project unit. TheBank expects these conditions to be met shortly.

- 30 -ANNEX IIPage 6 of 6

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

Consultants have been contracted and project execution hascommenced.

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

A consultant is now being contracted for a feasibility study ofSIDERPERU's expansion plans.

Loan 1963-PE: Aviation Development Project, USS58.0 million loan of ;Effectiveness Date: ; Closing Date:December 31, 1985.

This loan was recently approved and is expected to be signed soon.The conditions of effectiveness are now in the process of being satisfied.

Loan 1968-PE: Second Industrial Credit Project, US$60.0 million loan ofEffective Date:

Closing Date: June 30, 1985.

This loan was recently approved and is expected to be signed soon.The conditions of effectivenesss are now in the process of being satisfied.

- 31 -ANNEX IIIPage 1 of 1

PERU

POWER ENGINEERING PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I: Timetable of Key Events

(a) Time taken by the countryto prepare project: Two months.

(b) Project prepared by: Ministry of Energy and Mines.

(c) First presentation to the Bank: October 1980.

(d) Identification of Project: October 1980.

(e) Departure of Appraisal Mission: December 1980.

(f) Planned Date of Effectiveness: September 1981.

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

The following was agreed:

(a) that (i) by June 30, 1982, the Government would transfer toELECTROPERU responsibility for power sector planning and would

transfer to ELECTROPERU all its planning staff, equipment andmaterials by December 31, 1982; (ii) until December 31, 1982when the planning unit is fully established in ELECTROPERU,MEM and ELECTROPERU would collaborate closely in carrying outplanning activities; (iii) ELECTROPERU would, by June 30, 1982,establish the planning unit under an organizational structureand operating guidelines satisfactory to the Bank and agreewith the Bank on equipment to be purchased; and (iv) byDecember 31, 1982 ELECTROPERU would complete the purchase ofequipment and staffing of the unit and submit for Bank approvala training program for the unit, which it would thereafter carryout (para 67);

(b) ELECTROPERU would update the Master Plan at least once every sixmonths through December 31, 1983 and at least once every 12 monthsthereafter (para 67); and

(c) as a condition of loan disbursement for their respective parts

of the project, ELECTROLIMA, CENTROMIN and HIDRANDINA would enterinto subsidiary loan contracts with ELECTROPERU which aresatisfactory to the Bank (para 71).

- 32 -ANNEX IV

PERU Page I of 4

POWER ENGINEERING PROJECT

KEY FINANCIAL RATIOS FOR ELECTROPERU, ELECTROLIMA AND HIDRANDINA

YEARS 1978 AND 1979

… ------------ 1979…- …

Rlectroperu Electrolima Hidrandina Electroperu Electrolima Hidrandina

RATES OF RETURN:

Operating income to averageplant 4.4% 8.4% 3.0%

Net income to average capital 3.8% 3.3% 4.8%

BALANCE SHEET:

Debt/equity ratio 19/81 59/41 9/91 25/75 52/48 6/94

Current ratio (to 1.0) 1.3 0.6 0.8 1.1 0.8 1.7

CASH FLOWS

Debt-service coverage (to 1.0) 2.1 1.1 3.5 1.5 1.4 5.3

Contribution to expansion ratio - % 3 19 lt 10 11 1

1/ Neglibible investment programs

- 33 - ANNEX IV

Page 2 of 4

PERU

POWER ENGINEERING PROJECT

STATEMENTS OF SOURCES AND APPLICATIONS OF FUNDS FOR ELECTROPERU,;ELECTROLIMA.

AND TTID)RA"TNA - YFAR' l07 AM'P 1070

(millions of Soles)

--------1978…----------- - -- -… 1979- … -

Electroperiu Electrolima Hidrandina ElectroperG Electrolima Hidrandina

SOURCES OF FUNDS

Internal cash generation:

Operating income 3,399 2,237 146 4,962 4,140 418

Depreciation and similar charges 1,787 1,830 137 2,627 3,491 227

Connection fees, etc. - 973 64 _ 1,648 106

Total 5,186 5,040 347 7,589 9,279 751

Interest and related charges 695 2,230 99 1,071 3,469 100

Amortization of debt 1,792 (A) 2,280 - 3,838 3,307 42

Dividends - - 55 - - 75

Total debt service and dividends 2,487 4,510 154 4,909 h,776 217

Net internal cash generation 2,699 530 193 2,680 2,503 534

Borrowings 14,356 1,342 37 11,282 1,473 -

Capital contributions and other 55,829 (A) 673 - 8,022 790 1

Total Sources 72,844 2,545 230 21.984 4,766 535

=e=e== ...... ..... .... ---e---eGs_e

APPLICATIONS OF FUNDS

Investment:

Plant and equipment 73,358 2,863 57 21,348 2,841 86

Shares of subsidiaries 975 - - 920 - -

Intangibles 1,016 _ 104 764 - _

Other 3,193 - - 4,142 - -

Total 78,542 2,863 -7-161 27,174 2,841 86

Increase in working capital -5,698 -318 69 -5,190 1,925 449

Total Applications 72,844 2,545 230 21,984 4,766 535

Note: (A) excludes 21,971 of debt amortization by government.

-314 -

ANNEX IVPage 3 of 4

PERU

POWER ENGINEERING PROJECT

INCOME STATEMENTS OF ELECTROPERU, ELECTROLIMA AND HIDRANDINA FOR 1978 AND 1979(millions of Soles)

…--1 9 7 8 …---…-------- - -- _ ____ _ 1 9 7 9 --…- -______ElectroperG Electrolima Hidrandina Electroperu Electrolima Hidrandina

REVENUES

Energy sales 9,666 12,709 638 15,934 22,191 1,295Unbilled revenues _ 586 - - 974 -Other revenues 21 28 - 36 46 -Total revenues 9,687 13,323 638 15,970 23,211 1,295

Operating expenses:

Depreciation and similar charges 1,787 1,830 137 2,627 3,491 227Purchased energy - 5,011 - - 7,471 -Operations and maintenance 2,630 1,194 114 5,325 2,192 225Customer billing and sales 210 621 - 389 1,043 -Administrative and general 1,661 2,143 158 2,667 3,817 303Tariff compensation fund - 287 83 - 1,057 122Total operating expenses 6,288 11,086 492 11,008 19,071 877

Operating income 3,399 2,237 146 4,962 4,140 418

Non-operating expenses:

Interest and related financial charges 869 2,283 61 1,138 3,334 62Exchange losses and related charges - 153 102 - 499 100Non-operating income-credit 174 206 64 67 364 62Total non-operating 695 2,230 99 1,071 3,469 100

Net Income 2,704 7 47 3,891 671 318

-35 - ~ANNEX IVPage 4 of 4

PERU

POWER ENGINEERING PROJECT

bALANCE SHEETS OF ELECTROPERU, ELECTROLIMA AND HIDRANDINA AT YEAR-EN) - 19T8 AND 1979(millions of Soles)

------------December 1978 ------ - ---- December 1979-------------

Electroperd Electrolima Pidrandina E11stroperj Electrolima Hidrandina

ASSETS

Utility plant in service 35,023 60,167 8,752 41,802 88,870 15,223

Less accumulated depreciation 15,907 19,438 3,673 18,297 36 218 6,583

Net plant in service 19,116 40,729 5,079 23,505 52,652 8,640

Construction work in progress 83,711 2,292 26 98,280 2,732 69

Total utility plant 102,827 43,021 5,105 121,785 55,384 8,709

Investments 4,440 6 47 5,358 56 47

Total fixed assets 107,267 43,027 5,152 127,143 55,440 8,756

Current assets:

Cash and equiyalent 775 459 13 1,816 847 53

Accounts receivable:- Customers 2,499 2,483 75 3,505 4,449 305

- Others 781 763 32 1,630 1,333 109

Inventories 1,803 1,564 92 4,435 2,545 283

Prepaid expenses 3,502 74 118 112 144

Total current assets 9,360 5,343 330 19,633 ,286 894

Other Assets 15,473 1,535 112 1,341 106

Total Assets 132,100 49,905 5,594 165,334 66,067 9,756

LIABILITIES AND CAPITAL

Long-term debt, net of current portion 23,837 23,106 477 35,119 26,971 541

Current liabilities:

Bank overdraft 193 1,813 1 174 1,983 -

Current portion of debt 3,838 3,491 199 6,253 3,983 270

Other payables 3,163 4,245 219 5,234 257

Total current 7,194 9,549 419 18,537 11,200 527

Other liabilities 2,099 1,376 - 2,625 -

Total liabilities 33,130 34,031 896 57,444 40,796 1,068

Capital:- Paid-in 43,948 6,938 2,770 50,797 17,209 4,621

- Revaluation surplus 53,896 8,929 1,888 52,076 7,440 3,765

- Retained earnings 1,126 7 40 5,017 622 302

Total capital 98,970 15,874 4,698 107,890 25,271 8,688

Total Liabilities and Capital 132,100 49,905 5,594 165,334 66,067 9,756

weemS:= ~ ~ ~ ~ ~ ~ ~ .... ......===eu et ==t=====

- 36 -PERUTJFX

ELECTRIC POWER ENGINEERING PROJECT Page I of 1

EXECUTION SCHEDULE

Request Sign Complete Pre-feasibilitycr CompleteProposal Contract Feasibility Study Tender Documents

CENTROMIN

Yuncan hydroelectric (120 MW) Done Done Done 7/31/82

HIDRANDINA

Cahua hydro reinforcement (energy only) Done 6/30J81 9/30181 3/31J82Cahus hydro second stage (40 MW) 6/30/81 9/30/81 6/30/82 N.A.

ELECTROLIMA

Matucana daily storage extension Done Done N.A. 7/31/81Yuracmayo reservoir Done 7/01/81 11/30/81 9/30/82

ELECTROPERU

Platanal hydro (81 MW) 9/30/81 12/31/81 9/30/82 N.A.El Chorro hydro (150 MW) Done 3/31/81 12/31/81 9/30/82Molloco hydro (200-300 MW) 6/30/81 12/31/81 12/31/82 N.A.Rio Chili reinforcement (energy only) 12/31/81 - 3/31/82 12/31/82 N.A.Quishuarani hydro (30 MW) 6/30/81 12/31/81 12/31/82 6/30/84Rio Huaura hydro developments (339 MW) 6/30/82 12/31/82 6/30/84 N.A.Rio Santa reinforcement (14 MW) Done 6/30/81 9/30/81 12/31/81Evaluation of Olmos studies 9/30/81 12/31/81 6/30/82 N.A.trujillo-Chiclayo-Piura transmission line 6/30/81 9/30/81 3/31/82 12/31/82Fuel-firedthermal (about 200 MW) 6/30/81 9/30/81 3/31/82 12/31/82

IBRD 15608

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