(Corrects Sept 10 story to change title of Agrokasa employee to chief financial officer in paragraph 16; adds details in paragraphs 3, 14, 16, 26)
By Emily Schmall
ICA, Peru, Sept 10 (Reuters) - The World Bank Group, which has lent millions of dollars to turn Peru's fragile desert coast into verdant farmland, has stumbled into a film noir scene straight out of Roman Polanski's 'Chinatown' about the violent water wars of 1930s Los Angeles.
When a World Bank employee went in April to investigate complaints that loans made by its private sector arm had hastened the drying up of the Ica aquifer, he was shot at by gunmen after he spotted land pockmarked by clandestine wells.
Public prosecutors in Ica said the case was dropped and nobody was charged. The World Bank said it is now mainly trying to mediate water conflicts in the valley and was not looking for unlicensed wells.
Though the World Bank and its International Finance Corporation have been involved in a more sustainable project in northern Peru that uses water from the Amazon to irrigate fields, its work with well water in Ica has put it in the middle of a vexing problem.
Peru is South America's third-largest country and a top exporter of high-value specialty crops like asparagus. Farmers say it could become a breadbasket like Brazil or Argentina, well-positioned to feed a growing global population.
But it suffers from acute water shortages on its Pacific Ocean coast and they are expected to worsen as its ice fields in the Andes, the world's largest collection of tropical glaciers, melt because of climate change.
In Ica, where there is little control over who pumps water, the aquifer could dry up before the government comes up with a plan to pipe in rainwater from the Andes or the Amazon as it has done in northern Peru.
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"People talk about the land and how valuable it is. But it's the water," says Jorge Checa, who co-manages Agricola Athos, a 600-hectare asparagus and grape farm in Ica.
Because Ica sits next to the Pacific Ocean, the risks of overpumping are severe as saltwater could leach into the aquifer and, like in fertile parts of California, spoil the farmland.
Demand for water has intensified as Peru, long a leading minerals exporter, has sought to diversify its economy. Peru's export council, ADEX, says the country has ideal temperatures and soils along its coast.
Peru is already the world's top asparagus exporter, shipping $389 million in 2009, and the third-largest producer of artichokes. Its farm sector, which has attracted a wave of foreign investment, has grown rapidly, helped by laws allowing bigger land holdings and free trade agreements with the United States and Asian countries.
What's lacking is water. The coast's main source of fresh water, Andean glaciers, are quickly retreating and big investments in farming are "asymmetrical" with available water, said Raul Roca Pinto, a director in the Agriculture Ministry.
WATER DISPUTES IN ICA
The towering sand dunes in Ica, 185 miles (300 km) south of the capital Lima, belie a lucrative agricultural export industry that has grown fourfold in a decade.
One of Peru's biggest asparagus producers is Agrokasa, which in 15 years and with $23 million in loans from the IFC and, according to an Agrokasa field manager, has spread over 4,900 acres (2,000 hectares) of arid desert. Agrokasa Chief Executive Jose Chlimper says his firm has 2,975 acres in Ica and the company's web site says total holdings are 6,396 acres.
The IFC has conducted an audit of its loans in Ica and an internal ethics investigation after Agrokasa was poised to be approved for a fourth loan despite the objections of the lender's environmental review staff.
Also investigated was whether there existed a conflict of interest in making the loans to Agrokasa, since the company's chief financial officer is married to a World Bank employee. The World Bank said it has concluded there was no conflict of interest when the IFC made decisions about loans to Agrokasa.
Just days after Agrokasa approached the IFC in mid-2009 for a $10 million loan, an IFC ombudsman began receiving complaints that its loan would exacerbate the Ica water shortage.
Chlimper said the proposal, to build an underground tunnel to transfer water from the wells on one of its farms to a farm seven miles away whose wells were running dry, would ease the stress on the Ica aquifer. It would also expand the company's innovative drip irrigation system.
Jose Luis Rueda, an IFC sustainable agriculture consultant, visited Ica to assess Agrokasa's proposal and then recommended scrapping the loan, but he was soon removed from the team and the project was approved anyway, a World Bank source said.
After months of controversy, Agrokasa withdrew its request for funding in September. The IFC internal inquiry is ongoing.
"We are on the frontier of science but because of this IFC issue, we've become the icon of water misuse in Ica," Chlimper said. "I don't care. I don't need the IFC's money."
For Federico Vaccari, the president of one of Ica's water use associations, the hullabaloo over the Agrokasa project was reminiscent of Ica's water wars in the 1950s, when the aquifer supporting big cotton farms temporarily went dry.
"Fifty years ago, people here killed for water, and unless we do something, that is where we are headed," said Vaccari. "Our development could be the cause of our downfall."
David Bayer, an environmental activist and a former USAID administrative officer in Lima, predicts Ica's aquifer will dry up within a decade. He says Ica's six largest growers -- which consume 78 percent of Ica's groundwater -- should take half their lands out of production.
"The water crisis is real, and small and mid-size farmers are being nudged out," Bayer said.
Chlimper said the large growers use a smaller percentage of the water than estimated by Bayer, but did not specify how much. He said his company uses around 4 percent of the water.
Ica's water deficit is in part due to inefficient irrigation systems and Peru's government says most small farmers cannot afford drip irrigation.
"If you use new technologies like this drip system, it can buy you some time," said Lonnie Thompson, a Ohio State University professor who has been tracking Peru's ice caps since the 1970s.
PUBLIC IRRIGATION PROJECTS
Farmers say the only long-term solution for Ica is to have the government sponsor a massive irrigation project, like Chavimochic or Olmos in northern Peru, that pipes in water from rivers in the Andes or the Amazon basin.
World Bank loans helped plug seeping canals and repair dilapidated irrigation systems for the Chavimochic project, which broadened access to water, raised farm workers' average incomes and attracted billions of dollars in investment.
Some 370,000 acres (150,000 hectares) of desert have been converted into farmland and 200,000 new jobs were created in Chavimochic, according to Peru's export council. The World Bank says that expanding irrigation and labor-intensive farming best meet its mandate of creating jobs.
The Olmos project, which critics have decried as too costly, aims to avoid any reliance on glacial melt. Instead, Brazil's Odebrecht, which won the concession, will bore a 20-km (12.5-mile) tunnel through the Andes and bring water from the Amazon Basin to irrigate about 247,000 acres (100,000 hectares) of coastal land.
It plans to sell the land and the water in package deals to farmers starting in 2012. (Editing by Terry Wade and Kieran Murray)
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