Reach for the Sky.

An ancient ship and plucky investors hope to turn ugly duckling Puno into a high-altitude beauty.

FRESHLY-PAINTED WITH ITS HULL OVERHAULED, THE 240-TON Yavari recently inched down Puno's ancient slipway and back into the waters of Lake Titicaca, its home for the past 120 years. All the machinery in the semi-derelict shipyard used to winch the vessel out of the lake, then back in after the ship's facelift, dates from the heyday of Britain's Queen Victoria. Just like the Yavari itself.

The late January re-launch of the grande dame of the world's highest navigable lake comes compliments of Englishwoman Meriel Larken. When Larken traveled to Peru as a backpacker in the 1970s, she falsely believed her ship-building great grandfather had made two iron-hulled vessels that were transported to Peru in crates and reassembled on Lake Titicaca. By the time she discovered her family had no ties to the ship, Larken was already smitten with the rusting, listing Yavari.

She purchased the vessel from the Peruvian Navy in 1987 for its scrap metal value: US$5,000. Then she began raising restoration money through her London-based Yavari Project, which counts Prince Philip as a chief patron. So far, about $150,000 has been tapped, much of it in the form of corporate donations of paint and parts.

"People warned me, "This is the Third World and it's a 19th century boiler. If anything goes wrong when you start up, you'll be blasted right across the Lake into Bolivia:" says Larken, who has proven the skeptics wrong. The Yavari is fully operational and, by year's end, should be hauling tourists around one of Peru's most neglected destinations.

The mere mention of Lake Titicaca conjures up images of adventure and color. Its deep blue waters, ringed with mountains and dotted with enchanting islands, many of which were sacred for the ancient Inca culture, are a surefire tourist draw on the Bolivian side of the lake. Not so in Peru.

Peru's only sizeable town on the lake, Puno, is a disorderly mess of unfinished concrete houses climbing the hillsides higgledy-piggledy. Poverty is rife: streets are squalid, hustling traders work a huge contraband market and ragged urchins pick any promising pocket. Although it calls itself the folklore capital of Peru--and it boasts some wonderful festivals-- Puno's poverty makes it far from picturesque.

Entrepreneurs like Larken are rousing punenos to spark a turnaround based on tourism.

"Puno is more a potential than an actual tourist destination," says Arturo Schwarz, general manager of the year-old Sonesta Posada del Inca inn on the lake shore. "We need to consolidate and give value to the existing assets. Local people need to understand tourism is their best hope for economic development."

Harsh reality. In Schwartz's dream, Titicaca is peppered by happy tourists sailing, fishing or engaging in water sports. The real picture is quite different. Water at the shoreline is stagnant, covered in rank-smelling weed that flourishes wherever the town's sewage is dumped untreated.

But, with aid from German financial institution KfW, a cleanup has begun. Sewage is being diverted to an existing treatment area. Bio-remedies, including bacteria which eat pollutants, will soon be introduced to the lake. Sowing banks of reeds along the bay's edge will also mean cleaner waters.

The Yavari will be one of the first beneficiaries of a cleaner Puno. The vessel, one of perhaps only a dozen surviving iron-hulled ships in the world, was built in 1862 and transported from Britain in 2,766 pieces. Brought ashore at Arica--then a Peruvian port but now part of Chile--the heavy pieces were carried by porters and on mules some 190 miles. It took six years to move and reassemble the vessel.

Currently operating as a floating museum, the Yavari awaits a luxury refit that will make it an ecological tour ship.

In the meantime, other entrepreneurs are throwing their own ingredients into the new tourism pot. Bolivian-born Martha Giraldo recently built a 40-room solar-powered lodge on her private Titicaca island of Suasi. And businessman Jose Koechlin, who owns the nature-oriented Machu Picchu Pueblo Hotel at the base of the Inca citadel, received $8 million from the World Bank's International Finance Corp. to build additional lodges, including one near Puno.

Outside the altiplano city, tourists can spend a day or two at an alpaca breeding ranch. Mallkini, the property of the Arequipa-based Michell group, is 30,000 hectares of high, largely barren plateau, or puna, where 2,000 head of alpaca graze. With a comfortable lodge as their base, visitors can ride, climb and walk the ranch as they learn about some of Peru's important exports, alpaca wool and clothing.

Suasi's Giraldo is working with Mallkini to package a small tourist circuit on the northern side of the lake. Sonesta has signed an agreement with Peru's Libertador hotel chain and Orient Express, the new owners of the state-owned rail that links Puno to Cuzco and Arequipa. (Orient Express also owns luxury hotels in Lima and Cuzco and near the Machu Picchu ruins.) Joined under the name Tariq, or "welcome" in the indigenous Quechua language, Mallkini, Sonesta and Orient Express will market Peru--and Puno--to wholesale tour operators.

"What we need is to attract new tourists," says Schwarz. Government promotion agency Promperu agrees. Peru ambitiously seeks to welcome 2.5 million tourists by 2005. That compares with nearly a million today, if you believe official figures, or about half that if you rely on hotel statistics. Still, whatever their number, tourists in 2000 accounted for $1.2 billion in revenues, making tourism Peru's third-largest revenue generator.

Tourism to Peru has grown about 12% each year since 1995, with Puno outperforming the national average by growing more than 20% annually. A repaved road and the more comfortable train join new inns and eateries as increasing numbers of tourists slide into Puno after visiting Cuzco and the famous ruins of Machu Picchu.

With a cleaner town and bay, locals say the sky's the limit for high-altitude Puno.