Romania - Turceni Thermal Power Project

rlLI: {J"rl - of CIRCULATtN9G COPY FILE COPY T CIRCUAIGcp TO BE RETURNED TO REPORTS DESV DC;CUENT OF INTERNAT7ONAL BANK FOR RECONSTRUMON AND DEVELOPMENT Not For Public Use Report No. P-1416a-RO REPQRT RECOMMENDATION OF THE PESIDENT ;P THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK, RQMANIA . WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMIANIA FOR THE TURCENT THERMAL POWER PROJECT June 24, 1974 | eport wasprepa*e4 Qr off WUse t ny o Bank It makbe quote ' accuncy or comploteneu of the repot. ' an G.o not acept  CURRIJCY EQUIVALENTS 1. Official Rate lei 4.97 - US$1.00 lei 1 = US$0.20 2. Tourist Rate lei 14.38 = US$1.00 lei 1 = US$0.07 Conv araion Rate for Traded Goods I1i 20 = u S$. X00 X = US$0.05 Fiscal Year -- January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK, ROMANIA, WITH THE GUARANTEE OF TEE SOCIALIST REPUBLIC OF ROMANIA FOR THE TURCENI THERMAL POWER PROJECT 1. I submit the following report and recommendaticou an a proposed loain to the Investment Bank, Romania, with the guarantee of the Socialist Republic of Ronmania for the equivalent of US$60 million to help finance the foreign exchange cost of a thermal power project. The loan would have a term of 25 years, including 5-1/2 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. Romania joined the Bank on December 15, 1972. The first economic mission visited the country in March/April 1973 and its report, entitled "The Economy of Romania" (R73-274), was issued to the Executive Directors on November 30, 1973. An updating mission just returned from Romania and will complete its report later this year. The first basic mission is scheduled for 1976. Social and economic country data are given in Annex I. 3. Since the founding of the People's Republic of Romania in 1948, which in 1965 was reconstituted as the Socialist Republic of Romania, eco- nomic management has been organized along socialist principles which have included state and cooperative ownership of almost all productive resources, and the absence of private enterprise. Economic activity is directed by means of administrative development planning, coordinated by the central authorities. Productive enterprises operate within the framework of the development plan which defines the scope of their activity, the outlines of their production and investment goals and their targets for operating efficiency. The Plan is elaborated within a five-year time frame, each year having a separate Annual Plan. The country is presently in the fourth year of its Five-Year Plan for the period 1971-1975. 4. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a conmnon branch or industry without being directly engaged in production. Sub- ordinate to the Centrals are the productive enterprises whose principal task is meeting production targets. Production enterprises generally are not au- thorized to engage directly in foreign trade. For this purpose they use spe- cial foreign trade enterprises.  -2- 5. Economic development is of paramouit concern to the Romanian Govern- ment. Rapid industrialization is a major objective with priority being given to heavy industry including steel, machine tools and chemicals. To achieve their growth objectives the Romanian authorities have made considerable ef- forts to mobilize domestic resources for development and to maintain a high rate of capital formation. In the present Five-Year Plan planned and actual investment rates of around 30 percent of GN1 have been the norm. As a con- _uq"nce, consum.pcion has been restrained, and the development of the consumer goods industry has been less strongly emphasized than that of heavy industry. In 1972, heavy industry (led by machine tools, chemicals and ferrous metal- lurgy) accounted for about 70 percent of industrial production. 6. As a result of this strategy, a marked change has been achieved in the structure of Romania's economy. Rapid industrial growth, which over the last decade has averaged more than 13 percent per annum, has expanded the share of the labor force employed in industry including power and con- struction to 35 percent in 1972, from about 14 percent in 1950. During the same period, agricultural output almost tripled while the share of the labor force engaged in agriculture declined from 74 percent to around 42 percent. 7. Romania's population growth is around 1.0 percent per annum. Thus, the impact of rapid economic growth on per capita incomes has not been sub- stantially diluted by the population increase. In the last decade, GNP growth has been 9.0 percent per annum on average, implying a growth of about 8.0 per- cent per annum of per capita GNP. The latest World Bank Atlas estimates GNP per capita for 1971 at $740. 8. The organization of production in both the urban sector and in agri- culture is such that all labor is actively employed and there is no open un- employment. There is, however9 some labor surplus. Income distribution is also relatively equal. In 1972, average monthly wages were 1,498 lel (about $75 equivalent). Almost 80 percent of all monthly wages were within the range of 900-20^00 lei and less than 6 percent were under 900 lei. Minimum wages are guaranteed by the State; they were raised to 1,000 lei per month for full-time workers in September 1972. Prices for essential consumer goods and services such as basic foodstuffs, rents and urban transport are rela- tively low and most social services, notably education and health care, are provided without charge. Continuous efforts are made to increase the standard of living. Romania also pursues a positive regional policy which has sought to bring a balanced development of both human and natural resources to all parts of the country. 9. The official exchange rate of lei 4.97 per US$1.00 is used only for accounting purposes. The rate used for invisible and capital transactions is lei 14.38 per US$1. Under a new system introduced in January, 1974, the prices of all traded goods are converted at a uniform rate of lei 20 per US$1.00, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domestic lei price is found by adding to the converted foreign price a tariff rate which varies for different types of goods. The rate of lei 20 per US$1.00  has also been used to convert national income statistics from lei to sII; ,. Consequently, this rate has been used as the base rate for calculaticns in the appraisal. Recent Developments 10. Since the National Part:y Conference of 1967, w'nich set the stage for major qualitative advances in Romania's economic and social development, there have been important new emphases in Romania's economic management. Measures were taken to improve the institutional basis of planning (e.,. by creating the Centrals to assist in plan administration), to increase toe ef- ficiency of economic management and to improve upon the quality of production in industry. In agriculture efforts were made to raise productivity and stabilize growth through irrigation, mechanization and the expanded use of chemical fertilizers, To expand upon the growth of foreign trade and technical- economic cooperation the Romanian Government has concluded trade and cooperation agreements with a wide range of countries. In this context also, Romania has made positive efforts to expand its multilateral external relations and to pursue full cooperation with the international agencies, including UN, UNCTAD, UNESCO, FAO, UNIDO and GATT. 11. One result of these efforts is that foreign trade has expanded quite rapidly in recent years both in volume and in regional diversity. There has also been a tendency to move away from trade on a bilateral barter basis to- wards trade involving multilateral payments. During the period 1965-72, total foreign trade grew at about 12 percent per annum in current prices. In 1972, imports and exports each totalled about $2.6 billion, about 45 per- cent of which represented trade with non-socialist countries. Overall trade deficits have generally remained small. During 1968-72 the total annual trade deficit averaged about $75 million, i.e. less than 8 percent of average ex- ports. However, the results varied as between different trade regions. Im- ports from East European Socialist countries were slightly lower than Romania's exports to that region. In Romania's trade with Western industrialized coun- tries, on the other hand, exports were much less than imports. These deficits have sometimes been increased by deficits on the invisibles account with Western countries. 12. The Romanian economy has not escaped the impact of recent world developments affecting the energy sector, even though the country depends only marginally on imported fuels. At present Romania is a net importer of crude oil and a net exporter of petroleum derivatives. In 1973 Romania im- ported about 4.0 million tons of crude oil valued at around $80 million, out of a total crude consumption of around 17 million tons. Valued at 1974 prices, this volume of imports will cost over $200 million which represents a significant increase in required foreign exchange. These imports, however, are used mainly as chemical feedstock. Exports of derivatives in 1973 were about 5.0 million tons valued at about $140 million. To the extent petroleum derivative prices rise in response to recent changes in crude oil prices, there will be gains in export earnings to offset the rise in the oil import bill. The extent to which this will occur, however, is still uncertain. In  - 4 - November 1973, the Romanians embarked on a stringent program of economy ia the use of fuels, which included rationing of gasoline and fuel oil, in order both to minimize the import drain and maximize the supply available for ex- port; rationing ended in March 1974 following an increase in the selling prices of these fuels. Exter.Lal Assistance 13. The expansion of Romania's trade with the non-socialist industrial countries has led to an increased need zo obtain convertible currencies to pay for imports from those countries. Fomania has met this need both by bor- rowing abroad and by mounting a major effort to expand exports and tourism. Gross inflows of convertible currency capital were US$542 million in 1973, having grown from US$276 million in 1967. Romania's access to convertible finance, however, has been almost exclusively confined to financial and sup- pliers' credits with relatively short repayment periods. The net inflow of convertible capital in 1973, therefore, was only US$238 million. 14. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also taken active steps to attract long-term pri- vate capital. A regulation passed in 1972 defines the conditions under which foreign firms can establish joint ventures with domestic enterprises, prefer- ably in foreign exchange earning/saving industries. Romania has also estab- lished two joint banks, one in France and the other in the United Kingdom, in an effort to expand the availability of credit from European countries. Prospects 15. The current Five-Year Plan (1971-75), whose original targets in most sectors appear likely to be exceeded, reflects Romania's continued strategy of rapid growth. The targets contained in the Annual Plan for 1974, for example, include a 16.7 percent growth in industrial production, 14.6 percent growth in national income, an investment rate equal to 35 percent of national income and a 41 percent expansion of foreign trade. The Plan also lays stress on a range of qualitative aspects of development including tech- nical improvements and diversification in industry and foreign trade, improve- ments in capacity utilization, development of the nation's human resource potential and a continued emphasis on regional development. 16. Romania has good potential for further economic growth. Endowed with important natural resources - fuels, some minerals, timber, rich soils and a favorable climate both for agriculture and tourism - and located con- veniently with respect to its major international markets in the East and West, the country has built a broad industrial infrastructure (power, metal- lurgy, chemicals) which will serve as a base for the expansion of secondary manufacturing sectors such as machine building and consumer durables. Above all, Romania has a hard-working and increasingly skilled population devoted to the achievement of the country's development objectives. 17. Economic growth and structural change call for the introduction of new industrial technologies, improvements in the quality of products, more economic use of materials and factor inputs, and reductions in production  costs. The increasing diversity and complexity of Romania's economic s.z-c- ture require continuing improvements in the efficiency of economic planning and coordination and further refinements in industrial management. 7T up with these changes and requirements large programs of education and manpower training have been mounted, and efforts are being made to strengthen technical cooperation with industrialized countries and international organizations. Creditworthiness 18. At the end of 1973 Romania's total medium and long-term external debt amounted to $1,519 million. Most of these debts ($1,404 million) were denominated in convertible currencies, the major creditor countries being Germany, France, UK and Italy. While the total debt does not appear excessive in relation to the volume and growth of external trade, average maturities are relatively short and convertible debt service payments are estimated to be in the order of $340 million a year during 1974-75. The convertible debt service ratio was approximately 19 percent in 1973, reflecting the unfavorable terms of foreign credits available to the country. 19. The organization of economic activity in Romania and the pursuit of a development strategy involving high investment/saving rates and rapid income growth ensure the availability of domestic resources sufficient to service reasonable amounts of foreign debt. Moreover, the country's major efforts to expand exports (particularly to convertible currency areas), to attra(t private joint venture capital and to seek other forms of bilateral convertible currency financing are increasing the foreign exchange available for debt service. Convertible earnings rose from $585 million in 1967 to $1,902 million in 1973. The preferential trade status accorded to Romania by the EEC in June 1973 should facilitate the further expansion of such exports as could the granting of most favored nation status by the U.S. Last year, the Government also restricted the use of short-term credit faci- lities from western suppliers in an effort to improve the structure of the country's external debt. Assuming a continuation of present export and debt management policies it can be expected that the debt service ratio will gradually decline during the second half of the 1970's. The country's pre- sent outward-looking posture, the success of both its domestic growth and foreign trade policies, and its potential for continued development, all support the judgment that Romania is creditworthy for substantial Bank lending. 20. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. The only settlements which were still under dis- cussion at that time concerned claims in the United Kingdom and in the United States. The Romanian authorities have repeatedly assured the Bank of their intention to settle these old claims, and have from time to time advised the Bank staff of progress towards settlement. As far as the US claims are con- cerned, there have been several meetings between both parties. The most re- cent meetings between a Romanian delegation led by the l)eputy Minister of Finance and representatives of the US bondholders took place on June 10, 1t and 20 in Washington; the next meeting is planned for early July during which botlh sides expect to agree on procedures for formal registration and validation  - 6 - of Dutstanding bonds. Tlhe Romanian authorities have expressed confidence that _.a< azreenent on a compensation formula will be completed no later tilan -. ous-c 1974. The UK claims are larger and more complicated. The most recent -:eetings were hield in London on June 6 and in Bucharest on June 18. Both sides aim to exchange specific proposals during the next few weeks, and the komanian authorities have expressed confidence that final agreement will be reached By September. PART II - BANK GRO'JP OPERATIONS IN ROMANIA 21. Documents for the first loan to Romania, the Tecuci Fertilizer Proj- ect, were distributed recently to the Executive Directors. In addition to the proposed project, documents are also now being distributed for the proposed Otelinox Special Steel Project. 22. It will take time to build up a detailed knowledge of the economy whlch would allow a sharper focus on the outstanding development problems. At present, foreign exchange, especially in convertible currencies, appears to be a major constraint. During the early phase in the Bank's relations with Romania, therefore, one of the major objectives of Bank lending will be to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which would expand for- eign exchange earnings or savings. Bank lending will also aim at supporting the Government's efforts to introduce new industrial technologies, to improve the quality of products, to make more economic use of materials and factor inputs and to reduce production costs. In the power sector the Bank supports the Government's program of primary energy resource development and use, and the proposed project which will utilize the country's extensive lignite d>- posits, fits this objective well. Market aspects and marketing, especially for export goods, will also be emphasized. Special attention is also being given to agriculture where productivity levels are still relatively low. The Government is aware of this situation and has stepped up efforts to deve- lop agricultural sector as evidenced by the rapid expansion of irrigation, the increasing use of fertilizer and the continuing pursuit of institutional improvements in this sector. The Bank will assist the Government in implement- ing plans in this field. 23. In furtherance of these objectives of Bank lending, loans for an irrigation project in the area of Giurgiu-Razmiresti and an agricultural credit operation to develop agricultural production within the recently completed Sadova-Corabia irrigation system are envisaged within the next year. Also being prepared for Bank consideration is a multi-purpose power and irrigation project on the lower Olt River and a pulp and paper project. 24. In addition to significant help with the preparation of projects for Bank financing, the Bank (through the EDI) has supported a project appraisal training course for Romanian officials (held in Belgrade in October 1973). The preparation for a series of similar courses in Romania are underway.  - 7 - 25. Romania is not yet a member of IFC but preliminary contacts have been made to discuss Romania's cooperation with IFC. 26. The projects in the pipeline would represent only a small proportion of Romania's total need for external financing, and of its total disbursed convertible debt. However, they would provide a substantial net addition to the present inflow of convertible currency finance, and hopefully set a Dattern for obtaining finance on longer repayment terms. The disbursed debt outstanding to the Bank is not expected to constitute more than 10 percent of Romania's total projected convertible currency debt in FY79; the Bank's share of Romania's debt service payments in FY79 would be less than 4 percent. PART III - THE POWER SECTOR IN ROMANIA Energy Resources 27. Romania relies predominantly on domestic sources of primary energy, though in recent years imports of crude oil and coal have become important. The country's single most important source of primary energy is natural gas, accounting for 41 percent of total consumption in 1973. Of the balance, oil accounted for about 30 percent, coke and coal for about 28 percent and hydro- electricity for about 1 percent. 28. Total gas production in 1973 was 30 billion m3, of which 5 billion m3 was derived from oil. It is expected that production will increase by about 1 billion m3 annually until 1975 with no increase thereafter. Known reserves are expected to provide 30-50 years supply of natural gas at these extraction rates. As for crude oil,. Romania consumed or processed about 17 million tons in 1973 of which 13 million tons was from domestic reserves. Domestic crude is generally of very high quality with less than 1.0 percent sulphur content. Of the country's coal reserves about 90 percent consists of relatively low grade lignite (with a combustible content between 35 and 38 percent). Of a total reserve of around 9 billion tons, most of which is in the Oltenia region, about 3 billion is considered economically exploitable. 29. The Government's energy policy aims at diverting Romania's limited gas reserves increasingly towards the use as feedstock for chemical industries, and basing additional power generation on less valuable domestic raw materials such as lignite and hydro resources. This not only increases the value added obtained from gas, but saves scarce foreign exchange for imports of fuel oil whiclh would othierwise be necessary, and lessens the risk of disruptions in raw material supplies. The proposed project exemplifies this policy. Electrical Energy 30. The installed generating plant at the end of 1972 was 9,357 MW (delivering 43,400 GWh) of which 9,100 MW or 97.3 percent was interconnected. The plant comprised 6,842 MW steam, 2,100 MW hydro, 306 .4W diesel and 109 MWi as gas-turbine. Of the total 8,501 MW was in the charge of the Ministry of  -8- Electrical Energy whilst the remainder represented plant installed at indus- trial works. The transmission system comprised 242,675 km of lines at all voltages of which 2,010 km at 400 kV, 2,458 km at 220 kV, and 9,259 km at 110 kV. Sub-transmission/distribution in the range of 1-60 kV accounted for 86,489 km of lines with the remaining 142,459 km being at less than 1 kV (see attached map). 31. hydroelectricity: In the years 1960-72, thie total hydro-based ca- pacity increased exactly tenfold (i.e. from 210 MW to 2,100 MW), Most of this inicrease, however, came in 1970/71 upon tlle completion of the Iron Gates I hydro-electric station on the Datube. This station has a total capacity of 2,100 MN and produces about 11,OCO GWh p.a. Only half of these amounts are available to the Romanian system as the Iron Gates output is shared equally with Yugoslavia. It is estimated that Romania's total hydro-potential (eco- nomically feasible) is around 31,000 GWh p.a. of which only 7,000 GWh p.a. is developed at present. 32. Thermal Power: In 1972, the output of 36,000 GWh from the thermal plant was derived from the following fuels: gas 59.1 percent, lignite 20.8 percent, coal 13.4 percent, fuel oils 3.8 percent and other fuels including secondary resources, 2.9 percent. The largest operating steam units are 315 MW at Craiova and are lignite-fired. Further units of similar size and type (330 MW) are under construction at Rovinari. Craiova and Rovinari are in the Oltenia region not far from Turceni. Twelve 200-MW units have been commis- sioned in the period 1966 to 1972. Romania has until recent years purchased its major power plant components from foreign sources, mainly Russia and Czechoslovakia. 33. Nuclear Energy: There is at present no nuclear power generating capacity in Romania but there are plans to develop a 440-MW plant with the commissionning scheduled for 1981. The Market for Electric Power 34. Electricity supply is available to 91 percent or 18.7 million of the Romanian people. Average annual consumption of electricity per capita was about 1,600 kWh in 1972. Total energy consumption within the country was divided as follows: industry 75 percent, commerce 11 percent, domestic 9 percent, and agriculture 5 percent. Of the country's total electricity production of 43,440 GWh, about 8.5 percent was exported, principally to Czechoslovakia via USSR. 35. Village Electrification: Romania presently has some 13,150 vil- lages. In 1960, 3,427 of these had been electrified. In the next five years (1961-65), 617 villages were electrified on average each year. In 1966-70 the rate increased to 815 p.a. Thereafter, as the remainder became increasingly remote the rate dropped to slightly more than 500 per year. By 1972, 88.5 percent had been electrified and the balance is to be completed by 1975 at the rate of 500 per year, at which tIme electricity will be avail- able to nearly the entire population.  -9 Development Program 36. The Government attaches high priovity to the development of the electric power sector because it considers the development of this sector as an essential element of, and prerequisite for, the development of Romania as a whole. State Plans in the past have included investment projects which substantially increased the production capacity of the power sector. Also, for the period up to at least 1980 further substantial capacity increases are envisaged in order to make the most ecoaomical use of the existing power resources of the country. Total investmenti to support the planned growth in the power sector over the years 1974-80 amomnt to lei 99.3 million (US$5 bil- lion equivalent). Of this, some 60 percent will be for new generating plant. This reflects an average system investment rate of 12,000 lei/kW plant in- stalled including tr,ansmission and distribution works, etc. 37. In the development program, hydro development will be accelerated as far as possible. Specifically the Riu Mare scheme with 320 MW of plant at 14,000 lei/kW investment is scheduled for construction during 1974 to 1980. The Cernavoda scheme on the Danube costing 20,000 lei/kW with 1,000 MW of plant and an annual output of 4,000 GWh is planned for construction during 1975 to 1983. 38. Thermal development will concentrate on the utilization of indi- genous solid fuel and the proposed project is typical, being sited so as to permit its extension by a further 1,320 MW of plant based on lignite fuel. Recognizing the inevitable exhaustion of solid fuel resources, development of nuclear plant is also planned, as described above. An important factor in the future thermial program is the planned retirement of old and relatively inefficient plant to be made possible by the construction of more efficient and modern units such as Turceni. Even neglecting any plant retirement as- pects, Turceni's contribution to the system peak demand will be absorbed in less than 14 months after commissioning; its installed capacity is about one- third of the total new plant being commissioned in the construction period. 39. While in making development plans for the power sector, the devel- opment needs and financial resources of the whole economy are taken into con- sideration, it is the Government's policy to ensure that a substantial part of the investments in the sector are financed from funds which are generated in the sector itself. Thus, in the period 1974 to 1980 it i8 planned that more than 40 percent of the investments in the sector will be financed from funds generated by power sector enterprises. Consequently, it is also the Government's policy to set the prices in the power sector at a level sufficient to cover operating and administration expenses (including maintenance, depre- ciation and taxes, if any) and to produce substantial benefits. lr a letter supplemental to the Loan and Guarantee Agreements the Guarantor would confirm that these principles are applied whenever decisions for specific investment projects in the power sector are taken, and that the exchange of views and in- formation as agreed upon between the Guarantor, the Borrower and the Bank, would provide adequate opportunities for further reviews of the application of the principles to the actual investment and financing plans for the electric power sector.  Organization of the Sector 40. The Ministry of Electrical Energy (MEE) administers the sector through a board comprising the minister, three deputy ministers and the various directors of subordinate units. Power production, transmission and distribution facilities are operated by enterprises of which there are 16 for generation and 17 for distribution, all of which are subordinated to the Industrial Cen- tral for Electric Power and Heat (CIEET). The Central serves as an interme- diary between the Ministry and the enterprises, collating and monitoring their investment and production plans, supervising their activities and reviewing their finances. 41. The Design Institute for Thermal Studies (ISPE) which is subordinate to the Ministry is responsible for project design. There are also foreign trade enterprises dealing with the sector which serve as agents in the pro- curement of equipment from abroad. 42. The Turceni generation enterprise was established on August 1, 1973 by a decree of the Council of Ministers. It is a legal entity, whose desig- nated officers have the power to sign contracts and utilize the investment funds provided for the project. It is a self-accounting unit, recording the costs of construction and subsequently those of production when the power station is commissioned. Its function during the construction and operation phase of the project are described in more detail in paras 49.and 50 below. The Borrower 43. The borrower for the proposed loan would be the Investment Bank, which is the specialized agency, under the Ministry of Finance, for investment projects in all sectors of the economy except agriculture (including water resources) and food processing. It has a large technical and economic staff with branch offices in all districts of the country. The Investment Bank's involvement in investment projects commences in the preparation phase of a project; its staff appraises all major investment projects technically and financially and recommends approval or otherwise of their financing to the Council of Ministers. When a particular project and its financial plan has been approved by the Council of Ministers, all major funds (budget allocations, depreciation funds, share of planned benefits) are channeled through the Investment Bank in accordance with the approved financial plan. All payments in lei for the execution of a project have to be authorized by the Investment Bank which keeps separate accounts for each category in the firancial plan for every enterprise. It is the bank's obligation to ensure that a project is executed according to the financial and technical data included in the final technical and economic study as approved by the Council of Ministers. Its inspectors check whether the project is proceeding according to the schedule approved in the Plan. 44. While the Investment Bank's supervision and control function is thus rather strong during the implementation phase of a project, its func- tions are much more limited during the operation pliase of a project. Al- though it has the right and obligation to verify that the enterprise is  meeting the targets set in the investment plan, it has no legal authoricy to influence directly the management of the enterprise or to force the en- terprise directly to take operational actions which it considers necessary. In practice, however, it can request such actions very effectively by re- porting through the Ministry of Finance to the Government. To ensure that the Turceni Enterprise meet the requirements specified in the loan agreement concerning the operations phass, the Guarantor shall cause the enterprise to comply with such requirements (see Section 2.03 of the Guarantee Agreement). 45. As mentioned above, the Investment Bank is the channel for all sources of major domestic investmenit financing, but its own funds are still relatively small. Its prime source of funds is the State Budget. The Guarantee Agreement, therefore, includes a provision (Section 2.02) that the Guarantor shall provide all necessary funds for the implementation and ope- ration of the project. The Guarantor would also provide sufficient funds to the Investment Bank to ensure that it can meet the debt service on the Bank loan (see para 53 below). In view of the status of the Investment Bank with- in the government system, it is considered sufficient to rely in this respect on the Guarantee Agreement (Section 2.01). PART LV - THE PROJECT 46. The project was identified in mid-1973 and appraised in November 1973 on the basis of technical and economic data submitted by the Government. Negotiations were held in April/Yiy 1974 in Washington. The Romanian delega- tion which included representatives of the Government and the Turceni Enter- prise was led by Mr. Mihai Diamandopol, President of the Investment Bank. Approval by the Council of Ministers of the main indicators of the technical and economic study for the project would be a condition of effectiveness of the loan. Project Description 47. The Turceni power plant, which will be constructed under the pro- posed loan, will be among the largest of the lignite-fuelled plants in Romania, comparable to the existing plants at Craiova and Rovinari. Its detailed analy- sis as well as the initiation of construction is included in the Romanian 1971-75 Plan. The Project's completion and attainment of full capacity will be part of the 1976-80 Plan. The project will include the construction of: (a) a thermal power station with four 330-MW lignite-fired units delivering 7,920 GWh to the interconnected system at a load factor of 74 percent, complete with the Jiu river realignment for cooling water intake purposes and flood control, road and rail links for construction and generation purposes; (b) 400-kV and 110-kV transmission lines, about 600-km long, con- necting Turceni with Mintia and Brazi substations including  - 12 - a switching station and interconnection with the existing 400-kV system out of Iron Gates I power station. The 110- kV line is for construction and standby purposes and will connect with two nearby substations. 48. The development of lignite supply as fuel for the Turceni plant, although not part of the project, was also examined during appraisal. The fuel will be supplied from the Oltenia deposits from two new mines, one an open cast mine at South Jilt and the other an underground mine at Matasari, supplemented by some expansion of existing mines in the Oltenia region. A Loan and Project Summary is given in Annex III. The Appraisal Report en- titlea "Appraisal of the Turceni Thermal Power Project" is being distributed separately to the Executive Directors. Project Execution 49. Responsibilities for project execution have been delegated to several agencies of the Ministry of Electrical Energy but the Turceni Enter- prise will have overall responsibility for the coordination of project execu- tion and of the project related activities of the other agencies involved (see Section 3.01 of the Loan Agreement). The Design Institute for Thermal Studies (ISPE) and the Design Institute for Studies and Projects for Power Station Equipment (ICPET) are responsible for basic design and engineering and the technical aspects of bid s;pecification and evaluation. They will also supervise the construction of civil, electrical and mechanical works. Civil works will be undertaken by the Thermal Construction Trust (TEC) and the electrical and mechanical works in the power station by the Electro~- Mechanical Construction Trust (TENM). The transmission, distribution and substation works will be undertaken by the Transmission and Substation Construction Trust (TEM). The procurement of foreign equipment and materials needed for the project will be the responsibility of the foreign trade enter- prise ROMENERGO. Goods and services required for the project and to be sup- plied from within Romania will be procured directly by the Turceni Enterprise with the guidance of the design iuistitutes ISPE and ICPET who would assist the enterprise in a manner similar to a consultant. At the same time, the Investment Bank has a team of specialists who effect a technical and admin- istrative audit during the investment period. Project Operation 50. The Turceni power plant will be operated by the Turceni Enterprise within the Industrial Central for Electrical Power and Heat. The organiza- tion and functioning of Turceni is in accordance with the 1971 law on the organization of State production and administration units. This law pro- vides for a general manager of the enterprise (appointed by the Ministry of Electrical Energy) who, assisted by a management committee, decides on and supervises the daily operations of the enterprise. Under the Romanian system of collective decision-making the organization of the enterprise also includes an Assembly of the Working People in the enterprise, which meets twice yearly to determine matters of broad policy interest and a Committee of Working People  - 13 - (formed from the Assembly) which determines operating policies at monthly meet- ings. All decisions of these bodies must be made within the framework of t6hC Plan. Project Cost 51. The total cost of the project (excluding interest during construc- tion) is equivalent to US$353.5 million with a direct foreign exchange compo- nent of US$89.3 million, or 25.3 percent of the total. The project cost in- cludes the cost of the transmission lines and other associated works (e.g. switching station, construction rail link, compensation for the use of agri- cultural land) totalling about $60 million. Local costs are based on fixed Romanian prices and are unlikely to change significantly; however, an allow- ance not exceeding 5 percent is built into the base costs of local project components in accordance with Romanian practice. Price contingencies on items to be financed by the Bank Loan were calculated at 14 percent for 1974, 11 percent for 1975 and 7-1/2 percent for subsequent years; for the remainder of direct imports a price contingency of 5 percent is provided. Physical contingency has been allowed at 5 percent on the overall cost of the project which is in accordance with Romanian experience. Financing 52. The proposed Bank loan of US$60 million would be sufficient to fi- nance about 67 percent of the direct foreign exchange cost of the project. Interest on the Bank loan during construction (amounting to about US$14 mil- lion) and the remaining foreign cost would be provided by the State. ('How- ever, an understanding has been reached that any undisbursed loan portion as a result of cost savings would be used to finance part of interest during construction on the Bank loan). For the sector as a whole, the investment program of the Industrial Central over the period 1974-79 requires about lei 87 billion (about US$4.4 billion equivalent), of which 46 percent will be financed from internal cash generation and 54 percent from external sources. Of the latter about 52 percent will be from the State Budget, about 1 percent from Investment Bank loan and &bout 1 percent from the proposed Bank loan. Lending Terms 53. The proposed loan to the Investment Bank would be guaranteed by the Coveranmenit and would be for a term'of 25 years including 5-1/2 years of grace a t anl initerest rate of 7.25 percent per annum. In accordance with the finan- cinlg meclhanism for projects in Romania, which is described in detail in para- graphs 3.14 to 3.19 of the Appraisal Report, the Investment Bank would not actually relend the Bank loan to thie enterprise. liowever, the enterprise would be the beneficiary of the Bank loan and its annual transfer of funds to the State Budget and Investment Bank would be sufficient to cover the lei equivalent of the debt service on the Bank loan (Section 4.01 (h) of the Loan Agreement).  - 14 - Audit 514. Romania has a well developed system of internal and external audit- ing primarily to ensure that the investment and production activities of enter- orises conform to state plans. Any deviations are brought to the attention of higher authcrities. Each enterprise and industrial central has its own internal controllers, appointed by the Ministry with the approval of the Ministry of Finance, who carry out a basic annual audit. The Bank would re- ceive annual audit reports of the Turceni Enterprise and the Borrower prepared by the ilinistry of Finance (Sections 6.01(e) and (f) of the Loan Agreement). Also, a letter supplemental to the Loan Agreement to be delivered by the Guarantor and the Borrower would provide for the Bank to receive annual audit reports by the Ministry of Finance on the accounts and results of the Indus- trial Central for Electric Power and Heat. These arrangements would adequate- ly meet the Bank's information requirements in this respect. Procurement 55. Procurement of the items financed by the Bank loan would follow interniational competitive bidding in accordance with Bank guidelines and would be coordinated by ROMENERGC. It would involve the purchase of com- plete components (such as standby diesel sets and ash handling plant) to be delivered directly to the site, and of equipment and materials (such as special steel plates and pipes) for incorporation in, and manufacture of, the boilers, turbines and generators being made in Romania. In general, Romanian suppliers, although eligible to bid, are not expected to bid, since the list of equipment and materials to be financed by the Bank has been pre- pared after excluding all goods likely to be available locally. Disbursements 56. The Bank loan would be disbursed against the foreign exchange costs of imported equipment, components and materials and against the ex-factory price of locally manufactured equipment and materials, should Romanian sup- oliers bid successfully. No disbursement would be made for costs incurred prior to the signing of the loan. A schedule of expected disbursements is given in Annex III. Ecology 57. Specific attention has been given both to plant design and location in order to minimize the risks to the physical and social environment of the area. In fact, choice of the station site as against other alternatives was largely made on an analysis of ash and gas emission which would pertain to the full development of Turceni to 2,640 MW, together with the influence of neighboring lignite-burning plants (Craiova and Rovinari). The design of Turceni abides by the satisfactory pollution standards set by Romanian law. Tthe Turceni Enterprise would submit regularly reports to the Bank on pollution concentration levels and any necessary corrective action taken.  - 15 - 58. The environmental effects arising from the open cast mining of lignite will be dealt with by rehabilitation of tlhe overburden dumps and worked-out areas by contouring, fertilizing and replanting. Labor Force 59. Permanent employment in the Turceni power station will be approx- imately 1500. Of this total about 90 percent are skilled and unskilled workers, the remainder being engineers and other professional staff. About 5,500 people will be employed during the construction phase of the project. At peak oper- ation (i.e. after 1980) the mining activity associated with the project will involve the employment of about 5,000. Justification 60. The appraisal mission has reviewed the methods the Romanian author- ities use for forward planning and making investment decisions, including the derivation of least cost programs; unfortunately, the authorities made avail- able only part of the data necessary to allow the validity of these methods to be assessed fully and such data were restricted to a choice between spe- cific thermal alternatives. Nevertheless, given the plans for developlment of both nuclear and hydro-based power, which were described in outline, and taking account of the largely peaking characteristics of the hydro resources, we believe there is ample room for base load thermal plants such as Turceni. Within the range of thermal alternatives the choice of lignite as a fuel is amply justified by comparison with imported fuel oil (or implicitly with gas), since at fuel oil prices of $8 a barrel the lignite choice is the least cost solution at discount rates up to 25 percent. 61. The economic rate of return on the project is 8.6 percent if bene- fits are measured by incremental revenue attributable to the Project and financial costs are adjusted for taxes and internal transfers. However, this incremental revenue understates the benefits consumers receive from the Project, since the level of tariffs (particularly for industrial users) is low, with only marginal changes since 1963. Also, the incremental revenue excludes the social benefits deriving from expanded industrial employment and urbanization which the incremental energy provided by the Project would help to foster. In the light of the foregoing arguments, the development of an indigenous lignite fuel resource and a thermal power station based on it, is judged to be an appropriate part of the development plan. PART V - LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Loan Agreement between the Bank and the Investment Bank, the draft Guarantee Agreement between The Socialist Republic of Romania and the Bank, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. The special features of the loan documents are described above.  - 16 - 63. I am satisfied that the proposed loan would comply with the Articles of Agreel2ent of the Bank. PART VI - RECOMMENDATION 64. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. June 24, 1974  ANN EX I Pag-e71 of 2 pages OCUNThT DATA - IAIP4ANIA A RE, POPULATION LENSITY 273 7,5 (9( key 2023 elor cd18.lklfarb ln SOCIAL TIlMCATORS Reference Count, les Roi-inA Yu .2"q MO ~ ~ ~ ~ ie Iti (WP PER_ C-APITA US ATIA5 83IUSIS aI /n3 , 75( :: (5 ?,-TA1bTrth ruts (per thou.and) - I) 21 jI5 Crude death rate (p-r thousand) 91 I09 c Infant mortality ruto (per thounand line birthsc) 75 49 c' ' Life expectancy at birth (yoAr.,) c.(9c : 1 Greenreproduction' rate (I / b V.P nI . PoPoloilen growth rets- ur%ban 3.8 /d 3.: d .'i) Ago structure (percont) 0-25 7~~~~~~~~~~~~~~~~~~~~~:8 lb 2(. /c 20 Is' 2. 15-6h 3 5 ~ 67 : 4 65 and o"er 65 75- 13' To65 1 bonendency ratio /5 ~~~~~~~ ~~~~~~~~~0.5 7; 0.7 77 1.13 /c ic0'a/ 1.0 Urban populatiocon aspurcent of total 3 d5 d3 99 e Pa-ilyplcolg: No. o- acceptor, ounelatlo- (thoom.~ . N-. of coors, (% of carried aceen) . .. Total labor force (thousands) 9,58(3 9,920 9,600 1,(( 9bi~I Porceotags employed An agriculture 66 49 52 17 Por-otago unonplnyocl 0 013. INCOC DlISTRIBUTIONI Peceont Of salaried workers Darning lees than 2,200 Jet . 2,.73 13.5 4,iq ..- Percent Of salaried worker.e earning more than 2,500 leli 6.3 13.1 z2~ DISTRIArTInON OF LAND OFAERSHIP i owned by top 19% of onaers.... X ownod by veal11-t i0% of owneros.. F&ALThi AND NUJTRITION 16o7paltioc per pysician 740 /o 65130 /n I ,(X)180 5 Pop,lutiono per curaing person 36200 7290 /5 Population per hoard tat bed31102835Oc 16I POr capita calorie supply as 5 of reqoirements 5 lA 110O 125 lc// 16/s Per capita protein supply, total (grams1 per day) 6 82 132 92 ;i.7 1cc7 Ofwhich, animal and pulse 25 28 29 ' 7Ws