Romania - Tecuci Fertilizer Project

CIRC1JLATING COPY 3 TO' RF 'T' RM E'D 7:, ,9RTq DESK Report No. 459-RO Appraisal of RETURN TO Tecuci Fertilizer Project REPORTS DESK Romania ONE WEEK May 21, 1974 Industrial Projects Department FILE COPY Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association Thts report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENT WEIGHTS AND MEASURES Except where otherwise indicated all All weights and measures are in metric units figures are quoted in Romanian Lei. For all calculations, the following 1 Metric Ton (t) - 1,000 Kilograms (kg) conversion rate has been used: 1 Metric Ton (t) - 2,2o4.6 Pounds 1 Kilometer (km) - 0.62 Miles US$ 1 - Lei 20 1 Hectare (ha) - 2.47 Acres Lei 1 - US$ 0.05 1 Cubic Meter (m3) - 35.3 Cubic Feet Lei 1,000 = US$ 50.00 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED Combinate, Enterprise, Project Combinatul de Ingrlaqminte Chimice "TECUCI" (Tecuci Enterprise) Company, Central Fertilizer Central Craiova IPROCHIM Process Engineering Company for Chemical Industry IPUC Construction Engineering Company for Chemical Industry ROMCHIM Export-Import Agency under the Ministry of Chemical Industry Government The Government of Rouania Borrower, IB Banca De Investitii (Investment Bank) N, Nitrogen Nitrogen Content in Fertilizer P205, Phosphate Phosphorus Pentoxide (P205) Content in Fertilizer CIF Cost, Insurance and Freight FOB Free on Board TPD Metric Tons per Day TPY Metric Tons per Year ROMANIAN FISCAL YEAR January 1 - December 31 'his report has been prepared by: Donald E, Brown, Manfred Ferber and larind4r S. Kohli.  ROMANIA APPRAISAL OF TECUCI FERTILIZER PROJECT TABLE OF CONTENTS Page No. SUMMARY AND C01CLUSIONS ............ ...... i-iii I. INTRODUCTION * *f ****** **** *....... 1 II. FERTILIZER INDUSTRY AND ORGANIZATION ........... 1 A. History of Fertilizer Central . ........... 1 B. Plant Facilities and Operations ........... 2 C. Financial Analysis and Romanian Financial System ......... ............ 4 D. Investment Bank ...... ..................... 7 III. MARKET AND MARKETING . ....................... ..... 8 A. Agriculture in Romania ... . ............ 8 B. Past Fertilizer Growth in Romania ......... 9 C. Fertilizer Market Forecast for Romania 10 D. Fertilizer Exports . .*..6....o.o.o.o.. .... 12 E. Fertilizer Marketing in Romania .... o ...... 13 IV. THE PROJECT .....o...... ..... ........ o.. 16 A. Project Scope and Location ....o.o ........ 16 B. Raw Materials and Utilities ..... o.o.. 16 C. Employment and Training ........ -........ 17 D. Ecology ...... o.o..... 006....000...................... 17 E. Project Implementation ........o....o........ 18 V. CAPITAL COSTS AND FINANCIAL PLAN ... o ........... 19 A. Capital Costs ....... o ... oo ........... 19 B. Financing Plan .... ............ ... 0-0. 22 C. Allocation of Bank Loan and Disbursements.. 23 D. Procurement .... .... . . . . . . ..... ......... 23 VI. FINANCIAL ANALYSIS . ..... . ... ..o. ..... . . . 24 A. Revenues and Operating Costs .... .......... 24 B. Financial Projections .*...o............ 25 C. Cash Flow and Allocation of Benefits o.... 26 D. Financial Return and Risks ..o .... o ....... 27 E. Auditing and Reporting . 28  TABLE OF CONTENTS (Cont'd>) Page No. VIi. ECONOMIC ANALYSIS ........... ............ .... 29 A. Foreign Exchange Rates .......... 29 B. Fertilizer Prices ..... ................ 29 C. Raw Material Costs ..........*..*........... 30 D. Economic Rate of Return ..n............ 31 VIII. AGREEMENTS ................................... 32 ANNEXES 1 Glossary of Technical Terms 2-1 Craiova Central - Production 2-2 Craiova Central - Organization Chart 2-3 Investment Decisions and Financing of New Projects in Romania 2-4 Major Accounting Practices in Romania 2-5 Craiova Central - Consolidated Income Statements 2-6 Craiova Central - Consolidated Balance Sheets 2-7 Pricing System in Romania 3-1 Agriculture in Romania 3-2 Past and Present Fertilizer Situation in Romania 3-3 Market Forecast for Fertilizer in Romania 3-4 Fertilizer Market and Distribution System in Romania 4-1 Description of Project 4-2 Schematic Flowsheet 4-3 Organization Chart 4-4 Implementation Schedule 5-1 Capital Cost Estimates 5-2 Breakdown of Major Components of Capital Costs 5-3 Working Capital Estimates 5-4 Phasing of Expenditures and Financial Plan 5-5 Schedule of Repayments and Interest on IBRD Loan 6-1 Revenues and Operating Costs Estimates 6-2 Projected Income Statements 6-3 Projected Cash Flow Statements 6-4 Projected Balance Sheets 6-5 Cash Flow and Distribution of Benefits in Romania 6-6 Financial Rate of Return Calculations 6-7 Control and Audit System in Romania 7-1 Economic Rate of Return Calculations 7-2 Economic Rate of Return and Sensitivities 7-3 Sensitivity of Economic Rate of Return to Different Assumptions MAP Map of Romania with Location of Fertilizer Plants (IBRD Map 10671)  ROMANIA APPRAISAL OF TECJCI FERTILIZER PROJECT SUMMARY AND CONCLUS'.:ONS i. This report appraises the proposed Tecuci Fertilizer Project for which the Government of Romania has requested financing from the Bank. The project consists of a urea/diammonium phosphate (DAP) fertilizer plant with a production capacity of about 420,000 tons per year (TPY) of urea and 208,000 TPY of DAP, equivalent to 225,000 TPY of nitrogen (N) and 100,000 TPY of phosphate (P205) in terms of nutrients. The plant is to be located at Tecuci in the province of Galati, some 250 km north-east of Bucharest. The project forms part of Romania's large scale program to expand its ferti- lizer production and also allow a more economical use of its natural gas re- sources; it will be the eighth fertilizer plant to be commissioned in Romania between 1973 and 1978. Total financing required for the project, including working capital and interest during construction, is estimated at Lei 4.0 billion or US$200.8 mil:iion equivalent, of which US$87.0 is foreign exchange; capital costs are based on the price level prevailing in the first quarter of 1974 and include realistic contingencies. ii. The proposed Bank loan of US$60 million equivalent would cover about 30% of the total financing required and about 69% of the foreign ex- change expenditures of the project: it would finance all direct foreign exchange costs for engirneering fees, imported equipment, interest during construction on the Bank loan and US$2.3 million of US$15 million imported stainless steel required for tie project. The loan does not cover US$6.1 million in equipment already financed through suppliers credits, working capital (US$8.2 million) and the remainder of imported stainless steel. The residual financing will be provided by Romanian sources in the form of interest free advances to the Tecuci Enterprise which is to carry out and operate the project. The Bank loan would be made to the Investment Bank with the guarantee of the Government of Romania for 15 years, including 4-1/2 years of grace at an assumed interest rate of 7-1/4%; the Enterprise would receive the funds at 9% and on otherwise equal terms, with the guarantee fee of 1-3/4% accruisg to the State. iii. In the recent past, fertilizer consumption in Romania has been limited by domestic production and priority given to exports. The large ex- pansion of fertilizer production facilities in Romania is planned to satisfy domestic market needs as well as allow an increase in exports of nitrogenous fertilizer from about 600,000 tons at present to 1.1 million tons in the late 1970s. As a result, Romania should become one of the world's largest exporters of N fertilizers. Projected production and domestic consumption of respec- tively about 2.4 million and 1.4 million tons of N in 1980 will be more than twice present levels. Substantial efforts in the agricultural sector in Romania will therefore be necessary to achieve the projected growth rates in  - ii - agricultural output and fertilizer use, but in view of the substantially in- creased domestic fertilizer production and the renewed emphasis being given to agriculture in Romania it is expected that these goals will be reached. Though all of the project's output is intended to be marketed in the region surrounding Tecuci, in economic terms the project's nitrogen capacity will add to Romania's export capacity. This is not so, however for the project's phosphate capacity since Romania is unlikely to continue to have an exportable surplus of phosphate fertilizer. No major problems are foreseen in selling the project's production domestically or abroad given Romania's already well established position as major and competitive fertilizer exporter in an expanding international market. iv. The Fertilizer Central Craiova, which is the parent organization for all fertilizer production units in Romania will be the sponsor and parent organization of the Tecuci Enterprise. Fertilizer production at Tecuci will be based on domestic natural gas to be supplied from the existing National pipeline system, on imported ?hosphate rock to come mainly from Morocco and sulfur from Poland under long-term contracts. Principal responsibility for project execution will be witl. the Tecuci Enterprise and IPROCHIM, the Ministry of Chemical Industry's engineering company. Process license agree- ments will be concluded with well-known international fi m from the Nether- lands, the UK and US and IPROCHIM will use its own technology for some of the plant sections. The project in a large part will be similar to other ferti- lizer projects now under construction in Romania and will utilize a substan- tial amount of Romanian equipment. Although it has not yet been proven that these projects can be operated as planned, the technical risks for the proj- ect are acceptable taking into account IPROCHIM's general experience in build- ing fertilizer plants and the provision of assistance from the process licensors. v. The project is expected to start production in January 1978 and will have a sound financial structure. Based on the input and output prices which are all set by the Government and using the Bank's normal measurements, the project's financial indicators such as debt service coverage, debt/equity ratio and current ratio are acceptable given the specific financing mechanism for industrial enterprises in Romania. However, due to pecularities in the Romanian pricing system, the financial return of the project is low at 4.5Z, although it would increase to 11% aiter proper adjustments. In general, Romanian prices of inputs in relation to outputs in the fertilizer industry, were set in the late 1960.; they have not been changed since and are therefore no longer in line with international costs and prices. As an example, the price of the nitrogen nutrient in urea, Tecuci's major product is about 30% lower than that in other nitrogenous fertilizers and the Romanian sulfur price is about twice the international price. vi. The Government is considering a revision of prices over the forth- coming years. It is not yet known to what extent prices of gas, oil, power and imported fertilizer- raw materials as well as fertilizer prices themselves  - iii - will change other than that the general trend will most likely be upward to reflect more closely current or anticipated international prices. Whatever adjustments in fertilizer inptts and outputs may be made, however, these are not expected to adversely affect the financial viability of the industry, and thus of the project, in view of the Government's policy to provide for reason- able earnings after covering average production costs. The financial risks of the project are therefore essentially limited to its physical success; i.e., successful project construction and operations. Both these risks are judged to be acceptable. vii. The economic return of the project is a satisfactory 13.2%. It is based on a conservative :evenue/cost structure, using estimated long-term international prices for all tradeable inputs and outputs; specifically US$110 per ton of urea f.o.b. bulk as export and US$180 per ton of DAP c.i.f. bulk as import substitution. Both assumptions are well below present international market prices. As noted above, the project's main raw material is domestic natural gas, which is the ideal feedstock for the production of nitrogen fertilizer. In addition, Romania has substantial experience in equipment manufacturing as well as in operations of chemical plants. These factors give Romania a comparat-ve advantage for producing fertilizers. Indirect economic benefits from She project will be derived from the creation of indus- trial activity in Tecuci area, increased domestic fertilizer consumption and additional foreign exchange earnings. Total net foreign exchange benefits of the project are estimated at about US$36 million per year. viii. As mentioned previously the Government has a very direct and major influence on the conception, preparation, financing and operation of industrial projects. However, while investment decisions are seemingly made primarily to meet production targets, economic considerations are also taken into account when determining the scope, size and location of industrial enterprises, and so are social factors. Romania has succeeded in developing its industry rea- sonably efficiently with quite broad geographic dispersion; this achievement also holds for the fertilizer industry in general. The project here considered is of high priority both in helping the future development of Romanian agricul- ture and in providing some additional and much needed fertilizer in the world market. ix. Based on the agreements with the Government and the Investment Bank, the project is suitable for a Bank loan equivalent to US$60.0 million.   I. INTRODUCTION 1.01 The Government of Romania has requested a Bank loan of US$60.0 million eqtdvalent to cover about 69% of the foreign exchange expenditures for a fertilizer plant in Tecuci, some 250 km north-east of Bucharest (Map IBRD 10671). The proposed project, which is sponsored by the Ministry of Chemical Industry is to produce 420,000 metric tons per year (TPY) of urea and 208,000 TPY of DAP, equivalent to 225,000 TPY of N and 100,000 TPY of p 20 in nutrient terms. 1/ Total financing required for the project is estimated at about Lei 4.0 billion cr US$200.8 million. Except for the Bank loan and US$6.1 million supplier's credits, the financing will be provided by the Government. The project wouli be the eighth fertilizer plant in Romania to be commissioned between 1973 and 1978, and in part would be a duplicate of some of the plants now under construction. The ambitious ex- pansion of fertilizer production is based on the Government's policy to use its natural gas resources more economically and is intended to not only keep Romania largely independent of fertilizer imports but even allow some increase in exports. 1.02 The project was identified in April 1973 and a preliminary techno- economic feasibility study was submitted to the Bank in July 1973. As a result of the appraisal mission in September 1973, consisting of Messrs. M. Ferber (Chief) and D.E. Brown of the Industrial Projects Department as well as H. S. Kohli and E. Kipp of the EMENA Region Program Department, and a second mission in November 1973, the project scope was modified to better meet domes- tic agronomical and export market requirements. The appraisal was completed in March 1974 following completion of a revised preliminary feasibility study and another mission to Romania. The definite techno-economic feasibility study which is necessary for the detailed incorporation of the project into the Romanian Plan is new being finalized and is expected to be approved by the Government by October 1974. II. FERTILIZER INDUSTRY AND ORGANIZATION A. History of Fertilizer Central 2.01 The present organizational structure of the Romanian fertilizer sector has evolved over the last few years and has followed similar trends in other sectors of the economy. Creation of Centrals--comparable to holding companies for enterprises in one or more related sectors of economic activity --was one of the major institutional changes decided by the National Party Conference of 1967. 2.02 In February 1971, the first fertilizer central was established to coordinate, plan and supervise the various activities in the fertilizer field. However, at that time the fertilizer industry was expanding rapidly and in mid-1972 two new fertilizer centrals, Fagaras and Turnu Magurele, 1/ A glossary of technical terms is contained in Annex 1.  were created along geographical lines to replace the Central in Bucharest; Fagaras controlling all activities ia the north of the country and Turnu Magurele in the south (IBRD Map 10671). Following the latest reorganization of the economy in early 1973, when tiae total number of centrals was reduced in all sectors, a single central for the fertilizer industry was formed at Craiova in April 1973. The Fertilizer Central Craiova, which is one of the nine centrals under the jurisdiction of the Ministry of Chemical Industry, is the sponsor of the project and the parent organization of the Tecuci Enterprise. B. Plant Facilities and Operations 2.03 The main existin3 fertilizer production facilities under the Craiova Central are at Craiova, Turgu Mures, Turnu Magurele, Piatra Neamt and Navodari. The historical production is shown in detail in Annex 2-1 and is summarized below: Past Fertilizer Production in Romania (In '000 tons of nutrients) Average Annual Prel. Growth Rates Nutrient 1960 1964 1968 1970 1972 1973 1960-70 1970-73 llitrogen (N) 18 105 418 604 871 1,110 41% 22% Phosphate (P205) 52 111 182 244 313 435 16% 21% 2.04 Prior to 1960, the fertilizer industry consisted of a few very small plants, producing primarily superphosphate and ammonium nitrate. The first significant capacity expansion occurred during 1964-1973 and comprised essentially several new, relatively large, ammonia-based plants to produce urea and ammonium nitrate (AN) as well as sulfur-based triple superphosphate plants. At present, there are nine fertilizer plants in Romania, six pro- ducing only nitrogenous, two only phosphatic and one mixed NP fertilizers. Total nutrient manufacture in Romania today is more than seven tines as large as ten years ago and the industry is currently engaged in another round of expansion in which toth new plants will be built and several existing plants be enlarged (para. 2.09). 2.05 The operating and maintenance performance of the Romanian fertilizer industry is good. Capacity utilization in recent years has reportedly been *UXY' of "defined" capacity which is somewhat less than design capacity as tAs.Aally defined. In general, operations are excellent and plants probably operate at about 90% or above of true design capacity once the commissioning period is completed. Plant staff appears well trained and knowledgeable in respect to operations and technology. Each pldht has a large workshop and  - 3 - most maintenance, including the rebuilding of spare parts, is performed by the enterprises themselves. The Craiova Central reports no difficulties in the supply of power and natural gas, both obtained from national networks and also other materials appear to be readily available. 2.06 Most fertilizer for exports is sold in bags, usually plastic or plastic-lined jute, but for domestic consumption a significant quantity is shipped in bulk. Each p;Lant is served by rail and road with most products using rail transport. All fertilizer for domestic consumption and exports is contracted for in advance and allocated to individual plants and except for dispatching from the factory, marketing or distribution activities are not within the responsibility of the Central or the factories (paras. 3.13 and 3.15). 2.07 The individual plants are organized as separate entities (Combinates) and their managements have as their main responsibility the achievement of production targets. The Craiova Central has coordinating and supervising functions particularly with respect to production and investment planning and execution; it also has major responsibilities for centralized activities such as spare parts, supplies, operations of workshops and training. The general managers of each Combinatte report directly to the senior management of the Central whose organizat-on chart is shown in Aanex 2-2. 2.08 The projected fertilizer production in Romania is shown in detail in Annex 2-1 and is summarized below: Projected Fertilizer Production in Romania (In '000 tons of nutrients) Average Annual Prel. Growth Rates 1973 1974 1975 1976 1978 1980 1973-80 Nitrogen (N) 1,110 1,397 1,610 1,970 2,370 2,475 12% Phosphate (P205) 435 488 570 700 890 930 11.5% 2.09 The substantial planned production increase, again more than doub.ing fertilizer output between 1973 and 1980, is the result of a second large expansion program, initiated in 1970 and to be achieved through eight new fertilizer plants. At that time (1970), Romania decided to build six large and modern, essentially duplicate plants, not only with the objective of increasing fertilizer output more easily and efficiently, but also to further  -4- s;tm-alate the domestic engineering and equipment manufacturing capabilities in the petrochemical industry. The eight new facilities include two ammonia/ urea plants taat were receatly commissioned (1973); six ammonia plants con- tracted from Kellogg (UK/US); four NPK plants from Norsk-Hydro (Norway); 1/ an ammonia/urea expansion at Turgu Mures; and the Tecuci project. The indi- vidual plants and their raspective capacities, in the order of commissioning are: Capacity of New Fertilizer Plants in Romania (In '000 tons of 'wutrients) N2 P2 0 K20 Year-on-Stream 1. Slobozia 247 - - 1973 2. Pietra Meamt 138 - - 1973 3. Turgu Mures 225 100 35 1974 Arad 225 100 35 1975 5. Craiova 225 100 35 1976 6r Turnu Magurele 225 100 35 1976 i. Turgu Mures 225 - - 1977 8. Tecuci 225 100 1978 W4ith the exception of the Tecuci project, all other plants are either on stream or being implemented; construction is about on schedule and expected to be completed in accordance with the above timetable. C. Financial Analysis and Romanian Financial System 2.10 The conventional financial analysis usually applied by the Bank to evaluate the performance of commercial organizations is of limited significance in the case of Romanian enterprises. Under the country's centrally planned economy, investment decisions are tiaken by the State and not by individual enterprises, in conformity with national economic and social priorities. Annex 2-3 describes the system followed to arrive at investment and financing decisions. The planning and financing of the fertilizer sector is integrated with that of all other sectors of the economy to form the Five-Year Socio- Economic Plan; the current Plan covers the 1971-75 period. Based on the targets specified in the Five-Year Plan, an annual production plan is speci- f ied for each sector by the Grand National Assembly. These broad production targets are converted by the centrals into production goals for individual en-erprises. The enterprises then draw up their annual production and finan- c a1 plans to meet the specified targets; the annual financial plans are sub- equently collated from different centrals in a sector and submitted by the ;cal Ministry concarned to the State Planning Committee and the Ministry , 'inance for preparation of the annual National Financial Plan. 1/ Norsk-Hydro is an operating company that owns the NPK process technology. Thle engineering fi:-m that supplied the design is Davy-Power-Gas (US/UK).  2.11 The State Budget makes the necessary provisions for funds requested by various enterprises in order to meet their production targets. The Finan- cial Plan and the State Budget are submitted by the Council of Ministers for approval by the Grand National Assembly after which they become law. Since all commercial entities are owned by the Government, most important investment decisions are also taken by it. All projects estimated to cost over Lel 70 million (US$3.5 million eqnivalent) are approved by the Council of Ministers after analysis by the Ministries concerned, the Investment Bank and the State Planning Committee. Projects costing between Lei 30 to 70 million can be approved by the Ministry, while projects costing between Lei 10-30 million are generally approved by the Central. The enterprise can plan investments in projects costing up to Lei 10 iiillion on its own authority. However, irrespective of the level at which an investment is approved, expenditure connected with it must be included in the Annual Financial Plan which is ultimately approved by th3 Council of Ministers. 2.12 In addition to the above final decision powers over the physical and financial planning o' individual enterprises, the State also determines all prices. Consequently, the primary responsibility of Romanian enterprises is to meet the physical iroduction targets set for them by higher authorities and to make optimum use of resources provided to them. Since both the product mix and prices of all inputs and outputs are pre-determined, the financial profitability is neither a true measure of an enterprise's efficiency nor an important factor in investment decisions. The following financial analysis of the Craiova Central should be viewed in this context. 2.13 The Craiova Central and the individual enterprises under its jurisdiction prepare annual financial statements. Although, as described in Annex 2-4, these statements and their frequency differ from those prepared by most Bank borrowers, they are well suited to the Romanian industrial and financial system and with some minor modifications (para. 5.07) provide sufficient information for purposes of the Eank's project evaluation. 2.14 Since the Creiova Central would be the sponsor of the project and the parent organizatiorn of the Tecuci Enterprise, its past and near future financial performance--and thus that of the consolidated position of all its enterprises--is discussed below and financial statements are summarized in the following table from Annexes 2-5 and 2-6:  -6- Fertilizer Central - Summary of Financial Statements (In million Lei) /2 Years ending December 31, 1971-- 1972 1973 1974 1975 --------Actual-Projected- Sales Value of Production 5,106 5,648 7,325 8,956 12,239 Operating Expenses 4,454 4,954 5,446 6,406 8,699 Adjustments 27 121 (21) (46) (60) Benefits (Profits before Tax) 679 815 1,900 2,504 3,480 Benefits as x of Sales 13.3 14.4 25.9 28.9 28.5 Current Assets 2,444 2,407 Current Liabilities 2,444 2,407 Net Fixed Assets 9,066 9,23 Projects Under Construction 4,360 6,12, Total Assets 15,870 17,760 Equity Funds for Investment 13,426 15,353 /1 Year first Fertilizer Central was established. /2 1973 figures preliminary; no balance sheet forecasts are prepared by Romanian Enterprises and Centrals. 2.15 The profitability of the Fertilizer Central has been good and is expected to improve further in the next few years after commissioning of several large modern plants presently under construction. Between 1971 and 1973, benefits (profits before tax) nearly tripled while sales went up by only 43%; during the same period benefits as % of sales just about doubled (from 13.3% to 25.9%) and are expected to rise to 28.5Z by 1975. This rela- tively high profitability reflects satisfactory operations but also Romanian pricing policy. 2.16 In Romania, the Government sets prices on the basis of the average costs of production of all units manufacturing the same product or groups of products plus a margin of profit which also is determined by the State. Details about pricing policies are given in Annex 2-7. As is practically true for all prices in Romania, present fertilizer and raw material prices were established years ago, based on production cost of the then existing producers which on the whole were using higher cost processes than the more rpcent generation of fertilizer plants. The possibility of future price nanges, as well as Romanian fertilizer input and out prices in comparison with international prices, are discussed in para. 6.01. _17 The Craiova Central has a satisfactory financial structure consi- dering the special characteristics of Romanian investment practices and the cash flow system (Annex 2-3 and para. 6.06). The current ratio of the Fertilizer Central was 1.0 at the end of 1971 and 1972 and is expected to remain at about the same level in the future despite the forecast sharp  -7- increase in self-generated funds. This is so because under the Romanian system any surpluses in cash flow are automatically transferred to the State Budget and the liquidity of an enterprise is kept at a minimum level since all essential financial needs, be they for investments or operations, are provided and guaranteed by the State. As most Romanian enterprises, the Craiova Central has incurred practically no long-term debt in recent years except for some medium-term credits extended by the Investment Bank for the financing of equipment for projects under construction. As described in Annex 2-3, in practice these credits are paid off as soon as a plant is commissioned. As a result, at the end of 1972 the Craiova Central had no long-term debt outstanding and equity (state advances) accounted for about 86% of total assets. D. Investment Bank 2.18 The Investment Bank is the channel for all sources of major domestic investment financing including (a) budget allocations; (b) depreciation funds; and (c) share of planned benefLts of enterprises allocated for investment. Recently, IB has also started to make credits on its own, though funds avail- able for this purpose are still relatively small. However, IB administers and controls all investment funds of the State Budget (except for agriculture and food processing) and acts as the main fiscal agent of the Government. The President of IB reports directly to the Ministry of Finance which has compre- hensive authority in the planning and financing of all projects. 2.19 The Investment Bank is a competent organization and has wide-ranging responsibilities in the implementation of projects. It plays a key role in the preparation, evaluation, procurement, execution, disbursement of invest- ment funds and supervision of all enterprises. For all projects, IB reviews the technical and economic study before submission to the Council of Ministers for formal approval. Thereafter, TB ensures that the project is executed according to the approved plan. Tn the case of Tecuci, it will check, with the assistance of IPROCHIM and ROMCHIM, all orders for equipment--domestic and foreign-before they are placed, will comment on any change in contracts, and can impose penalties on defaulting parties. Its inspectors check the appro- priateness of equipment deliveries and whether the projects are progressing according to schedule. All local project-cost financing is channeled through and authorized by IB which also keeps complete accounting records for each project until completion and which is therefore well suited for reporting to the Bank on the progress in the implementation of the Tecuci Project. 2.20 During the operational phase of the project, IB's functions are limited to checking whether the enterprise is meeting the targets set in the Investment Plan. I3 has no iegal authority to bring its views to bear directly on the managem2nt ot an en.erprise. In practice, however, IB can recommend necessary operational action to the Ministry of Finance, which, in turn, can act throughi the Xrinistry concerned with the project. It is for the reason of the inportant and broad role that the Investment Bank is playing in the industrial field, particularly in the project's implementa- tion, that it has been chosen as the Borrower of the Bank loan.  - 8 - I-I. MARKET AND MARKETING 3.01 Past and future developments of fertilizer demand and supply in Romania including background information on organization, crops and the potential of the country's agriculture are discussed in detail in Annexes 3-1 to 3-4 and briefly described below. A. Agriculture in Romaaia 3.02 Romania's potential for increasing agricultural output is very good. About two-thirds of its total area can be classified as agricultural land (14.7 million ha) and almost half as arable. 1/ The average rainfall per year varies from 400 mm to more than 1,400 mm in various parts of the country and is also not too well distributed throughout the year (July- September is normally the dry season) but supplemental irrigation from the Danube and other rivers has been increasing substantially. Maize and wheat are the most important field crops in Romania covering about 37% of agricul- tural land; natural grasslands and pastures represent another one-third, which at present is not too productive but should become increasingly so, as more attention is being given to meat production; the remaining 30% of agricultural land are taken up by rye, barley, oats, rice, oilcrops such as sunflowers and soybeans and other important field crops such as sugar beets, potatoes, fodder crops, fruits, vineyards and a wide assortment of vegetables. 3.03 Since World War II, Romanian agriculture has undergone a reorgani- zation which was completed in the late 1960's. State farms now make up about 17% of total arable land, cooperative farms 75%, and the remaining 8% are private farms. Also, some 10% of the area within the cooperative farms are individual plots of the workers. Within this system the state farms are more productive, due to a preference in allocation of resources including investments and fertilizer supply. 1/ Details of the agricultural situation in Romania are contained in Annex 3-1.  -9- 3.04 With highly productive soils, good climate, potential for irrigation and eaay access to major world markets, Romania has the capability of rapid agricultural development. Almost half of Romania's labor force is employed in agriculture. In view of this, the Government has given high priority to the agricultural sector particularly through increases in agricultural invest- ments, agricultural research and fertilizer application. The Tecuci project forms part of this program to increase domestic fertilizer consumption and provide flexibility in types of fertilizer as an important input for agricul- tural growth, and at the same time maintain or even increase exports of agricultural products and fertilizer (para. 3.10). B. Past Fertilizer Growth in Romania 3.05 Fertilizer production, consumption and exports from 1960 to 1973 are shown in detail in Annex 3-2 and are summarized in the following table: Romania - Historical Fertilizer Production, Consumption and Exports (In '000 tons of nutrients) Nitrogen (N) Phosphate (P20g) Potassium (K20) 1 Produc- Consump- Apparent Produc- Consump- Apparent Consumption Years- tion tion ixports tion tion Exports 1960 18 25 (7) 52 47 5 3 1962 41 43 (2) 87 49 38 9 1965 163 145 18 127 110 17 12 1966 261 208 53 155 110 45 19 1967 269 289 80 165 135 30 - 1968 418 330 88 182 141 41 14 1969 491 350 141 221 164 57 19 1970 604 367 237 244 203 41 24 1971 826 431 395 245 180 65 23 1972 871 421 450 313 173 140 45 1973 (prel.) 1,110 440 670 435 250 185 35 /1 Consumption figures from the Ministry of Agriculture are based on agri- cultural years ending March and production figures from the Ministry of Chemical Industry are based on calendar year8; therefore the remainder (apparent exports) on a year-by-year basis is not fully consistent with the actual exports shown in Annex 3-2. As pointed out in para. 2.04, fertilizer production has increased rapidly in the past and, as a result, domestic consumption and exports have also risen. Given Romania's foreign exchange constraints as well as recent high interna- tional fertilizer prices, priority was given to exports, particlarly in recent years, thereby decreasing tie relative allocation for domestic  - 10 - consumption. Thus, while consumption iicreased sharply during the 1960's, it has levelled off since 1970; compounded growth rates between 1960-1965, 1965-1970, 1970-1973 for N amounted to 40%, 21%, and 6% and for P205 19%, 13% and 7% respectively. Potash is supplied from imported material and con- sumption has been relatively low. C. Fertilizer Market Forecast for Romania 3.06 Supply/consumption projections for nitrogen, phosphate, and potash fertilizers are discussed in Annex 3-3 and are summarized below; Romania - Proiected Fertilizer Production, Consumption and Exports (In '000 tot.s of nutrients) Nitrogen (N) Phosphate (P205) Fiscal Produc- Consump- Apparent Produc- Consump- Apparent Year tion tion Exports tion tion Exports 1973 1,110 440 670 435 250 185 1974 1,397 551 846 488 338 150 1975 1,610 661 949 570 420 150 1976 1,970 793 1,177 700 505 195 1977 2,090 950 1,140 770 580 190 1978 2,370 1,240 1,130 890 670 220 1979 2,430 1,310 1,120 900 780 (120) 1980 2,475 1,450 1,025 930 860 ( 70) 1981 2,475 1,525 950 930 920 ( 10) 1982 2,475 1,590 885 930 980 t 50) 1983 2,475 1,660 815 930 1,020 ( 90) 1984 2,475 1,730 745 930 1,080 (150) /1 The forecast consumption of potash, all from imports, is shown in Annex 3-3. By 1980, consumption should increase to 320,000 TPY K20 from a 1972 level of 45,000 TPY. 3.07 The fertilizer production projections are based on the Romanian forecast with minor reductions in 1974-1977 and assume full capacity achieve- r:ent as defined by the Romanian authorities after the second year of commis- sioning. In view of the difference in the Romanian definition of capacity (about 10% lower than design capacity) and the substantial operating experience of the Craiova Central, the production targets set for the end of the decade appear achievable. The total N production in 1980 of close to 2.5 million tons is expected to include about 40% as urea, 32% as calcium-ammonium nitrate (CAN) or AN, and the remaining 28% as complex NPK fertilizer. At present urea accounts for 58%, AN or CAN for 38% and NPK for 4%.  - 11 - 3.08 The above consumption projections are Bank estimates and take into account forecasts of the Romanian Ministry of Agriculture and those contained in a fertilizer market study prepared by the Tennessee Valley Authority (TVA) for the Bank. These separate foret:asts vary because of different assumptions made in them; essentially, the Rominian projections predict a higher ferti- lizer application relative to agricultural output. The Bank projections are based on an annual growth rate of agricultural output of about 5.5% (as against 3.5% per annum from 1960-1972). In the Romanian context, past ferti- lizer consumption growth is not of much help in determining future growth rates; the substantial projected increases of fertilizer consumption in Romania appear achievable because of (1) insufficient fertilizer having been available in recent years on account of export priority; (2) increasing emphasis being given to agriculture as also reflected by the large increase in planned ferti- lizer production over the next few years that will enable Romania not only to step up domestic fertilizer application significantly but at the same time satisfy its needs for exports; (3) fertilizer consumption in Romania not being limited by decisions of individual farms or karmers; and (4) the presence of a physical distribution system which can overcome constraints through the central allocation of necessary resources. Finally and most importantly, consumption is more a function of State planning and allocation than of market and price considerations. 3.09 The above Bank forecast of future fertilizer consumption has therefore not been determined by extrapolation of historical consumption figures but by an end-use analysis (Annex 3-3) taking into account the specific conditions of agriculture in Romania such as land availability, cropping pattern, crop production goals, soil conditions and availability of irrigation, investment 1and other agricultural inputs. The forecast indicates an average annual growtlh for N consumption from 1973 to 1980 of about 18% and for P205 of about 19%; it can be compared to the growth rates since the early 1960's as shown in para. 3.05. 3.10 A comparison of fertilizer use in Romania and a number of other selected countries on a kg/ha and per capita basis is given below: Fertilizer Use Per Hectare of Arable Land and Per Capita in 1971 (FAQ Annual Fertilizer Review) Fertilizer Use in Fertilizer Use in Country kg/ha Arable Land kg/capita Bulgaria 160.7 85.7 Czechoslovakia 242.1 89.3 D.R. of Germany 319.4 94.9 F.R. of Germany 399.8 54.2 Hungary 147.9 80.3 Netherlands 749.3 49.9 Poland 168.0 78.5 Romania 56.5 29.3  - 12 - Comparison of fertilizer consumption among countries should be used with care because of the differences in land type, climate and agricultural practices. Nevertheless, the table shows that fertilizer consumption in Romania is low in relation to its neighbor countries and does provide some additional indi- cation of the potential of growth of fertilizer use in Romania. By 1980, Romania should have reached a level of about 260 kg/ha and 130 kg/capita based on the Bank's consumption forecast; evidently fertilizer use in the other countries will by then also have increased further. D. Fertilizer Exports 3.11 Romanian exports of N fertilizer are expected to increase from about 600,000 tons at present to some 1.1 million tons by 1976, stay at that level through the remainder of the decade and decrease gradually thereafter in line with rising domestic consumption. Given a total international trade of N fertilizers of currently about 7 million tons per year, Romania would temporarily become one of the world's largest exporters of N fertilizers in the mid- to late 1970's. The international fertilizer market is in an unusual situation at present. Low fertilizer prices several years ago have resulted in shutdowns of small and obsolete plants and have kept new investments at a low level. As a result production capacity has not increased in line with demand which had risen unusually rapidly because of two major unprecedented circumstances: (1) many major food producing and food exporting countries have had poor crops which they tried to increase by higher fertilizer appli- cation; and (2) the problem of food shortage in developing countries has been getting increasing public attention with a push for increased fertilizer use. 3.12 In addition, the recent shortages in petroleum supplies and price increases have added substantial uncertainties. Though it can be expected that rising feedstock prices will be recovered through rising fertilizer prices, major traditional fertilizer exporting countries which are short of own hydrocarbon feedstocks such as Japan and Western Europe may not continue to cover additional fertilizer demand in developing countries through expan- sion of their production thereby gradually diminishing their position as exporters. At present, fertilizer prices are substantially higher than two years ago and supply is extremely tight. The tight fertilizer market is expected to continue at least for another several years until substantial new capacities will have come on stream such as in Russia, Mainland China, India, the U.S., the Middle East, Venezuela, North Africa as well as Romania. Thereafter the world market should again become more balanced. Romania will be in an advantageous selling position as compared to most of the other exporters because it (1) is in a relatively favorable geographical situation to supply Western Europe, Africa, Eastern and Mediterranean countries; (2) is a member of Comecon; and (3) has trade agreements virtually all over the world. On the other hand, significant portions of world trade will involve markets in Asia and America where Romania is at a freight disadvantage to production based in the Persian Gulf and Venezuela.  - 13 - 3.13 It is not expected that Romania will have major exporting problems since it is not only a competitive fertilizer producer but it already has a vell established export market position and projected additional sales abroad are relatively small. At present Romania is exporting about 600,000 tons of N per year which would gradually increase and peak in 1976 with some 1.15 million tons of N. Long-term contracts exist for most of Romania's exports (70%); 20% are supplied to cotntries on an established basis and the rest (10%) represents spot sales. At present, Romania's major markets are Mainland China (23%), India (15%), Egypt (12%), Algeria (9%), France (5%) and the Federal Republic of Germany (5%). Practically all exports are undertaken within bilateral trade agreements and are reportedly based on world market prices. E. Fertilizer Marketing in Romania 1. Fertilizer Allocation 3.14 The mechanism of determining the needs of fertilizer and its allo- cation to the consumers must be evaluated in the context of Romania's planned economy. The fertilizer needs of the farms are collated at the district level and reported to the Ministry of Agriculture for incorporation into a country- wide ministerial plan. This annual plan is then coordinated with the ferti- lizer production plan of the Ministry of Chemical Industry and the central planning authorities, taking export targets into account. Once the final supply/allocation plan is approved by the Council of Ministers, each farm is notified how much and what type cf fertilizer it will receive in the forthcoming year. The corresponding information is given to the fertilizer plants which thus have the year's production contracted in advance and in accordance with a detailed delivery program. Given the restraints of domestic fertilizer consumption in the past, requests for fertilizer have by far been exceeding actual allocations. Within the allocation system preference has been given to the State farms and to a lesser extent to Cooperatives whereas individual farmers have been supplied with virtually no fertilizer. However, it is expected that with increasing fertilizer production all demand, including that of private farms, can be met. 2. Distribution System 3.15 The distribution system has been simple and has worked reasonably well. Each fertilizer plant is given information on delivery details such as customer, quantity and type of fertilizer to be shipped, and the fertilizer is moved directly from the plant by rail or truck to the farm with no inter- mediate storage. Whenever fertilizer is available at the factory, it is delivered and farms are required to accept it at that time. Little provision has been made for proper storage of fertilizer on the farms and losses through spills and improper storage, although no exact data exist, are probably signi- ficant. Shipping distances, on average, are not large, and up to now, the volume of fertilizer has been relatively small and can easily be handled by the existing rail and trucking systems.  - 14 - 3.16 The Government has already undertaken some studies on the intro- duction of immediate fertilizer storage facilities recognizing that the envisaged increase in fertilizer consumption will require changes in the distribution system particularly in storage facilities, transportation and possibly methods of packaging (bulk vs. bagged) as well as close coordination on all levels between producing and consuming units. The Bank intends to keep -he matter under close review and the Borrower will submit to the Bank by not later than the end of 1975 a detailed plan of how fertilizer, particularly from the Tecuci plant, will be distributed. 3.17 Credit availability should not pose any restraints to an increased consutption of fertilizers. Under the Romanian system, the planning of economic activities is undertaken in physical terms and the funds necessary for the movement of goods are an adjunct of such planning. If a farm unit has an allocation for fertilizer as part of its overall production program, the necessary credit requirements are already taken into consideration, and the Agricultural Bank will finance the purchase of the fertilizer and pay directly to the National Bank account of the fertilizer enterprise upon delivery. 3. Fertilizer Prices 3.18 Fertilizer selling prices in Romania are usually quoted on a bulk, ex-factory basis and are as follows: Fertilizer Prices in Romania - May 1974 (Bulk, ex-plant and excluding ex,:ise duty) Lei/ton US$/ton Material Nutrient Material Nutrient Nitrogen Fertilizer CAN (26% N) 751 2,888 37.60 144.60 Urea (46% N) 1,170 2,543 58.50 127.20 Complex NPK Fertilizer N 3,604 180.20 p205 2,724 136.20 K20 1,420 71.00 DAP (18-46-0) 1,885 94.30 Crsts for bagging amount to Lei 100/ton (US$5/ton) and for transportation to about Lei 25/ton (US$1.25/ton) for average hauls of up to 300 km; these costs and the excise duty which amounts to 1Q to 20% of the sales price are charged separately to the consumer. Domestic fertilizer prices, as practically all other prices in Romania, were fixed in the 1960's and have hardly changed since. However, in view of recent substantial increases in imported raw materials and higher capital costs due to inflation elsewhere, they are likely to be adjusted in the near future in line with actual cost increases (para. 6.01).  - 15 - 3.19 Domestic prices are difficult to comlare with international prices because of uncertainties in establishing a realistic exchange rate; current abnormally high internatio-aal prices; and the fact that prices in Romania in general have not changed for more than ten years. However, using an exchange rate of Lei 20 per US$ and fertilizer world market prices prevailing in 1972/1973, i.e., prior to the recent sharp increases, Romanian fertilizer prices are low by international standards (para. 6.02). Furthermore, the fertilizer-crop price relationship in Romania is reasonable and should encourage fertilizer consumption. 4. Market Area for Tecuci Project 3.20 The natural market area for the Tecuci project is the Moldavia region, which represents about one-fifth of Romania's agricultural land and whose agricultural pattern is similar to that of the country as a whole (Annex 3-4). Assuming that crops in the Moldavia region will be fertilized at the same rate as in the rest of the country, the estimated fertilizer demand in that region by 1980 would reach about 290,000 tons of N and about 175,000 tons of P205. Thus, the Moldavia market is larger than the capacity output of the project, i.e., 225,000 tons of N and 100,000 tons of P 205 respectively. 3.21 Distances froma other Romanian fertilizer plants to the Moldavia region are relatively small and since the country's transport system is well developed, distribution of fertilizer from other plants to Tecuci's marketing area would also be econcmical. However, given the policy of the Government to locate fertilizer plants in the center of agricultural regions it can be expected that Tecuci as well would supply its prime marketing area and that exports of fertilizer will be effected from other plants which have capacities in excess of the needs of their su-7rounding agricultural regions, such as Craiova, Turnu Magurele and Turgu ilures. On the other hand, the Tecuci project will produce urea and DAP which--due to their high analyses-do not only have low transport costs but are also traded widely internationally. It may therefore be economically advantageous to Romania to export a major portion of the project's output. This subject will be reviewed further and will form part of the fertilizer distribution study to be undertaken by the Government (para. 3.16).  - 16 IV. THE PROJECT A. Project Scope and Location 4.01 The Project will have a capacity of 420,000 TPY urea and of 208,000 TPY DAP fertilizer with a total nutrient equivalent of 225,000 N and 100,000 TYP P205 and will allow adding potash to produce a wide range of NPK fertilizer grades. The urea unit will be based on the Stamicarbon (Netherlands) urea pro- cess and the DAP unit on technology from C & I Girdler (USA) as well as the Romanian Process Engineering Compary for Chemical Industry (IPROCHIM). The intermediate units required are a 200,000 TPY ammonia plant based on the Kellogg (USAJUK) design, a duplicate of five other plants in Romania now under construction; a 400,000 TPY sulfuric acid plant based on IPROCHIM technology; and a 110,000 TPY P205 phosphoric acid plant. The project also includes gyp- sum drying (for agricultural use and as additive to cement); gypsum wallboard and/or blocks manufacture (para. 4.08); an air separation plant (9.6 billion m3/yr); and a 2,300 TPY aluminum fluoride recovery unit A detailed descrip- tion and a schematic flowsheet of the project are shown in Annex 4-1 and 4-2. Final decisions on the detailed technology to be incorporated in the urea, phosphoric acid and gypsum processes have not yet been taken and the several choices being considered are discussed in para. 4.08 and Annex 4-1. 4.02 The project will be at a new site, 'about 75 km north of Galati, and will include all necessary ancillary facilities such as storage, utilities, workshops, roads and office buildings. The site is acceptable. It is adjacent to rails and roads and requires no special or unusual amount of site prepara- tion work. The Tecuci site has been chosen in accordance with the Government policy of decentralization of industry and locating fertilizer factories in the regional market area. B. Raw Materials and Utilities 4.03 The principal raw materials are (1) natural gas; (2) phosphate rock; and (3) sulfur. Natural gas, produced domestically, will be delivered from the existing national pipeline network requiring only moderate additional investments for meeting the requirements of Tecuci (para. 5.03). Romania currently produces about 30 billion m3 per year of gas with about 10% consumed by the fertilizer industry, a share that is expected to increase to about 20% by 1978. The project will consume about 0.5 billion m3 of natural gas per year. Already proven gas reserves are adequate and no supply problem is there- fora anticipated. Phosphate rock (350,000 TPY) and sulfur (138,000 TPY) will be imported in bulk; phosphate rock through the port of Galati and then railed to the site and sulfur by rail from Poland. Romania's total projected ferti- lizer raw material import requirements (1978-80) are about 4 million TPY and sufficient handling and transport facilities are reportedly available. Phos- phiate rock is purchased mainly from Morocco, as part of a long-term contract but also from the USA and the USSR, and sulfur equally on long-term contracts  - 17 - from Poland; but other sources such as France, USSR, Canada, USA or Mexico could also be utilized. Each of the above countries is a major exporter of the respective raw materials and still additional sources are available. Therefore, Romania should have no difficulties in obtaining adequate raw material supplies. 4.04 The project will generatet its own steam requirements, and obtain water from an adjacent river. Some 75% of the plant's power needs will be purchased from the national grid and the remainder self generated as part of the energy conservation design incorporated into the project. The power net- work is well established in Romania and no difficulty in having an adequate and reliable supply is anticipated. C. Employment and Training 4.05 Tecuci will emp'oy a staff of about 2,400 including operations, maintenance and administrative personnel. This level is somewhat high but still considered reasonable. An organization chart of the Tecuci Enterprise is shown in Annex 4-3. As any chemical fertilizer plant, the project itself is not labor intensive with only 15 jobs per US$1 million of capital invested. Additional indirect employment, however, will be created primarily by the con- struction and equipment manufacturing activities in Romania; the additional manpower needs in fertilizer distribution and application; and the general economic development of the Tecuci area, caused by the project. 4.06 The Craiova Central has an excellent training program, based on its operating plants and those under construction, and carried out in coordination with its licensor engineering companies and equipment suppliers. The existing factories have well-trained staff which together with the existing facilities will be used to train Tecuci's personnel. About US$1 million equivalent is provided for in the project budget for training expenses and no difficulty is foreseen in supplying ard training the needed staff. Mr. H. Cocan has been appointed as General Manager of the Tecuci Enterprise; he previously was in the Management of the P.atra Neamt fertilizer plant and also has considerable operating experience in the fertilizer industry. Also, the other principal members of the project team for the Tecuci project have already been recruited from the Craiova Central staff. D. Ecology 4.07 The project will be located in a relatively un-industrialized area in line with Government policy to establish new industrial facilities away from present centers of population. Nevertheless, caution must still be exercised with respect to plant emissions. There are several potentially harmful waste streams produced from the raw materials and technology employed in the project; notably sulfur oxides; fluorides; and gypsum. Maximum emis- sion levels of 80 kg/hour for sulfur oxides (corresponding to 99.8% sulfur recovery), and 2 kg/hour for fluorides have been set by IPROCHIM. Water is recirculated for re-use and is treated before discharging from the plant.  - 18 - 4.08 Gypsum (about 500,000 TPY), a solid waste from phosphoric acid manufacture, will be converted into gypsum wallboard or blocks (about 120,000 TPY) and the remainder is to be dried and used about half in the cement industry as a retardent and about half in agriculture for soil amelioration. For wallboard, blocks and cement uses, the chemical purity of the gypsum is critical and this affects the choice of phosphoric acid technology. IPRDCHIM has been cautious in setting emission levels. The sulfuric acid plant design is the most efficient (double absorption) which is commercially available and actual sulfur emissions are expected to be considerably less than stated by IPROCHIM. Similarly, with the planned fluoride recovery unit, the fluoride emission level is also expected to be much lower. With these factors consid- ered, the air, water and solid pollution levels of the project are judged to be reasonable. Finally, the Romanian authorities are equally interested in adequate pollution controls and the project will be carried out with due regard to environmental requirements. The cost of pollution control equipment (including gypsum) is estimated at about 7% of the project cost. E. Project Implementation 4.09 The main responsibility for project execution is divided between IPROCHIM, IPUC and the Tecuci Enterprise-all acting within the Ministry of Chemical Industry-with civil works, erection and procurement contracted to other Romanian enterprises as is normal practice in that country. The Tecuci Enterprise as part of the Craiova Central, having primary responsibility for overall coordination of project implementation, project budget and progress, is responsible for the successful project completion. IPROCHIM and IPUC will act as engineering contractors. The Ministry of Chemical Industry has some supervisory, controlling and coordinating functions such as determining priorities for the different projects within its Ministry as well as respons- ibility for coordination with other Ministries. 4.10 IPROCHIM will utilize existing license agreements with reputed inter- national firms and its own technology (para. 4.01). Tecuci would be similar to other projects under construction in Romania and would utilize substantial local equipment. Although the basic technology to be employed is well estab- lished, IPROCHIM and the Romanian equipment suppliers have not yet fully demon- strated their ability to construct and operate some of the plant units since they have not yet become operational. However, since most of these plant units are nearing completion and/or involve experienced process licensors, the tech- nical risks are considered acceptable. IPROCHIM is also responsible for engi- neering, licensing arrangements and the preparation of feasibility reports and has a coordinating or technical advisor role in equipment supply, procurement and erection and commissioning activities. IPROCHIM will receive a process design package from the licensors and then complete detailed engineering. It also gives equipment specifications to domestic suppliers for local equipment.  - 19 - The local suppliers, in turn, go to their central design institutes for de- tailed design and fabrication drawings. Prom these, materials are ordered, including the necessary imported materials, and subsequently the equipment is fabricated. IPUC is responsible for the engineering of the construction activities and utility systems. 4.11 This divided responsibility and partly sequential approach to proj- ect implementation and the fact that IPROCRIM, and the Tecuci Enterprise as part of the Craiova Central have only limited control over other Ministries and enterprises involved in project execution, may help to explain the rather extended project schedule of about three and a half years preceeded by six months of engineering which is already far advanced. Also project control and scheduling techniques during project implementation appear to be relativ- ely weak. Although some minor technical assistance in connection with project engineering, scheduling and control is part of the project, it will be dif- ficult to modify greatly the project execution method in Romania at this time with the objective of reducing construction time and thus capital costs. Furthermore, modification will have to be introduced gradually to avoid major disruptions within the project execution system and thus run the risk of an even longer construction period. IPROCRIM has agreed to develop (by June 1974) a detailed project implementation plan showing among others the specific responsibilities of all entitios involved in the project and particularly the role of the licensor firms dur:e.ng all phases of project implementation. While there is therefore room for streamlining project execution and thus accelerating it, the ample recent experience of IPROCHIM and the Craiova Central in executing fertilizer projects is expected to assure that Tecuci will be implemented within the time schedule envisaged. The project implemen- tation schedule with an expected start of commercial operations of the project in January, 1978 is shown in Annex 4-4. V. CAPITAL COSTS AND FINANCING PLAN A. Capital Costs 5.01 Total capital costs are estimated at Lei 3.9 billion (US$193.8 million) and total financing required including interest during construction at Lei 4.0 billion (US$200.8 million). Capital costs are shown in detail in Annex 5-1 and are summarized below. 1/ 1/ Lei 100 million (US$5 million) have been added in the summary capital costs for the Phosphorgypsum Processing Facilities. The detailed scope of these facilities has not yet been determined. The provided amount is based on processing 120,000 TPY of phosphorgypsum into gypsum blocks.  - 20 - Summary of Capital Cost Estimates (in million Lei) (in million US$) X Local Foreign Total Local Foreign Total of Total Engineering and Fees 36 136 172 1.8 6.8 8.6 4.4 Equipment and Materials 458 498 956 22.9 24.9 47.8 24.6 Erection and Materials 262 130 392 13.1 6.5 19.6 10.1 Stainless Steel - 300 300 - 15.0 15.0 7.7 Project Management 10 - 10 0.5 - 0.5 0.3 Civil Works 739 12 751 36.8 0.6 37.4 19.3 Sub-total 1,505 1,076 2,581 75.1 53.8 128.9 66.4 Import Duties 307 - 307 15.4 - 15.4 7.9 Training 23 - 23 1.2 - 1.2 0.6 Pre-operating and Commissioning 24 26 50 1.2 1.3 2.5 1.3 Spare Parts 10 20 30 0.5 1.0 1.5 0.8 Related Investments 112 60 172 5.6 3.0 8.6 4.4 Contingencies /1: Physical 126 88 214 6.3 4.4 10.7 5.5 Price - 146 146 - 7.3 7.3 3.9 Working Capital 89 163 252 4.5 8.2 12.7 6.6 Phosphogypsum Facilities 60 40 100 3.0 2.0 5.0 2.6 Total Capital Costs 2,256 1,619 3,875 112.8 81.0 193.8 100.0 Interest during Construction 20 120 140 1.0 6.0 7.0 Total Financing Required 2,276 1,739 4,015 113.8 87.0 200.8 /1 Excluding contingencies on stainless steel the scope of which is already well defined and which will be ordered shortly for use in local equip- ment manufacture. 5.02 Capital costs are based on estimates prepared by IPROCHIM in early 1974 in cooperation with the process licensors. Prices of local components are fixed and risks are therefore limited to physical factors; as a result no price escalation on local components but a contingency of 6% has been provided for. These estimates correspond to what the final techno- economic study will show. Also local equipment costs are not expected to  - 21 - change until 1976/77 as a consequence of the overall price review and any up-or downward adjustments are expected to be marginal. Estimates of foreign components are based on the expected mid-1974 price level and were obtained from the procurement of similar plants under construction during the years 1972 and 1973 and from recent discussions with the process licensors and prospective equipment suppliers; a 10% physical contingency and an annual price escalation of also 10% until the expected date of expenditures have been added. Placement of orders is expected to start in August/September 1974. Compared with past Bank practice, this is an unusually high price escalation provision but is considered justified in view of expected added cost increases due to higher energy costs, and also practically full order books of most of the prospective equipment manufacturers. For the urea and phosphoric acid plants for which the exact processes have not yet been determined, adequate price and contingency allowances have been made for the selection of modern processes. With these provisions and particularly the fact that the major part of the project represents a duplication of plants already under construction or completed, the capital cost estimates are considered realistic. 5.03 Details of the capital cost items, major equipment components, stainless steel and civil works are given in Annex 5-2. Civil works costs are relatively high with Lei 751 million (US$37.6 million); also some invest- ments are contained in "Related Investments" (about US$6 million), such as railroad and utility (including gas) network development which in other countries are usually not taken care of by the project entity itself. Further- more, import duties on equipment and materials are substantial, ranging from 10% to 48% with a total of Lei 307 million (US$15.4 million). On the whole, therefore, project costs are relatively high, particularly on account of high local costs which are influenced by the above factors but may partly also be the result of the not fully representative conversion rate (Lei 20/ US$1) used in the above estimates (para. 7.02). 5.04 A provision for permanent working capital of Lei 252 million (US$12.7 million) has been made of which about 65% is in foreign exchange as shown in greater details in Annex 5-3. The provision was calculated by IPROCHIM and is based on Romanian laws stipulating a stock of four months of imported raw and auxiliary materials and one month of finished goods. In comparison with the Bank's other fertilizer plants, the above provision of working capital, is relatively high. Initial working capital requirements are provided by State Budget funds through the National Bank (or through the Investment Bank during first three months after commissioning). Subsequent increases in working capital needs can be financed through allocations from the yearly earnings of the Enterprise (Annex 2-3) or to the extent that these allocations are not sufficient, they can be readily provided by the National Bank which also handles the Enterprise's cash movements on a daily basis. Sufficient working capital to the Enterprise will be provided by the State (para. 6.06).  - 22 - B. Financing Plan 5.05 The financing plan and the phasing of expenditures on a quarterly basis are presented in detail in Annex 5-4 and are summarized below: Financing Plan (in million Lei) (in million US$) Local Foreign Total Local Foreign Total Loan Funds IBRD - 1,200 1,200 - 60.0 60.0 State Funds Funds for Investments 2,187 376 2,563 109.3 18.8 128.1 Funds for Working Capital 89 163 252 4.5 8.2 12.7 2,276 539 2,815 113.8 27.0 140.8 2,276 1,739 4,015 113.8 87.0 200.8 5.06 The financing plan assumes that the Bank would finance all foreign expenditures except for working capital (US$8.2 million), foreign equipment already purchased and financed (US$6.1 million) and US$12.7 million of imported stainless steel. The Bank loan would thus amount to US$60.0 million (Lei 1,200 million) equivalent to about 30% of the total financing required or some two-thirds of the project's foreign exchange expenditures. The remaining funds would be provided in the form of equity contributions through allocations from the State Budget and own funds of the Central. The purchases of equipment already made were undertaken in early 1974 in connection with purchases for other fertilizer plants; they were made at favorable prices and financed by the US Export-Import Bank and the Chase Manhattan Bank on a medium-term basis. The mechanism of local financing of projects in Romania which also explains the high equity proportion in the project, is described more fully in Annex 2-3. According to that mechanism equity funds are channelled back to the Central and the State Budget through allocations based on yearly earnings of an enterprise. The remaining foreign exchange (US$27.0 million) and local financing (US$113.8 million) as well as any addi- tional funds - in both local and foreign currency - to cover any unexpected overruns in project costs will be provided by the State. 5.07 The Bank loan would be extended to the Investment Bank for 15 years including 4-1/2 years of grace at an assumed interest rate of 7-1/4% per annum; the Tecuci Enterprise would benefit from the loan proceeds for the same length of time and at a cost of 9% (Annex 5-5). Local funds for fixed investments will be channelled as usual through the Investment Bank and those for working capital through the National Bank.  - 23 - C. Allocation of Bank Loan and Disbursements 5.08 The Bank loan would be used for meeting 100% of the following foreign exchange expenditures of the following goods and services: Expected Allocation of Bank Loan (In milli)n US$) Engineering, Design and License Fees 6.8 Equipment, Machinery, Material and Supplies /1 33.2 Stainless Steel 2.3 Interest During Construction 6.0 Unallocated (Contingency and Escalation) 11.7 60.0 /1 Excludes US$6.1 million equivalent for equipment already purchased. 5.09 It is expected that up to US$6 million of equipment could be proprietary or standardization items depending on the final selection of processes for the variou3 plant units. Retroactive financing for license and engineering fees shall be required up to an estimated amount of US$0.5 million. A forecast of estimated quarterly disbursements is given in Annex 5-4. D. Procurement 5.10 Procurement will be undertaken under the general coordination of the Tecuci Enterprise. For technical aspects procurement responsibility will rest with IPROCHIM and -- as far as imported goods are concerned - ROMCHIM, a special Export-Import Agency under the Ministry of Chemical Industry, will handle the commercial aspects. Equipment to be supplied inter- nationally wil be subject to a prequalification procedure based on advertising plus the process licensors' knowledge of potential equipment suppliers. Three or more suppliers, where possible, will be prequalified for each of the about sixty equipment packages and bid soliciting, evaluation and awards will be conducted according to Bank guidelines. However, it may be advantageous to the project from technical and price considerations for several equipment packages to be supplied by the same vendors as in the other duplicate plants in Romania. As noted previously about US$6 million of equipment has already been purchased and will not be financed by the Bank. Procurement procedures for up to US$6 million of additional duplicate but mainly proprietary equipment required to ensure efficient plant operations, will be reviewed with the  - 24 - `nterprise and IPROCHIM prior to soliciting )ids to determine the best methods to be used to comply with Bank guidelines and assure the optimal qualitv and price. 5.11 The list of equipment and materials to be financed by the Bank has been arrived at after excluding all goods that can be obtained locally. There- fore, it is not expected, in general, that Romanian equipment manufacturers will participate in the bidding of the foreign equipment packages. However, provision has been made that the Bank loan could be disbursed for Romanian equipment if a Romanian supplier would prequalify and win the bid. Otherwise, no local equipment will be financed by the Bank nor will civil works and building construction which will be executed by Romanian enterprises. For Romanian supplies there is no "competitive" bidding; once the quantities of materials are established, fixed unit costs determine the price and there is usually only one Romanian supplier for major equipment items or one contractor. Detailed design is also affected by the desire to maximize the local content of a project. However, the Bank is satisfied that the type of equipment to be supplied locally for the project can be produced satisfactorily in Romanian shops and within the time required, and that the quality of civil construction is adequate. 5.12 In order to proceed with the procurement as soon as possible and not to delay the project, the'Enterprise has requested obtaining disbursements on the Bank loan before the miin techno-economic indicators of the project will be approved (by October 1974); provision has been included that disbur- sements up to US$4 million can be made prior to such approval if the Council of Ministers has first given its approval for the procurement of at least US$35 million for foreign contracts for the project. VI. FINANCIAL ANALYSIS A. Revenues and Operating Costs 6.01 As was discussed in para. 2.16 and Annex 2-7, prices for all inputs and outputs are set and controlled by the Government and most input prices have remained constant since their establishment in the 1960's on the basis of the overall cost structure at that time. In general, raw material and fertilizer prices in Romania have been in line with international prices pre- vailing until early 1973, except for sulfur and for the price of urea in comparison with other N fertilizers. 6.02 However, in view of recent developments on the international fertilizer market and drastic price increases for oil and phosphate rock the Romanian price structure does no longer adequately represent financial or economic costs and benefits and Annex 6-1 contains a comparison between  - 25 - financial and currently estimated economic values to demonstrate this point further. But even disregarding the absolute level of fertilizer prices which has to be seen in relation with the input prices, it is evident that the structure of N fertilizer prices in Romania is neither justified from the point of view of production costs nor from the market value. For example N in the form of urea is priced at about 70% and 88% of the N content in NPK and CAN fertilizers respectively. The low N price in the form of urea which is contrary to the international fertilizer price structure is the main reason for the low financial rate of return of the project (para. 6.09). 6.03 As discussed earlier, the major raw materials and utilities used are natural gas, phosphate rock, sulfur, fuel oil and power. These inputs account for about 57% of total operating costs and most of their prices are substantially lower than the international prices that have been prevailing since October 1973 (Annex 6-1). An exception is the sulfur price which is about twice the current import price. Labor costs are relatively low prima- rily due to low wage rates both for skilled and unskilled workers. 6.04 The Government is considering a price revision of all products in the near future to reflect: (i) technological innovations and productivity increases which have led to cost reductions since most prices were last fixed in 1963; (ii) elimination of relative price distortions among commodities; and (iii) higher costs of energy and investments. It is not yet known to what extent prices of gas, oil, power and imported fertilizer inputs as well as fertilizer prices themselves will change other than that their general trend will most likely be upward to reflect more closely current or near future international prices. Therefore, in the financial projections of the project, present prices have been used. Whatever adjustments in fertilizer inputs and outputs may be made, however, these are not expected to adversely affect the financial viability of the industry in view of the Government's policy to provide for a reasonable benefit after covering average production costs. B. Financial Projections 6.05 Detailed projections of income statements, cash flow and balance sheets for the project are contained in Annexes 6-2, 6-3 and 6-4 respectively and are summarized below:  - 26 - Tecuci - Summary of Financial Projections (in million Lei) 1978 1979 1980 1985 1990 Income Statements and Cash Flow Capacity Utilization (%) 60 80 100 100 100 Sales Revenues 642 856 1,070 1,070 1,070 Production Costs 515 584 676 676 676 Depreciation 206 206 206 206 206 Benefits ( 79) 66 189 189 189 Benefits as % of Revenues ( 12%) 8% 18% 18% 18% Cash Flow (Benefits and Depreciation) 127 272 394 394 394 Debt Service Coverage Ratio 1.2 1.6 2.3 2.3 - Balance Sheets Current Assets 202 252 254 263 272 Current Liabilities 109 111 79 126 - Net Fixed Assets 3,557 3,352 3,146 2,117 1,089 Bank Loan 1,127 1,056 977 443 - Equity Funds for Invest- ment & Working Capital 2,521 2,437 2,344 1,811 1,361 Current Ratio 1.9 2.3 3.4 2.1 - Debt/Equity Ratio 29:71 29:71 28:72 19:81 6.06 The projections are based on estimated 60% and 80% capacity utili- zation during the first two years of operations (1978 and 1979) and 100% utilization thereafter. This is considered conservative since the "defined" capacity underestimates the actual production capability of the project, as is usual in most Romanian plants (para. 2.05). Benefits as a percentage of sales are expected to increase from a loss in 1978 to 8% in 1979 and 18% in 1980. Benefits can be considered equivalent to profits before taxes and interest. There is no equivalent of corporate taxes in Romania, instead all surplus funds are remitted to the State Budget on a predetermined basis depending on the level of earnings. C. Cash Flow and Allocation of Benefits 6.07 The cash generation projected above should only be considered indi- cative as to the actual funds that will be available to the Tecuci Enterprise in future years. Instead, as described in Annex 2-3 and 2-4, the Enterprise will prepare its detailed annual financial plan each year indicating expected sources and usages of funds for the approval of the higher authorities. Since the State is the owner of all enterprises, any shortfalls or surpluses  - 27 - in the financial resources will be provided or absorbed by the State after approval by the Grand National Assembly. The depreciation funds, charged as expenses in the income statements, are repaid to the Investment Bank before any al'locations of benefits are made. The mandatory depreciation remittances and annual benefits will be sufficient to cover the payments of interest (9%) on and principal of the Bank 'Loan; also the Government will provide any funds necessary for the operatio:as of the Tecuci Enterprise. The depreciation funds alone are expected to exceed the debts service payments. 6.08 Allocation of beaefits between workers, State and enterprise are made in the following order of priority and within the following main cate- gories as explained in detail in Annex 6-5: (i) mandatory allocation to the State Budget (10% of planned benefits); (ii) bonus payments to employees (up to 2% of total wages and salaries); (iii) allocation to centralized investment fund; (iv) allocation to the non-centralized investment fund; (v) reserve funds; and (vi) the remainder, if any, is allocated to the State Budget. The above order is applied for planning purposes. However, during the actual distribution of benefits, first priority is given to meeting the planned allocations to the State Budget (categories (i) and (vi)). If the planned benefits are not achieved, the State Bitdget allocations are made in full, workers' bonus is reduced proportionately and no allocations are necessary for the discretionary funds (non-centralized and reserve funds) controlled by the enterprises. In case the actual benefits exceed the planned figure, the workers' borus is increased proportionately and, based on pre- determined ratios, some additional funds are authorized for social investments like schools and housing. D. Financial Return and Risks 6.09 The financial return of the project based on present Romanian prices is only 4.5%. As discussed in para. 6.01, present input and output prices for fertilizer production in Romania cannot be used for determining the viability of a fertilizer project. The low return is the result of major disparities between the input and output prices for urea/DAP fertilizer plants, particularly the urea price and the sulfur price. Though the finan- cial return is low, the financial ratios of the project entity are expected to be satisfactory. If the sulfur price were to be reduced to an actual international market price and if urea were to be priced according to the N content price of NPK fertilizers in Romania, the project would yield a satis- factory return of about 11%. The calculation of the financial return is shown in Annex 6-6. 6.10 Since prices on the revenue and cost side are set by the Government in line with overall economic objectives; to maintain the financial viability of the Enterprise (para. 6.04); and all necessary funds are provided by the State, the financial risks of the project are essentially limited to the physical success of the project, i.e., successful project construction and  - 28 - operations. Both risks are judged to be small since proven process designs ,nd equipment for the critica:. plant units will be used; an ample construc- tion and start-up period has leen provided for; and technical assistance from the process licensors during roject implementation and commissioning will be available. E. Auditing and Reporting 6.11 Romania has a fairly elaborate control and audit system, details of which are contained in Annex 6-7. Each enterprise submits periodic reports to the concerned ministry through its central. These reports not only give details of the financial performance but also on 14 other techno-economic indicators such as raw material usage and productivity levels. In addition, regular re:orts are received by the Investment Bank on projects under con- struction and by the National Bank on ongoing operations. These banks also perform the audit function and present their reports to the ministry in charge of the enterprise and the Ministry of Finance. 6.12 It should be noted that the audit and control system, due to the particular economic conditions in Romania, focuses primarily on controlling the physical production and optimum use of funds and materials and to a lesser extent the financial performance. ihe Tecuci Enterprise will be audited and controlled by its superior organization--the Craiova Central and the Ministry of Chemical Industry--and also through the special auditing departments of the Ministry of Finance. Additionally, there are extensive audits from the Investment Bank and National Bank on the proper use of funds including post evaluation of projects. Since the Ministry of Finance is responsible for overseeing the financial performance of all other ministries, its audit reports on the Tecuci Enterprise will serve the purpose of independent audits. The Bank will receive the annual audit reports on the accounts of the Enter- prise carried out by the Ministry of Finance. 6.13 Romanian enterprises have elaborate reporting obligations to the Central and the banks concerned including weekly, monthly, quarterly and annual reports. Though the presentation and contents of these reports is somewhat different from those normally received by the Bank, it should not be very difficult to adjust them to contain sufficient information for moni- toring the progress of project construction and operations. The Bank's usual reporting requirements were discussed and the Borrower will submit project progress reports and quarterly and annual financial statements of the Enter- prise in a format satisfactory to the Bank.  - 29 - VII. ECONOMIC ANALYSIS 7.01 For the economic arnalysis, costs and benefits have been evaluated at estimated world prices in 1978 when the project is expected to start operations. Tradable items are valued at border prices, and non-tradable items have been transferred to world prices at an exchange rate of Lei 20 to US$1. A. Foreign Exchange Rates 7.02 Romania follows a complex foreign exchange system. The official rate of Lei 4.97 per US$1 is used only for accounting purposes. Since 1970, the rate used for invisible and capital transactions has been Lei 14.38 per US$1. Under a new system introduced in January, 1974, the prices of all traded goods are converted at a unifirm 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 iuported 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 dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Sensitivity analysis has been conducted on the conversion rate by also using a rate of Lei 25 - US$1.00. B. Fertilizer Prices 7.03 The main project outputs are urea and DAP fertilizer. As many other commodities, international fertilizer prices have skyrocketed within the past two years. For fertilizer, this is partly due to a rather unexpected and substantial rise in demand, lagging additions to production capacity as well as to increased raw7 material costs. Whereas typical urea prices two years ago were in the US$45-60 f.o.b. range they have now climbed to about US$150-200 and beyond. Even at these prices substantial quantities are dif- ficult to obtain. The same market development has happened to DAP. It is not expected that fertilizer prices will return to anywhere near the low levels that prevailed two years ago, since feedstock prices and investment costs have increased considerably; investment costs in the fertilizer industry have increased by about 20% within the past 12 months. However, fertilizer prices should return to somewhat more reasonable levels after the demand/supply balance will have been re-established. This may be expected once the large number of facilities now under construction or being planned will start operations in the late 1970s. 7.04 Though it is expected that the bulk of the urea produced by the project is actually consumed domestically, in incremental economic terms it has been assumed that urea will be exported, since Romania is--and is likely to remain--a net exporter of nitrogenous fertilizer (para. 3.11). The f.o.b. price for urea in the economic analysis has been assumed at US$110/ton in bulk  - 30 - which is well below present market prices; it is in line with the assumed raw material costs (para. 7.07) and is based on the expected export prices from large-sc;-le, and low-co3t energy, fertilizer production facilities such as in the Persian Gulf countries. The estimated 1978 price for urea f.o.b. Persian Gulf port is US$120/ton bagged which is equivalent to US$110/ton in bulk, f.o.b. Romania. 7.05 The project's DAP output hias been assumed to be domestically con- sumed as indicated by the consumption forecast; it is thus considered import substitution and an estimated c.i.f. world price of US$180/ton of DAP has been used in the economic analysis. Similar to urea production, which is mainly based on petroleum derivates or gas, DAP production costs have been substantially affected by a recent sharp price increase in its major raw material, phosphate rock. The US$180/ton c.i.f. plant price corresponds to US$150 f.o.b. from major export-oriented production facilities such as in North Africa and the US. 7.06 The fertilizer prices used for determining the benefits of the project are well below present market prices and are based on expected long- term fertilizer prices and raw material costs. Furthermore, it is expected that in the longer run higher raw material costs will result in at least corresponding increases in product prices. Even considering some ease in the fertilizer market, the prices used for calculating the economic return are considered conservative. C. Raw Material Costs 7.07 The principal raw materials used are domestic natural gas and imported rock phosphate and sulfur. At present, Romania is producing and consuming about 30 billion m3 per year of natural gas, most of it being used for power generation. Based on information from the Ministry of Mines and Petroleum, it is expected that no major additional gas resources are domes- tically available and that production in the foreseeable future will remain stable. The project forms part of Romania's program to switch gas use from power generation to more economic uses, such as the petrochemical industry. However, since gas production in Romania is not expected to increase, the gas used by the project has to be priced, in economic terms, at its import costs. The alternative materials for energy generation, such as heavy fuel oil, are not considered alternatives to natural gas in the case of feedstocks for fertilizer production, because investment and operating costs for gas- based fertilizer plants are considerably lower. Furthermore, Romania is expected to become a net importer of petroleum in future years. 7.08 For determining the long-term price of urea, export prices of the expected world's least cost producers have been assumed (para. 7.04). Although low-cost energy is an important element of N-fertilizer production costs, capital related costs such as sufficient capacity utilization are even more important. However, Romania can combine both factors. It has considerable experience in building and operating chemical plants and has  - 31 - domestic gas resources which are the ideal feedstock for nitrogen fertilizer production. Practically all surplus energy countries are non-industrialized countries. Therefore, full capacity attainment in these countries in general is more difficult to achieve than in industrialized countries. A 1978 urea price assumption of US$120 f.o.b. Tecuci plant bulk which would be US$10 higher than assumed in this report corresponds to the production costs of a large-scale fertilizer plart in the Persian Gulf with natural gas costs at US$0.50 per 1,000 cubic feet and capacity achievement of 90%, which is optimistic. If the capacity utilization is reduced, substantially higher urea prices would be necessary to cover the production costs. The gas price assumed for the Persian Gulf plant plus liquefaiction and transport costs to Romania would result in a c.i.f. Romania price of US$1.40 per thousand cubic feet which has been used in the economic analysis of the project. If higher f.o.b. gas costs are assumed, corresponding increases in the long-term product price would be expected as a result. The assumed gas price in relation to the price assumed for the finished product is conservative. 7.09 Phosphate rock as the other major raw material has been assumed at US$40 per ton c.i.f. Romania. This price is somewhat lower than present world market prices (US$42 per ton f.o.b. Morocco) because it is expected that the phosphate rock market will again become more balanced within a few years and that as a result prices should return to more reasonable levels. Sulfur has been assumed at the contract price (with Poland) of US$25/ton. D. Economic Rate of Return 7.10 With these assumptions the project yields a satisfactory economic rate of return of 13.2% (base case). A detailed description of the calcu- lation of the return and its sensitivities are presented in Annexes 7-1, 7-2 and 7-3. As usual, the return is sensitive to changes in revenues; a 10% increase in revenues, which would about correspond to the prices expected by the Bank's Economic Analysis and Projections Department, would increase the return to 17.6%. A 10% or 20% increase in the gas price decreases the return to 12.1% and 10.8% respectively. If a conversion rate of Lei 25/US$1 were to be used in the economic return calculations, the base return of the project would increase from 13.2% to 15%. As noted previously the probability of significant delays and cost overruns for the project is considered low because of the longer construction period already planned in and the contin- gencies provided. 7.11 Indirect economic benefits from the project will be derived from the creation of industrial activity in the Tecuci area, increased domestic fertilizer consumption and additional foreign exchange for Romania. It is estimated that the project's net foreign exchange benefits (partly import substitution and partly additional exports) will amount to about US$36 million per year (Annex 6-1).  - 32 - VIII. AGREE 4ENTS 8.01 The Loan and Guarantee Agreements will record the following major agreements and assurances: (i) the main techno-economic indicators of the project should be approved by the Government (para. 1.02) prior to disbursements exceeding US$4 million. Disbursements of up to US$4 million can be made if approval for at least US$35 million of foreign procurement is given by the Council of Ministers (para. 5.12); (ii) a detailed study of the fertilizer distribution system, particularly within the Tecuci market area, will be prepared by not later than the end of 1975 (para. 3.16); (iii) the project will be carried out with due regard to environmental requirements (para. 4.08); (iv) the Government will provide to the Enterprise the residual funds to complete the financing of the project (para. 5.06); (v) the Government will provide to the Enterprise in a timely manner any additional funds (local and foreign) that may be needed to cover cost overruns of the project (para. 5.06); (vi) the Government will provide to the Enterprise any funds necessary for Tecuci's operations; (para. 6.07 and 5.04); (vii) the depreciation remittances and annual benefits will be sufficient to cover interest on (9%) and repayment of the Bank loan (para. 6.07); (viii) reporting requirements will be met (para. 6.13); (ix) the annual audit report on the accounts of the Enterprise will be carried out by the Ministry of Finance (para. 6.12). 8.02 Based on the above mentioned agreements and assurances, the project is suitable for a Bank Loan to the Investment Bank, guaranteed by the Gov- ernment of Romania, of US$60.0 million equivalent for 15 years, including a 4-1/2 years grace period. Industrial Projects Department May 21, 1974  ANNEX 1-1 Page 1 ROMANIA TECUCI FERTILItER PROJECT Glossary of Technical Terms 1. Following is a description of the technical terms used in this report: 2. Plant Nutrients: Essential to plant growth are some 16 elements, 6 in large and the remainder in small or micro quantities. Carbon, hydrogen, oxygen, nitrogen, phosphorus and potassium comprise the first six, and others of lesser significance include calcium, magnesium, sulfur, silicon, zinc, iron, aluminum, manganese, boron, sodium, and copper. Carbon, hydrogen and oxygen are readily available from the atmosphere and water. Nitrogen, phosphorus and potassium -- three main nutrients -- and the other elements are drawn from the soil. Unless supplemented by regular additions of materials containing the three main nutrients, soil is soon depleted of fertility by cropping. Use of organic materials such as animal and vegetable wastes can be utilized but the scale and intensity of modern agriculture have far exceeded the availability of natural "fertilizers." Consequently, the majority of the world's primary plant nutrient needs are now supplied in the form of manufactured or "chemical" fertilizers. To an increasing degree, secondary nutrients such as calcium, magnesium, sulfur, and micro nutrients such as boron, zinc, copper and manganese are also added to soils along with the primary nutrients in ratios prescribed by agronomists according to specific crop and soil needs. 3. Chemical Fertilizers: Chemical compounds suitable as fertilizers should be high enough in nutient content; stable to avoid hazards and handling problems; and readily water soluble and available to plant root systems. Commercially available materials meeting these requirements to a large degree are: Primary Fertilizer Materials % of N % of P2O5 % of K20 Nutrient Nutrient Nutrient Urea 46% Triple Super- Potassium Chloride 61 % Ammonium Nitrate 34% phosphate 46% Potassium Sulfate 54% Amonium Sulfate 21% Single Super- Diammonium phosphate 18% Phosphate 48% Because of the high nutr:.ent content of urea, diammonium phosphate and potassium chloride (KCL), they are some of the most popular fertilizer materials in the world today. It is the common practice to report the nutrient content of materials in terms of percentages of N and P205 (phosphorus pentoxide) and potassium K20 (potassium oxide).  ANNEX 1-1 Page 2 4.,e. or _PK Fertilizers: All three primary nutrients (N, P205, K20) are frequjvntiy applietl to the soil at the same time ih ratios varying with the nutrient requirements of different crops. To facilitate handling, the several required chemicals are usually agglomerated into uniform granules for distribution. The analysis of each nutrient is given as a ratio to describe the NPK product. Thu.s ,5-15-15 complex fertilizer contains 15% each of N, P205, and K20; and ,2-24-.2 complex fertilizer contains 12% N, 24% P205 and 12% K20. 5. Phosphate Water Solubility: The agronomic availability (or effi- ciency) of phosphate materials vary substantially. A common practice is to use water solubility as a criterion although in acidic soils it is a less significant factor. Higher P205 water solubility permits the fertilizer to be absorbed more rapidly. The minimum recommended in most cases is about 60% solubility but in some cases up to 80-85% solubility is preferred. 6. Ammonium Nitrate (AN) is produced by reacting ammonia with nitric acid. Nitri-c acid (HNO3), in turn, is made from ammonia (NH3). AN contains 34.5% nitrogen, half in the ammonium form and half in the nitrate form, and is very hydroscopic. It also is a commercial explosive. In many countries, a diluent --- e.g., limestone -- is added to lower the analysis and negate the explosive properties as well as to minimize the hydroscopic properties. 7. Diammonium phosphate (DAP or chemically(NH4) 2HP04) is produced by reacting NH3 with phosphoric acid (H3pO4) followed by granulation and drying. 8. Partial Oxidation is a method of producing hydrogen from hydrocarbon fuels of almost any type by a non--catalytic reaction with oxygen followed by removal of the by-product, carbon monoxide. 9. Feedstocks are the hydrocarbons used to produce hydrogen for the ammonia synthesis; in the proposed Tecuci plant, the feedstock would be natural gas which is usually the most economical choice when available. Other potential feedstocks are naphtha, fuel oil, crude oil, coal or lignite. 10. Urea is known chemically as carbamide or NH2CONH2 - the normal amide of carbonic acid; this compound contains about 46% N, all in the ammonium form. It is considerably less hydroscopic than ammonium nitrate and it is the most widely used straight nitrogen fertilizer today. 11. Urea Svnthesis: Urea is made by reacting ammonia with carbon dioxide. Since both of the materials are produced during the ammonia syn- thesis, urea production is usually undertaken alongside an ammonia plant. Unfortunately, the corresponding acid of carbon dioxide (carbonic acid) does not form stable ammoniuni salts as do nitric, sulfuric or phosphoric acids. The refore, simple neutralization as used in making ammonium nitrate and sulfate fertilizers is not possible. Instead, ammonia and carbon dioxide are combined  ANNEX 1-1 Page 3 under heat and pressure to make ammonium carbonate which, although unstable, can be dehydrated under pressure to form urea, a stable compound. Again, unfortunately, the overall reaction is completely reversible and even at 300 atmospheres pressure and 200' C, the conversion to urea in a single pass through the reactor is under 70%. This introduces several complications: high pressure must be used to maximize conversion; uncor.verted reactants must be separated and recycled- increased corrosion under tne high temperatures and pressures used must be overcome, and urea decomposition into undesirable pro- ducts must be minimized. In recent years, several engineering and producing companies have developed trays of surmounting these problems, and large plants capable of producing a thousand tons per day, or more, or urea to rigid che- mical and physical specif-lcations are now operating successfully for long periods throughout the world. Petroleum Units and Measures 12. The petroleum industry historically has used units of measure based On the English measuring system. ConversioiL rates for some units are given below: 1 barrel 42 US gallons; 3 1 US gallon - 0.95 liters = 0.00095 M 1 ton crude oil - 7.0 barrels (approximately, based on the crude oil specific gravity); and 1 ton oil 1.25 M3 of natural gas (approximately, based on oil and gas compositions). The conversion rates between volumetric units, such as gallons, and weights are approximate since the specific gravity of the oil varies slightly with its composition. 13. Materials that exist in the form of gases, such as methane (natural gas), are measured in volumetric units. Since gases are compressible, standard conditions of temperature and pressure (0