Romania - Bucharest Glass Fiber Project

Report No. 1504-RO Romania: Appraisal of Bucharest Glass Fiber Project April 28, 1977 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Romanian Lei and US Dollars. For all calculations, the following conversion rate has been used: US$1 = Lei 20 Lei 1 = US$0.05 Lei 1,000 = US$50.00 WEIGHTS AND NEASURES All units are metric. 1 metric ton = 1,000 kilograms (kg) 1 kilogram = 1,000 grams 1 metric ton = 2,204.6 pounds 1 kilog,am = 2.2046 pounds 1 gram (g) = 0.0353 ounces I kilometer (km) 0.621 miles 1 meter (m) = 39.37 inches 1 millimeter (mm) 0.04 inch 1 micron 2 0.001 mm 1 square meter ( ) = 10.76 square feet 1 cubic meter (m ) = 35.31 cubic feet 1 tex = 1 g per 1,000 m of yarn PRINCIPAL ABBREVIATIONS USED IB - Investment Bank (the Borrower) CISCF - Industrial Central for Glass and Fine Ceramics (the Central) IPIU - Design Institute for Light Industry ROMSIT - Foreign Trade Enterprise for Light Industry GRP - Glass Reinforced Plastic tpy - Tons Per Year ROMANIAN FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ROMANIA APPRAISAL OF BUCHAREST GLASS FIBER PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .. ........ .......... .......... . i-iii I. INTRODUCTION * ............... so I II. THE SECTOR AND THE BORROWER ......................... 1 A. Ministry of Light Industry ......o..... .......... 1 B. Industrial Central for Glass and Fine Ceramics . . ........ . ..............* * *** ........... 2 C. Romanian Financing System and the Investment Bank (the Borrower) ........... 2 III. THE MARKET ........... ..................... ........... 3 A. Uses of Glass Fibers ......................... 3 B. World Market ......... . ........................ 5 C. World Market Prices .......................... 6 D. The Romanian Market ....................... .... 7 E. Marketing Arrangements ................. . ...... 9 IV. THE PROJECT* ..... ............ .ooo ............... .......... 9 A. Project Scope ............ ........................ 9 B. Process Technology ........ . . . . . . . . . . . . . . . . . . . 9 C. Raw Materials and Utilities .................. 10 D. Management and Project Execution ............. 10 E. Employment and Training ...................... 11 F. Ecology *.o.eo....................................... .. 12 V. CAPITAL COST AND FINANCING PLAN ..............se..... 12 A. Project Cost ........ ..................................... 12 B. Financing Plan ............................... 14 C* Procurement .. ................................ 16 D. Allocation and Disbursement of Bank Loan ..... 16 VI. FINANCIAL ANALYSIS ....... ......................... 17 A. Volume and Value of Production ..*a* ........ . 17 1. Volume of Production .................... 17 2. Value of Production .......... ........... 18 B. Production Cost .............................. 18 C. Financial Projections ......oo ... ............ 19 D. Financial Rate of Return ........ so ........... 21 E. Auditing and Reporting ....................... 21 Fe Risks ...**..................................... 22 This report has been prepared by Messrs. G. Becher and E. Tortorelli of the Industrial Projects Department. 1Th document has a fetricted disrbuton and may be used by recipients only in the performance of tr official duties. Its contents may not otherwise be disclosd without World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. VII. ECONOMIC ANALYSIS ............................ ................ . 22 A. Economic Costs and Benefits and Rate of Return ................................. 22 B. Employment and Foreign Exchange Effects ........ 23 C. Transfer of Technology and Future Possibilities *...................... 24 VIII. AGREEMENTS .......................................... 24 ANNEXES 1 Glossary of Main Technical Terms 2-1 The Ministry of Light Industry 2-2 The Central for Glass and Fine Ceramics 3-1 Glass Fiber Products and Their Application 3-2 World Market for Glass Fiber 3-3 Romanian Market for Glass Fiber 4-1 Project Description 4-2 Graphic Presentation of Production Process 4-3 Plant Layout 4-4 Raw Material Quantities and Sources 4-5 Organization Chart of Enterprise 4-6 Implementation Schedule 4-7 Training Program 4-8 Environmental Impact and Protection 5-1 Detailed Capital Cost Estimate 5-2 Working Capital Estimate 5-3 Interest on and Repayment of IBRD Loan 5-4 Disbursement Schedule for IBRD Loan 6-1 Domestic Selling Prices 6-2 Annual Production Cost 6-3 Assumptions Used in Financial Projections 6-4 Projected Income Statement 6-5 Projected Cash Flow Statement 6-6 Projected Balance Sheet 6-7 Break-Even Chart 6-8 Financial Rate of Return 7-1 Adjustment of Project Cost for Economic Evaluation 7-2 Adjustment of Production Cost for Economic Evaluation 7-3 Comparison of Cost of Production in 1976 Prices between Western European and Romanian Glass Fiber Plant 7-4 Price Comparison (1976) 7-5 Economic Rate of Return Map - IBRD 12652R1  ROMANIA APPRAISAL OF BUCHAREST GLASS FIBER PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the Bucharest Glass Fiber Project for which the Government of Romania has requested a Bank loan of US$18.3 million. The Project consists of two sections. Section I, the spinning plant, will pro- duce 6,000 tons per year (tpy) of continuous glass fiber through the direct- melt process in the form of roving and yarn (glass fiber intermediates), and Section II will convert 1,270 tpy into woven roving, fabrics, tapes and braided tubes. The remainder will be sold as roving and yarn. Sec- tion I will employ sophisticated technology available only from a rather closely held industry, while Section II will use conventional textile tech- nology. The plant will be located in the industrial area "Militari", in the south-western outskirts of Bucharest. It will be operated by a newly established enterprise belonging to the Central for Glass and Fine Ceramics under the Ministry of Light Industry. Total financing required for the Proj- ect is estimated at Lei 914 million or US$45.7 million equivalent, includ- ing US$24.5 million in foreign exchange. ii. None of the Project's glass fiber production is planned for direct export since it will substitute imports and meet rapidly expanding domestic demand which will result from the increasing usage of glass fiber by basic industries provided for in the current Five-Year-Plan (1976-80). Romania already has a small plant for 1,000 tpy of glass fiber which uses the simpler but less efficient marbles process based on imported marbles. It began pro- duction in 1974 and produced 516 tons in 1976 meeting 38% of demand in that year. Demand started to grow rapidly in Romania in the early seventies from only about 200 tons in 1970 to 1,345 tons in 1976. During the current Five- Year-Plan consumption is expected to increase to about 7,100 tons in 1980. This market projection does not yet take into account the effects of the re- cent earthquake which, on balance, should lead to an increase in requirements for glass fiber reinforced plastic needed to reconstruct Romania's severely damaged chemical industry and general housing. iii. Glass fiber is used internationally for reinforcing plastics and rubber in the construction, automotive and boat building industries and for electric insulation, and to a lesser extent for fireproof fabrics. In con- trast, in Romania glass fiber so far is used primarily for electric insula- tion (33%) and in the chemical industry for reinforced plastic tanks and pipes (62%), while the building materials industry uses only a small portion (5%). The current implementation of downstream projects will substantially change this structure and increase the consumption of glass fiber by the building materials industry to 52% of total demand, reducing the market share of the chemical industry correspondingly. iv. The projected increase will bring Romania's per capita glass fiber consumption from 0.06 kg in 1976 to 0.32 kg in 1980, which corresponds to the US per capita consumption of the late 1950's and the 1975 consumption of Spain,  - ii - Italy and Austria. It will also bring the structure of Romania's glass fiber consumption closer to that in more industrialized countries, but fur- ther important potential applications of reinforced plastics remain, such as applications in the boat building and automotive industry which are not yet foreseen for Romania during the current Five-Year-Plan. After a steady increase in world glass fiber consumption, a drop occurred in 1975, due to the general recession in that year, but results for 1976, which are available only for the USA, also the world's most important producer, indicate that world consumption is increasing again, although it has not yet returned to the peak level of 1973 and 1974. Therefore, there exists at present some surplus capacity in the USA, Western Europe and Japan which is, however, expected to be absorbed by increasing demand by 1978-79. v. The proposed Bank loan which would be for a term of 15 years, includ- ing three years of grace, at an interest rate of 8.2% p.a., would be passed on to the Project Enterprise by the Investment Bank, which controls the use of investment funds in Romania and supervises the progress of projects. The loan would provide 82% of the foreign exchange requirements (excluding interest during construction) and would be disbursed against the supply of know-how, machinery and equipment, erection supervision, training and start- up assistance for the spinning plant (Section I). The Government will use bilateral credits of US$4.1 million to meet part of the foreign exchange expenditures for Section II, and will provide the remainder of the financing required to cover US$21.2 million equivalent of local costs and interest during construction. vi. Technically, the manufacture of glass fiber itself is part of the glass industry, its further processing (into roving, yarn and woven products) is part of the textile industry. In Romania, both these industries belong to the Ministry of Light Industry which has given responsibility for the Project to the Central for Glass and Fine Ceramics (CISCF). The Project was originally planned for completion by mid-1978. However, due to the longer than anticipated time needed for selecting the process and licensor for Section I, this schedule can no longer be met, and Section I is now expected to start production in mid-1979; Section II, on the other hand, is still forecast to commence operations in mid-1978 as originally scheduled. Until the commissioning of Section I, the weaving and finishing plant (Section II) will use imported yarn and roving. vii. CISCF has established the Glass Fiber Yarn and Fabric Enterprise to operate the plant, and has appointed an experienced Project manager. The Ministry's Design Institute for Light Industry (IPIU), which also prepared the technical-economic study for the Project, is responsible for engineering (based on the information and designs provided by the foreign licensor and suppliers). The time-critical contract for Section I was awarded as a turn- key, lump-sum contract after international-competitive bidding and was signed in April 1977. The required down-payment of US$1.4 million is proposed to be financed retroactively by the Bank. viii. Practically all raw materials (sand, boric acid, dolomite, lime- stone and calcined alumina) will come from domestic sources, and utilities will be supplied from existing facilities in the industrial area selected for the Project. The Project poses no difficult environmental problems.  - iii - ix. In Romania all prices are fixed by the State Committee for Prices. The primary responsibility of an enterprise is to meet established physical targets, and inputs and outputs are calculated at the fixed prices. There is a historical tendency for prices not to be changed over long periods of time. The product prices for the Project have been approved by the State Committee on the basis of projected production costs plus a margin of 10% of production costs for profit. Although financial viability is not of pri- mary importance to Romania because of the centralized nature of its economy, achievement of profitability targets as established for each enterprise on the basis of fixed prices is a measure of the efficiency of an enterprise's management. The financial projections for the Enterprise provide for losses during the first two years of operation, and the profit break-even point (61% of capacity utilization) is expected to be exceeded during the third year of operation (1980). The Project's financial rate of return is 11%. x. The Project faces few risks. It has been well prepared, and the licensor/supplier for Section I guarantees the quantitative and qualitative output of the plant. However, due to the tight implementation schedule, the possibility of a minor delay exists. Furthermore, glass fiber production requires skilled operators. There is already some experience available from the small existing plant but, in addition, provision for operator training by the licensor/supplier has been made. xi. The economic cost of production of the Project is comparable to that of a similar plant in Western Europe that was recently completed. This is so because practically all raw materials come from Romanian sources, and the lower Romanian labor costs offset the slightly higher cost of investment and of maintenance materials. Both plants would need a price level of about US$2 per kg of roving and yarn in order to yield a satisfactory return, and this is also about the current price level for the same intermediates in the USA, Western Europe and Japan. Using this price level, the Project yields an economic rate of return of 16.5% in real terms. The Project will employ about 1,200 persons, representing an investment of about US$38,000 per per- son. At full capacity, the Project will yield net annual foreign exchange savings (before amortization of the Bank loan) of about US$12 million. xii. Based on the agreements reached on the points listed in Chapter VIII of this report, the Project is suitable for a Bank loan of US$18.3 million equivalent for a period of 15 years, including three years of grace, at an interest rate of 8.2%.   I. INTRODUCTION 1.01 The Government of Romania has requested a Bank loan of US$18.3 mil- lion equivalent for the construction of a plant in the outskirts of Bucharest to produce 6,000 tons per year (tpy) of continuous glass fiber, in the form of roving, yarn, woven roving and yarn fabrics, tapes and braided tubes. 1/ Total financing required for the Project is estimated at Lei 914 million (US$45.7 million), including Lei 490 million (US$24.5 million) in foreign exchange. The Government will provide the remainder of the financing, using bilateral credits to cover part of the remaining foreign exchange require- ments. The Project was approved and funds allocated by a decision of the Council of Ministers. Implementation of the Project has begun, and production is scheduled to begin in mid-1978 for one section and mid-1979 for another. 1.02 The Project is part of the Government's strategy to promote rapid industrialization and to introduce new and advanced technologies. Domestic demand for glass fiber is projected to grow rapidly during the current Five-Year-Plan period (1976-80), and the Project will substitute imports. Continuous glass fibers are used mainly for reinforcing plastics and rubber and for electrical insulation, and to a lesser extent for fireproof curtains and upholstery. None of the Project's glass fiber production is planned for direct export but some may be exported as part of reinforced plastic or electrical goods. 1.03 The Project was first reviewed by a Bank identification mission to Romania in April 1976, which from a list of eight industrial projects gave this Project together with two others priority for Bank support. The Project was subsequently appraised in November 1976 by a mission consisting of Messrs. G. Becher (Chief) and Eus T. Tortorelli of the Industrial Projects Department and M. Greco (consultant). The appraisal is based on the technical- economic study prepared by the Romanian Design Institute for Light Industry (IPIU). II. THE SECTOR AND THE BORROWER A. Ministry of Light Industry 2.01 Technically, the manufacture of glass fiber is part of the glass industry, its processing into roving, yarn and woven products is part of the textile industry. In Romania, both these industries belong to the Ministry of Light Industry, and this Ministry has, therefore, been assigned the task of implementing the Project. The Ministry has, in turn, given this responsi- bility to its Industrial Central for Glass and Fine Ceramics (CISCF), which has established the Glass Fiber Yarn and Fabric Enterprise (the Enterprise) to implement and operate the plant. The organizational structure of the light industry has the same three step hierarchy as all industrial sectors in Romania, consisting of the technical ministry at the top, the industrial 1/ A glossary of the main technical terms used in this report is given in Annex 1.  2 central in the middle, and the enterprise at the bottom. The ministry is responsible for the planning and performance of its sector for which it also approves investments for subsequent submission to the Council of Ministers, the highest authority for final approval. A list of the eight centrals under the Ministry of Light Industry is given in Annex 2-1. The industrial central directs the operations of all enterprises in its particular sub-branch of the economy (e. g. Central for Cotton Products, Central for Glass and Fine Ceramics), allocates production programs and coordinates purchase of raw mate- rials and domestic sales. The Ministry of Light Industry also has under its control the Design Institute for Light Industry (IPIU), which is responsible for the preparation of feasibility studies, 1/ and the general and detailed design, as well as construction and erection supervision of projects carried out by the centrals under the Ministry. The Ministry further has two foreign trade enterprises: ROMSIT which is responsible for the import of know-how and machinery and equipment, and ROMANOEXPORT, in charge of the export (and import) of light industry products. IPIU has prepared the feasibility study for the Project and is preparing the general and detailed designs, and ROMSIT, with the advice of IPIU, is responsible for the procurement of imported goods for the Project. B. Industrial Central for Glass and Fine Ceramics 2.02 The Central for Glass and Fine Ceramics (CISCF) is responsible for the planning and production of glass products, chinaware and pottery. It employs about 40,000 people in its 26 enterprises. Its seat is Bucharest. Romania has a well established glass and ceramics industry. Its growth rate since 1950 has averaged 13% p.a., very close to the average rate for the entire industrial sector of 12.9%. In 1975 it produced 358,000 tons of glassware. About 20% of its production is exported. CISCF also has an institute responsible for all research in the glass industry. A more detailed description of CISCF, including summarized financial statements, is presented in Annex 2-2. 2.03 One of the enterprises under CISCF is a small plant for continuous glass fiber with a design capacity of 1,000 tpy (300 tpy of roving and 700 tpy of mat). The plant was designed by the Design Institute of the Ministry for Building Materials with assistance from an Italian engineering firm. It is based on the so-called marbles process (para. 4.02) and uses imported glass marbles for conversion into fibers. Most of the equipment is manufactured in Romania. The plant started production in 1974 with 76 tons, increasing to 436 tons in 1975 and 516 tons in 1976. It is to reach full capacity in 1977. The plant employs 110 people and is located right next to the site for the Project. Although its technology is much simpler, it will be very useful for training some of the operators for the Project. C. Romanian Financing System and the Investment Bank (the Borrower) 2.04 Investments are financed fully with non-interest-bearing capital. The central aggregates the funds available from cash generation of its 1/ In Romania called "technical-economic study" and required prior to approval of an investment by the Council of Ministers.  - 3 - enterprises and matches them against funds required for approved investments. Any surplus is transferred to the state budget, and any deficit is covered from the state budget. After start of operation of a new plant, the funds are returned to the State (via the central) in the form of payments by the enter- prise into several different funds (para. 6.13). All prices are fixed by the State Committee for Prices. The primary responsibility of an enterprise is to meet established physical targets, and inputs and outputs are calculated at the fixed prices. Financial profitability for an enterprise as related to capital employed and output is established by the central and the achievement of the specific profitability targets is a measure of the efficiency of an enterprise's management. There is a historical tendency for prices not to be changed over long periods of time. This implies not only that there is a lack of correlation with shifting supply and demand relations but, also, that cost/price relationships become distorted as the industry expands, new technology is introduced and labor productivity increases. To remedy these distortions periodic price resetting is undertaken for the whole economy, at which each sector is reviewed separately. The last such price resetting was in 1974-76 and the currently prevailing internal prices are expected to be in force at least through the end of the Five-Year-Plan period (1980). 2.05 The Investment Bank (IB) controls the use of all investment funds.1/ The president of IB reports to the Minister of Finance. During project preparation, IB reviews the technical-economic study prepared by the respon- sible design institute, before its submission to the Council of Ministers for final approval. During implementation, IB supervises the progress of the proj- ect and the use of funds. Therefore, as has been the case for all previous industrial projects financed by the Bank, IB is proposed to be the Borrower of the Bank loan. It will be responsible for supervising on the Romanian side the execution of the Project and the procurement of goods and services required for it; assurances in this regard have been obtained. III. THE MARKET A. Uses of Glass Fibers 3.01 Continuous glass fibers are used for purposes of reinforcement, insulation and fireproofing (para. 3.02). The fibers are not necessarily long or continuous when used in such applications but, when first manufactured, are drawn as continuous filaments from molten glass. This differentiates them from discontinuous fibers commonly referred to as glass wool which is used for heat and sound insulation. 2/ The fibers to be produced by the Project will be of "E" (electrical) glass, the normal type of glass used in continuous fiber production. As it is almost alkali-free, "E" glass has a high elec- trical resistance and is, therefore, ideal for electrical insulation. 3/ 1/ Except those allocated to agriculture and food processing which are controlled by the Agricultural Bank. 2/ Romania has glass wool production facilities for about 500 tpy. 3/ Other glass types are "A" glass (alkali-containing), "C" glass (chemically resistant) and "S" glass (high strength).  - 4 - 3.02 More than 85% of glass fiber currently produced in the world is used as reinforcement for plastic materials to improve their mechanical properties. The product obtained from the combination of polymers and glass fibers is called "Glass Reinforced Plastic" (GRP). In addition to their use in GRP, glass fibers have the following applications: (i) reinforcement of rubber materials such as conveyor belts and special tires. Glass fibers are used here as a multiplicity of twisted yarns or "cord"; (ii) insultation of electric wires and cables and other high voltage items; (iii) reinforcement of paper. Yarn is inserted in the paper to impart extremely high unidirectional strength. Main end uses are special bags and tapes; and (iv) manufacture of fabrics for fireproof curtains, industrial filters, upholstery and for the production of bituminous sheets for water proofing of buildings. The main products marketed by the glass fiber producers are roving (used as such or woven), chopped and milled fibers (as such or as a mat or veil), yarn and yarn woven into fabrics and tapes or braided into tubes. A general description of these glass fiber products as well as their end uses and average content in GRP is given in Annex 3-1. 3.03 Since the largest share of glass fiber is used in GRP, the develop- ment trend for these products is of primary importance for future glass fiber consumption. As the table below indicates, consumption of GRP in the different end-use sectors varies in the main markets. Market sophistication and level of industrial development are important factors as the consumption of GRP shifts from building materials and electrical appliances in less developed markets to automotive and boat building in the more advanced ones. Consumption of Glass Reinforced Plastics (GRP) By End-Use Sectors (1975) (Percent of Total) W. Europe Japan USA Building Materials, Construction 22 45 15 Chemical Plants 22 14 10 Automotive, Transport Sector 16 5 20 Containers 9 7 10 Electrical Appliances 13 8 9 Boat Building 9 14 26 Miscellaneous 9 7 10 Total 100 100 100  -5- B. World Market 3.04 The following brief discussion of the world market for glass fiber serves as background information only, since the Project will use largely local materials and produce only for the domestic market. Manufacturing of glass fiber is a very sophisticated technology, and only few companies in the world have developed original processes in this field. The secrecy and exclusiveness of this industry is such that these companies are in a posi- tion to control the international market, either through participation or licensing agreements with most producers. 1/ In part on account of the oligopolistic structure of the industry, reliable capacity, production and consumption statistics are difficult to obtain, and there appears to be a tendency to overstate production capacity and understate capacity utiliza- tion. About 85-90% of all glass fiber used in the world are produced and consumed in the USA, Western Europe and Japan. Some minor production capac- ity exists in Canada, Eastern Europe and Latin America. World consumption in 1973, production capacity, actual production and consumption in 1975, and projected demand for 1980 are summarized below, and discussed in more detail in Annex 3-2. Production Capacity, Production and Consumption of Glass Fiber in the Major World Markets (1,000 tons) 1973 --------_------- 1975 --------------- 1980 Annual Growth Consumption Capacity Production Consumption Apparent of Consumption Exports Demand 1973-80 USA 307 390 245 240 5 410 4 W. Europe 149 222 145 a/ 145 - 250 8 Japan 67 120 63 45 18 140 11 Other 77 a/ 48 30 a/ 53 a/ (23) a/ 150 a/ Total 600 a/ 780 483 a/ 483 a/ - 950 a/ a/ Estimated World production capacity in 1975 was estimated at 780,000 tpy, led by the USA with 390,000 tpy (50%), followed by Western Europe with 222,000 tpy (29%), Japan with 120,000 tpy (15%) and the remaining producing countries with 48,000 tpy (6%). Estimated total world production increased steadily from about 400,000 tons in 1970 to 610,000 tons in 1974 (Annex 3-2, Table 4), but fell 1/ Annex 3-2 (Table 1) shows that the six most important licensors control 83% of the capacity in the three main markets (USA, Western Europe, Japan), and the three most important ones control 68%.  off sharply in 1975 to an estimated level of 483,000 tons, indicating a level of capacity utilization of only about 60%, which was caused by the general recession in that year. Average capacity utilization in the USA, which was also only about 60% in 1975, has improved to 73% during 1976 (Annex 3-2, Table 6), and is expected to return to the pre-recession level of 85-90% in 1978-79. 3.05 The projected glass fiber demand in the three main consuming areas in 1980 is based on an analysis of the GRP market by end-use sectors and their expected development trends. Glass fiber consumption in the USA, Western Europe and Japan is expected to grow from about 523,000 tons in 1973 to about 800,000 tons in 1980, representing an annual growth rate of 6.25%. Japan is forecast to show the highest growth rate (11% p.a.) and to more than double its level of consumption, from 67,000 tons in 1973 to about 140,000 tons in 1980. Western Europe is expected to have a growth rate of 8% , and the USA one of 4% p.a. Average per capita consumption in 1975 in the USA was 1.0 kg, in Japan 0.4 kg and in Western Europe about 0.5 kg, ranging from 0.3 kg in Italy, Spain and Austria to 0.7 kg in Germany and Netherlands. On the basis of the projected increase, 1980 per capita consumption in the USA would reach 1.4 kg, Japan 1.1 kg and Europe 0.8 kg. The production capacity in the USA, Western Europe and Japan in 1977 is indicated by the industry at 820,000 tons (Annex 3-2, Table 4), and the total world production capacity is indicated at 875 to 900,000 tons. A consumption level of 800,000 tons in 1980 in USA, Western Europe and Japan would nearly fully utilize their indicated 1977 capacity. No demand projections for countries outside the USA, Western Europe and Japan are available, but total consumption in these countries is unlikely to exceed 150,000 tons in 1980. This implies that additional capacity of 50 to 75,000 tpy must be built between 1977 and 1980 to meet projected world demand in 1980. C. World Market Prices 3.06 Prices of glass fiber products differ in the three largest markets, USA, Western Europe and Japan. Lowest prices are found in the USA, while in Japan and especially in Western Europe quotations for the same articles are normally higher. The explanation is found in the lower cost of raw materials and, in particular, natural gas in the USA. 1/ Romania is currently importing glass fiber from Japan, France, Belgium, Sweden and Czechoslovakia (CSSR). The table below compares current (1976) domestic prices in the USA, Japan and Western Europe with current import prices of Romania. On an average, Romanian import prices in 1976 were somewhat below domestic prices in the three main markets. However, as increasing demand absorbs the existing surplus capacity, import prices are expected to gradually return to the level of domestic prices. In the past, domestic prices for glass fiber have steadily risen to reflect increasing raw material, labor and energy costs, even in times of reduced capacity utilization such as 1975 (Annex 3-2). The high level of concentration in the industry most likely accounts for this resistance of prices against downward pressure. 1/ During the recent gas curtailments, some manufacturers in the USA had to shut down their plants or operate at reduced levels of capacity uti- lization. Other plants which were able to switch to alternative fuels, such as propane, raised their prices by a special energy surcharge of about US50 per kg.  - 7 - Domestic Prices in Selected Countries and Romanian Import Prices - 1976 (US$ / kg) Domestic Prices Import Prices (Ex-Factory) (Free Border) USA Japan W . Europe Origin Price Roving 1.20 1.25 1.30 Japan 0.75 - 0.93 Woven Roving 1.55 1.60 1.60 Japan/Belgium 1.05 - 1.73 Yarn 1.80 - 5.15 2-8 2.3 - 11.5 CSSR/France 2.60 - 4.65 Yarn Fabric 4.40 - 11.60 3-9 3.5 - 8.7 CSSR 3.00 - 14.44 D. The Romanian Market 3.07 Romanian glass fiber consumption began in the late sixties and developed at a very rapid rate (50% p.a. on an average). Local production started in 1974 with the small plant near Bucharest (para. 2.03) for roving and mat and reached about 516 tons in 1976, providing about 38% of the coun- try's glass fiber consumption in that year. Romania's production, import and consumption of glass fiber is shown below for 1971 and 1976. A more detailed discussion of the Romanian glass fiber market is given in Annex 3-3. Production, Imports and Consumption of Glass Fiber in Romania (1971 and 1976) (Tons) Production Imports Consumption 1971 1976 1971 1976 1971 1976 Roving and Yarn - 253.0 77.5 343.0 77.5 596.0 Mat and Chopped Strand - 262.8 - 25.0 - 287.8 Woven Rovings & Fabrics - - 96.5 390.0 96.5 390.0 Tubes and Tapes - - 23.5 71.0 23.5 71.0 Total - 515.8 197.5 829.0 197.5 1,344.8 3.08 Until now, electrical insulation and reinforcement of plastic tanks and pipes for the chemical industry have been the main applications of glass fiber in Romania. Within the current Five-Year-Plan (1976-80), the production capacity of some major users of glass fiber will be expanded considerably, particularly in the field of building materials. The current structure of consumption by end-use sector and the anticipated change are shown below: Structure of Glass Fiber Consumption in Romania by End-Use in 1975 and 1980 (Percent of Total Weight) 1975 1980 Building Materials 5 52 Chemical Plants 62 13 Electrical Applications 33 35 100 100  -8- A comparison with the structure of consumption by end-use sector in the markets of Western Europe, USA and Japan shows that in those markets the sectors of building materials, chemical plants and electrical applications constitute only slightly more than one-half of the entire glass fiber con- sumption. Other important end-use sectors are the automotive and other transport industry and the boat building industry. The latter alone uses about one quarter of the glass fiber consumed in the USA. However, these applications are not yet being considered in Romania. 3.09 The projected consumption, production and import of glass fiber in Romania for the years 1978, 1980 and 1985 are shown below (for detail see Annex 3-3). The figures for 1980 are based on the targets of the current Five-Year-Plan, but modified to take into account the actual status of imple- mentation of projects consuming glass fiber. This projection was prepared in November 1976 and does not yet take into account the effects of the recent earthquake on the economy and the market for glass fiber. However, on balance, this should lead to an increase in glass fiber requirements since large quantities of glass reinforced plastic will be needed to reconstruct Romania's severely damaged chemical industry and general housing. Growth of consumption after 1980 has been projected at 10% p.a. which is a conservative growth rate if compared with the actual rate between 1971 and 1976 OiL7% p.a.) and the planned growth rate for the current Five-Year-Plan (35% p.a.). Project Production, Consumption and Import of Glass Fiber in Romania (1978, 1980 and 1985) (Tons) Roving Mat and Woven Roving, Tubes & & Yarn Chopped Strand Fabric Tapes Total 1976 (Actual) Consumption 596 288 390 71 1,345 Production 253 263 - - 516 Import 343 25 390 71 829 1978 Consumption 3,700 749 1,216 102 5,767 Production 300 700 270 44 1,314 Import 3,714 a/ 49 946 57 4,767 a/ 1980 Consumption 4,366 764 1,791 179 7,100 Production 3,530 700 1,091 179 5,500 Import 836 64 700 - 1,600 1985 Consumption 7,030 1,207 2,915 288 11,440 Production b/ 5,030 700 1,091 179 7,000 Import 2,000 507 1,824 109 4,440 a/ Includes 314 tons of roving and yarn to be imported for the Project's weaving and finishing plant. b/ Based on capacity of small existing plant and the Project.  - 9 - 3.10 Consumption of glass fiber in Romania is expected to increase from 1,345 tons in 1976 to about 7,100 tons in 1980 and 11,440 tons in 1985. Per capita consumption which was only 0.06 kg in 1976 would increase to 0.32 kg in 1980, which corresponds to the US per capita consumption of the late 1950's and the 1975 per capita consumption of Spain, Italy and Austria. On the basis of the projected consumption of glass fiber, Romania would continue to import glass fiber, reaching a peak of 4,767 tons in 1978. Imports would still be 967 tons in 1981 when the Project is expected to reach full production. E. Marketing Arrangements 3.11 As mentioned above, the entire production of the Project is planned for domestic consumption, substituting imports. The Central for Glass and Fine Ceramics, under whose authority the plant will operate, will deliver the plant output to other centrals, who are the end-users of glass fibers. The respective ministries after consultation on the needs of their enterprises signed a protocol on the long-term quantities of glass fiber to be supplied by the Project. After Project start-up detailed annual sales plans will be prepared and actual sales contracts signed with the glass fiber consuming enterprises. The Enterprise is expected to have about 10 such contracts. IV. THE PROJECT A. Project Scope 4.01 The Project consists of a spinning plant (Section I) with a capacity of 6,000 tpy of glass fiber in the form of roving and yarn and of a weaving and finishing plant (Section II) with a capacity of 6 million m2 of fabrics, 10 million linear meter of tapes, and 3.3 million lin. m of braided tubes. Section II will use 1,270 tpy of yarn and roving from Section I, the balance (4,730 tpy) will be sold as roving and yarn. The plant will be located in Militari, an industrial area in the outskirts of Bucharest, southwest of the city. The area is being developed as a major industrial estate and provides common facilities for power generation, steam, water and natural gas supply. A detailed description of the proposed production process and plant facilities is given in Annex 4-1. B. Process Technology 4.02 The manufacture of glass fiber consists of three stages: (1) the manufacture of glass, (2) the drawing of continuous filaments, i.e. the conver- sion of molten glass into strands, and (3) the conversion of glass fibers into saleable products. At one time, these three stages constituted separate manufacturing activities. Glass was first produced in the form of marbles (marbles process), and the marbles were re-melted for conversion into fibers. Romania's first small plant uses this process. Some 15 years ago, the "direct-melt" process was introduced which converts the molten glass directly into fibers. The Project will use the direct-melt method which is more energy efficient, and has lower platinum/rhodium requirements and lower  - 10 - material losses. 1/ Only a limited number of companies in the world have developed processes for this specialized technology. The licensor will supply know-how, engineering, equipment, start-up assistance and training for Section I and will guarantee the performance of this plant portion. Section I will have two furnaces with a capacity of 3,000 tpy of glass fiber each. The furnaces have an expected life of 3 to 4 years, after which they are relined with new refractories. Having two furnaces permits relining of one furnace while the other is in operation. 4.03 The weaving and finishing plant (Section II) will utilize conven- tional technology similar to that for other fibers in the textile industry. Although glass fiber has special handling characteristics and requires special finishing technology, there are a number of suppliers who have the necessary know-how and manufacture equipment to the required specifications. The foreign suppliers will train Romanian operators and assist during start-up and commissioning, and provide a performance guarantee for their respective equipment. A graphic presentation of the production steps in Section I and II is shown in Annex 4-2 and a plant layout in Annex 4-3. C. Raw Materials and Utilities 4.04 The principal raw materials are quartz sand, limestone, calcined alumina, dolomite and boric acid. Except for a small quantity of calcium fluoride which will be imported, all raw materials are produced locally. Quartz sand is the most critical raw material since its purity and constancy of composition is an essential requirement of the direct-melt process. The Miorcani quarries in north-east Romania can supply a suitable grade of quartz sand in sufficient quantities. Raw material requirements, sources and means of transport are listed in Annex 4-4. Location of domestic raw material sources are shown in Map IBRD 12652R1. The central position of Bucharest, where the plant will be located, in the Romanian highway and railroad systems will keep the transportation costs for raw materials and finished products at a minimum. 4.05 Utility requirements will be met from external sources. Power will be supplied from the existing network, steam from the boiler house of a nearby synthetic leather factory and natural gas from the 28" pipeline which supplies gas to the Bucharest area from the Transylvania gasfields. These arrangements are satisfactory and no bottlenecks are expected to develop over the life of the Project. D. Management and Project Execution 4.06 As noted above, the Central for Glass and Fine Ceramics (CISCF) has already established the Enterprise to implement and operate the plant. CISCF and the Enterprise have primary responsibility for project implementation. They also have direct responsibility for the procurement of local equipment and raw materials and the recruitment and training of operating personnel. 1/ The unit production costs of Romania's small plant are about 40% above those of the Project.  - 11 - CISCF is well experienced in the implementation of new projects. It has delegated several areas of project execution to the following organizations which are well versed in their respective tasks and judged to be capable of handling them effectively: - IPIU, the engineering enterprise of the Ministry of Light Industry is responsible for the design of the entire plant (based on the information and designs provided by the licensor and suppliers); - ROMSIT, the foreign trade enterprise of the Ministry of Light Industry is responsible for the procurement of imported goods; - The Trust for Industrial Buildings is responsible for the execution of civil works and equipment erection. 4.07 CISFC has appointed a manager for the Enterprise. He is in the process of forming a team to coordinate and supervise project implementa- tion, and the same team will constitute the management of the Enterprise at the start of operation. An organization chart of the Enterprise is given in Annex 4-5. The appointed manager is an engineer with broad experience in the field of glass making factories, at both the design and construction stage as well as in production management, and is well qualified for the job. IPIU and ROMSIT have appointed senior members of their staff to the Project. The arrangements for project implementation are satisfactory. 4.08 According to the current Five-Year-Plan, the Project was scheduled for completion by mid-1978. However, due to the longer than anticipated time needed for selecting the process and licensor for Section I, this schedule can no longer be met, and Section I is now expected to start production in mid-1979; Section II, on the other hand, is still forecast to commence operations in mid-1978 as originally planned. Until the start of production of Section I, the weaving and finishing plant (Section II) will use imported yarn and roving. One furnace of Section I is to be lit up in April 1979 and the second in July 1979. The formal acceptance test for Section I is expected at the latest for January 1980. The phased commissioning of the two sections will allow a quick build-up of capacity utilization for the more capital- intensive Section I. A project implementation schedule is shown in Annex 4-6. As part of the information to be provided (para. 6.15), the Enterprise will submit by September 30, 1977, a critical path schedule for the implementation of the Project. E. Employment and Training 4.09 A total staff of about 1,200 (about 60% female staff), is expected to operate the plant including about 15% maintenance personnel needed for the sophisticated machinery. Training of operators for Section I will be carried out through: (i) specialized plant training at the licensor's processing units abroad;  - 12 - (ii) on-the-job training for mechanics, welders and operators by the licensor's supervisory staff present in Romania for plant erection and commissioning; and (iii) operator training in the existing small glass fiber plant. For Section II, training will be carried out in existing textile facilities in Romania and, if judged necessary, by machinery suppliers abroad. A total of about 820 staff will benefit from the training program, estimated to cost US$400,000 equivalent. An outline of the training program, as currently contemplated, is given in Annex 4-7. Assurances have been obtained that the Enterprise will submit by December 31, 1977, a detailed training program that is acceptable to the Bank. F. Ecology 4.10 The Project does not pose any difficult environmental problems. Fluorine and fluoride emissions which result from the reaction taking place during glass melting, are subject to Romanian standards (average fluorine and fluorides concentrations of 0.2 and 2.0 mg/m3 respectively), which are in line with standards in Western Europe and the USA. The Project will be designed to meet these standards. The discharge of industrial effluents in Romania is regulated by standards issued jointly by the Ministries of Industry and Public Health. Liquid effluents from the plant will be treated in a waste water treatment unit prior to discharge into the sewer system. The Project will produce about 2,500 tpy of waste glass fibers, which also do not pose difficult pollution problems as they are substantially inert. All equipment will be fitted with labor safety devices, and air conditioning will keep the concentration of noxious elements (including fiber) below maximum admissible limits. The proposed pollution control facilities, as envisaged under the Project, are considered adequate, and assurances were obtained that the Enterprise will operate these pollution control facilities with due regard to ecological, environmental and safety factors. A more detailed discussion of the environmental impact and protection is presented in Annex 4-8. V. CAPITAL COST AND FINANCING PLAN A. Project Cost 5.01 Total financing required for the Project (Sections I and II) is estimated at US$45.7 million equivalent, including US$24.5 million in foreign exchange. Details of capital cost estimates are given in Annex 5-1 and summarized below:  - 13 - Summary of Capital Costs Lei Million US$ Million %_ _ Local Foreign Total Local Foreign Total Equipment & Spares a! 108.6 297.2 405.8 5.4 14.9 20.3 53.3 Import Duties 124.0 - 124.0 6.2 - 6.2 16.3 Erection 4.2 12.0 16.2 0.2 0.6 0.8 2.1 Civil Works 96.8 16.6 113.4 4.9 0.8 5.7 14.9 Know-How & Engineering 14.6 40.0 54.6 0.7 2.0 2.7 7.2 Preoperating & Start-up Expenses, Training 29.0 18.0 47.0 1.5 0.9 2.4 6.2 Base Cost Estimate (BCE) 377.2 383.8 761.0 18.9 19.2 38.1 100.0 Contingencies: Physical (5%) 18.8 19.2 38.0 0.9 1.0 1.9 5.0 Price (6.4%) 4.0 45.0 49.0 0.2 2.2 2.4 6.4 Installed Cost 400.0 448.0 848.0 20.0 22.4 42.4 111.4 Working Capital 24.0 - 24.0 1.2 - 1.2 3.2 Project Cost 424.0 448.0 872.0 21.2 22.4 43.6 114.6 Interest during Construction - 42.0 42.0 - 2.1 2.1 5.5 Total Financing Required 424.0 490.0 914.0 21.2 24.5 45.7 120.1 a/ c.i.f. cost at plant site. 5.02 The capital cost estimate is based on the main fixed-price contract for Section I which is scheduled to be signed before the end of April 1977, on three contracts signed with suppliers for Section II and on recent quotations obtained for the remaining contracts to be signed. Local costs have been esti- mated by IPIU on the basis of the expected volume of civil works and erection. Foreign exchange requirements excluding interest during construction for Section I are US$18.0 million and for Section II US$4.4 million. Import duties on equipment average 33%. A physical contingency of 5% of the base cost estimate has been added which is sufficient due to the advanced state of the Project. For foreign supplied goods and services, although supplied on the basis of fixed-price contracts, annual price increases of 7.5% have been  - 14 - assumed in order to establish project cost in April 1977 prices. Local costs are forecast to increase 1% annually throughout the project implementation. The above cost estimates, including physical and price contingencies, are considered adequate. 5.03 In Romania, all financial flows in and out of industrial enterprises are recorded in accounts held by one single bank (National Bank) and payment terms are legally fixed at low levels. Romanian enterprises, therefore, can keep relatively small working capital, largely in the form of inven- tory. Net working capital required for the Project is estimated at Lei 24 million (US$1.2 million). A detailed estimate is given in Annex 5-2. B. Financing Plan 5.04 The Project is part of CISCF's current Five-Year-Plan. In establish- ing its investment and financing plan, the Central aggregates all approved investments of its enterprises and matches them against the availability of funds from its enterprises through cash generation. If the total investment requirements exceed the combined availability of funds, then the Central obtains a budget allocation. There is, therefore, no specific financing plan for this one Project alone. During the current Plan period (1976-80), the structure of CISCF's financing plan for its investments is as follows: Structure of CISCF's Financing Plan During 1976-80 Plan Period Source of Funds % Depreciation 69.2 Benefit (= profit) 24.9 Budget 5.9 100.0 5.05 The funds for the Project will be provided to the Enterprise through the Central and will be returned by the Enterprise to the State in the form of contributions to different funds (para. 6.13). Although the IBRD loan will be used for Section I and bilateral credits for the importation of machinery and equipment for Section II, these funds will not be on-lent to the Central or Enterprise. In this respect, the Investment Bank will work like a "central bank", making available the necessary foreign exchange to the Central and Enterprise against local currency provided in accordance with CISCF's financ- ing plan. Interest during construction which does not exist under the Romanian system but will accrue on the IBRD loan and the bilateral credits will be born by the Investment Bank and not charged to the Central or Enterprise.  - 15 - Bucharest Glass Fiber Project Proposed Financing Plan Lei Million US$ Milli-n Percent (Equivalent) Source of Total Funds - Central's Depreciation 604.0 30.2 66.1 - Central's Benefit 216.0 10.8 23.6 - State Budget 52.0 2.6 5.7 Sub-total 872.0 43.6 95.4 - Investment Bank 42.0 2.1 4.6 Total 914.0 45.7 100.0 Source of Foreign Funds - IBRD Loan 366.0 18.3 74.7 - Bilateral Credits 82.0 4.1 16.7 Sub-total 448.0 22.4 91.4 - Investment Bank 42.0 2.1 8.6 Total 490.0 24.5 100.0 5.06 The proposed Bank loan of US$18.3 million will be made to the Investment Bank for a period of 15 years, including 3 years of grace, at an interest rate of 8.2% p.a. The schedule of principal and interest payments on the Bank loan is shown in Annex 5-3. 5.07 The Council of Ministers' approval of the Project includes approval to spend funds up to the estimated cost of the Project (including foreign exchange). The organizations responsible for project implementation consider this amount as a strict limit that is not to be exceeded, since a new decision by the Council of Ministers would be required. The Council's decision for the Project has established the limit of Lei 850 million for the Project's total cost (excluding working capital and interest during construction) and US$24.5 million (excluding working capital, interest during construction and also indirect foreign exchange requirements) as the limit for the Project's foreign-exchange expenditures. Both limits exceed the latest estimate used in this report of Lei 848 million and US$20.9 million respectively. Moreover, the standard assurances were obtained that the Government will make available the funds needed for the execution of the Project. The Project will be considered as completed when the facilities during a period of 10 consecutive days, achieve design capacity production.  - 16 - C. Procurement 5.08 Procurement procedures for Bank financed goods and services are in accordance with Bank guidelines. As for the main contract for Section I all known suppliers of technology and equipment were contacted directly by ROMSIT but in addition, at the Bank's request, a letter was sent to all embassies of Bank member countries represented in Romania. Detailed technical discussions were held during 1976 with the four qualified suppliers who had expressed interest to participate in the bidding. Subsequently, they were invited to submit a final tender price in December 1976, based on the detailed technical documentation agreed upon during technical discussions. Only two of the four companies submitted valid bids. They were evaluated by ROMSIT and IPIU, and the evaluation was subsequently reviewed and the recommended award accepted by the Bank. The contract between ROMSIT and the selected bidder, a British engineering firm representing TBA-Bishop technology, 1/ is scheduled to be signed before the end of April 1977. It calls for the supply on a turn-key basis of the know-how, engineering, equipment, erection supervision, training and start-up assistance for Section I. The related contracts for twisting equipment and bushings for which the suppliers were specified by the main contractor and whose offers were evaluated together with the main contract, are expected to be signed in May 1977. Additional machinery and equipment for Section I not forming part of the main contract will be submitted to interna- tional competitive bidding (or international shopping for items below US$100,000 equivalent) in an amount of US$1.5 million. For this equipment, Romanian suppliers will be qualified to participate in the bidding, and the normal 15% preference will be applied to Romanian bids. Imported equipment for Section II, which will be financed from bilateral credits, will be pur- chased in accordance with Romanian procurement procedures. There will be about six contracts for Section II, three of which had been signed as of April 1977, with the remainder expected to be signed by the end of May 1977. D. Allocation and Disbursement of Bank Loan 5.09 The Bank loan will cover 40% of the total financing required for the Project, and about 75% of the estimated foreign exchange requirement. It will be disbursed against 100% of the foreign expenditures under the contract for the supply of know-how, engineering, machinery and equipment, erection supervision, training and start-up assistance for Section I and the related contracts for twisting equipment and bushings. It is expected that down-pay- ments of US$1.4 million will have been made on these contracts before the Bank loan is signed. It is, therefore, proposed to finance retroactively expenditures made after April 15, 1977, not expected to exceed US$1.4 million. In addition the Bank loan will be disbursed against 100% of foreign expendi- tures or local ex-factory cost of contracts won after international competi- tive bidding or international shopping for other, ancillary machinery and equipment for Section I, as summarized below: 1/ See Annex 3-2, Table 1 for main licensors.  - 17 - Allocation of Bank Loan Category Amount of Loan Allocated % of Expenditures (US$ Million) to be Financed 1. Know-how, engineering, machinery, 16.8 100% of foreign equipment, erection supervision, expenditures training and start-up assistance to be supplied under the main equipment and technology contract and twisting equipment and bushings connected therewith 2. Other machinery and equipment for 1.5 100% of foreign Section I expenditures and 100% of local expenditures, limited to ex- factory cost Total 18.3 Annex 5-4 shows the quarterly disbursement schedule for the Bank loan. VI. FINANCIAL ANALYSIS A. Volume and Value of Production 1. Volume of Production 6.01 The weaving and finishing plant (Section II) is expected to start production in July 1978 and reach 50% capacity utilization during the re- mainder of that year, 95% in 1979 and 100% in 1980. The spinning plant (Section I) is expected to start production in mid-1979, reaching 30% average capacity utilization in that year, 75% in 1980 and 100% in 1981. 1/ Although the Project incorporates technology that is new for Romania and requires skilled operators, the projected buildup of capacity utilization is considered realistic in light of the training and start-up assistance provided by the foreign suppliers. Also, since the design capacities of Sections I and II have been established with due allowance for downtime 2/, achievement of 100% of design capacity utilization can realistically be expected. 6.02 Since production of Section I will start about one year after the start-up of Section II, roving and yarn will have to be imported in 1978 and yarn in 1979. There will be no difficulty in importing the required quanti- ties. The production volume and import requirements of yarn and roving in the first four years of operation are projected as follows: 1/ Detailed projected capacity utilization and corresponding production volume are shown in the projected income statement in Annex 6-4. 2/ See Annex 4-1 for assumptions regarding number of operating days for Sections I and II.  - 18 - Production Volume and Import of Yarn and Roving for 1978-1981 1978 1979 1980 1981 Production: Section I Roving (tons) - 1,200 3,000 4,000 Yarn (tons) - 600 1,500 2,000 Import: Roving (tons) 138 - - - Yarn (tons) 176 100 - - Production: Section II Woven Roving (1,000 m2) 270 1,015 1,070 1,070 Fabrics (1,000 m2) 1,230 4,685 4,930 4,930 Tubes (1,000 m) 825 3,135 3,300 3,300 Tapes (1,000 m) 2,500 9,500 10,000 10,000 6.03 The gap which derives from the different start-up times for the weaving and finishing plant on the one hand and the spinning plant on the other, provides a welcome phasing during which the Enterprise can solve any problems in the weaving and finishing operation using imported roving and yarn. The weaving and finishing department should be operating well in 1979 (at an expected capacity utilization of 95%), allowing the gradual phasing in of roving and yarn produced in the Enterprise's own spinning department. 2. Value of Production 6.04 Prices: As is practice for new products in Romania, producer prices have been approved by the State Committee for Prices on the basis of projected production costs plus a margin of 10% of production costs for profit (benefit). These prices, like all prices in Romania, will be subject to only minor modifications (if at all) and will normally be fixed at least for the period of the current Five-Year-Plan. The detailed price list is shown in Annex 6-1. 6.05 Gross Production and Gross Product: Two important plan indicators of Romanian enterprises are (a) the gross production which counts the pro- duction of Section I (roving and yarn) and of Section II (woven roving, fabric, tubes and tapes) at their respective prices, and therefore, includes double counting of roving and yarn consumed in Section II, and (b) the gross product which deducts this consumption of roving and yarn. In the financial projections which do not include changes in finished goods inventory the gross product is equivalent to sales revenues. At full capacity utilization, the Project will reach an annual gross production of Lei 327.2 million (US$16.4 million) and a gross product (= sales revenues) of Lei 269.8 million (US$13.5 million). B. Production Cost 6.06 Detailed production costs, with quantities and unit prices, are shown in Annex 6-2. At full capacity utilization, annual costs are estimated at Lei 187.7 million (US$9.4 million) as follows:  - 19 - Annual Production Cost at Full Capacity (Prices of 1976) (Million Lei) (%) Raw Materials 20.2 10.7 Auxiliary Materials 35.1 18.7 Maintenance Materials 17.0 9.0 Power 10.8 5.8 Other Utilities 3.3 1.8 Labor 26.1 13.9 Depreciation 67.5 36.0 Reserve for Relining 4.0 2.1 Contingency 3.7 2.0 187.7 100.0 6.07 All raw materials except calcium fluoride, which represents only 2.3% of the raw material cost, come from local sources. Sizing materials make up 70% of the estimated cost of auxiliary materials. Initially, these sizing materials will be imported, but the know-how to be made available by the suppliers for Section I and II will include the formulation for the sizing materials, and the Enterprise and the suppliers will identify suitable Romanian enterprises to produce these sizing materials locally soon after Project start-up. 6.08 About 68% of the production costs are fixed and 32% are variable. Maintenance materials have been calculated at 2% of fixed assets. Deprecia- tion is on a 12-year straight-line basis, in line with Romanian depreciation schedules. The life expectancy of the furnaces is about three years, after which relining takes place (para. 4.02). One-third of the estimated cost of relining (Lei 12 million) is debited each year in the form of a "reserve for relining". C. Financial Projections 6.09 The projected financial statements for the Enterprise are summarized below. The assumptions used are listed in Annex 6-3, the projected income statement in Annex 6-4, the cash flow statement in Annex 6-5, and the balance sheet statement in Annex 6-6, all for 10 years.  - 20 - Summary of Projected Financial Statements for the Glass Fiber Yarn and Fabric Enterprise (Million Lei) 1977 1978 1979 1980 b/ 1981 c/ Gross Production - 29.9 175.9 275.4 327.2 Gross Product (= Sales) - 29.9 121.5 218.0 269.8 Production Cost - 44.8 145.3 177.2 187.7 Benefit (Loss) - (14.9) (23.8) 40.8 82.1 Allocations to Funds - ( 2.9) 47.7 82.3 94.9 Net Working Capital a/ - 14.0 19.1 24.2 24.4 Net Fixed Assets 288.5 617.5 756.5 693.0 621.5 IBRD Loan 62.0 228.0 358.0 366.0 355.4 State Funds 226.5 403.5 417.5 351.0 310.1 a/ Current Assets less Payables b/l! Full capacity utilization for weaving and finishing plant (Section II) c/ Full capacity utilization for spinning plant (Section I). 6.10 The Enterprise is expected to incur losses during the first two years of operation. The State will make up any resulting cash deficits. The Project's profit break-even point is estimated to be at 61% capacity utilization. A break-even chart is shown in Annex 6-7. 6.11 The financial projections do not provide for price changes since all prices in Romania are controlled and revised by the State Committee for Prices only after fairly lengthy intervals (para. 2.04). 6.12 As explained in para. 5.05 above, projects in Romania are financed fully on a "non-interest-bearing-capital" basis, but funds are recovered by the State through payments from the Enterprise into several state funds. In order to indicate the amounts of interest and principal due to the IBRD, payments by the Enterprise equivalent to the actual payment due to the Bank are shown in the projected cash flow statement and so is a "notional" debt service coverage, relating benefit plus depreciation to debt service on the Bank loan. Since the Bank loan finances only 42% of total project cost, this notional debt service coverage in all years is relatively high (above 2.5 times). 6.13 As mentioned previously, the capital advanced by the State to different enterprises for their projects is returned to the State in the form  - 21 - of payments into several funds. Firstly, an amount equivalent to the Enter- prise's annual depreciation is paid into the "depreciation fund". In the financial projections for this Project, principal repayment on the Bank loan has been considered as an advance payment into this depreciation fund and correspondingly deducted from the payment into that fund. Secondly, an amount equivalent to 10% of the planned benefit of the Enterprise must be paid into the State budget. Thirdly, the Enterprise can pay a bonus to workers, not exceeding 2% of total labor cost. Fourthly, the equivalent of 1% of net working capital can be retained by the Enterprise in the form of a reserve fund to increase its working capital. All remaining funds are transferred to the State budget, except for very small bank balances and petty cash. Assur- ance was obtained that in any given year after 1980 the sum of annual benefit and depreciation remitted by the Enterprise to the State shall be at least sufficient to cover the equivalent in Lei of the interest and principal to be paid by the Investment Bank in that same year to the Bank, except that an interest rate of 10% shall be applied. D. Financial Rate of Return 6.14 With an expected life after start-up of 12 years, the Project yields a financial rate of return of 11% (Annex 6-8). The results of the sensitivity analysis of this return are as follows: Sensitivity of Financial Rate of Return 1. Base Case 11.0% 2. Production Cost up 5% 9.9% 3. Production Cost up 10% 8.8% 4. Project Cost up 5% 9.8% 5. Delay of 6 Months in Start-up 9.0% 6. Delay of 6 Months in Reaching Full Capacity 8.0% Increases in production costs beyond the projected level are considered un- likely, since production costs have been estimated with due allowance for the possibility of lower efficiency of plant operation in early years. Chances of an increase in project costs are also low. However, because of the tight implementation schedule, a delay in project start-up is possible. A six-month delay would reduce the rate of return to 9.0%. There is also a certain probability that the attainment of full capacity utilization might be somewhat delayed due to operator inexperience; as one such (extreme) case, the possibil- ity of a 6-month delay has been considered which would reduce the project's financial return by 3 percentage points. E. Auditing and Reporting 6.15 Romania has an elaborate audit system under which enterprises submit periodic operational and financial reports to their Central, Ministry and Investment and National Banks. These reports serve to ensure achievement of plan targets and proper use of funds. Though the contents and presentation  - 22 - of these reports differ from those normally received by the Bank, it is possible to adjust them to provide sufficient information for the Bank to adequately monitor the progress of project implementation and operations. The Bank's reporting requirements were discussed during negotiations, and agreement was reached that the Enterprise will submit quarterly progress reports and annual financial statements, in a form satisfactory to the Bank, and that the Bank will receive within three months after the end of each year copies of annual audit reports of the Enterprise prepared by the Ministry of Finance. F. Risks 6.16 The Project faces few risks, the only important one being initial problems in reaching full capacity utilization or high quality production in Section I, due to operator inexperience. However, through the proposed training program and the guarantee from the licensor/contractor, who ensure that the plant will achieve the specified production program quantitatively and qualitatively, all reasonable precautions against this eventuality have been taken. The possibility of the actual growth rate in Romanian glass fiber consumption falling below the substantial increase provided for in the current Five-Year-Plan is small because of the nature of Romania's planned economy where the expansion of new production facilities is closely coordi- nated with the expansion of consuming industries. Furthermore, the expected rapid growth of glass fiber consumption starts from a low base and there remain important applications of GRP not yet considered (automotive industry, boat building and sporting goods), which would be introduced should this be necessary for maintaining the planned growth rate for consumption. VII. ECONOMIC ANALYSIS A. Economic Costs and Benefits and Rate of Return 7.01 International prices, at the conversion rate of Lei 20 per US Dollar, have been used for tradable, and domestic prices for non-tradable goods and services, for purposes of calculating the economic costs and benefits of the Project. Project costs have been kept at their financial value, except for import duties which have been deleted (Annex 7-1). Pro- duction costs were adjusted as follows. For quartz sand, the potential export price is estimated to be 40% above the Romanian price, and for boric acid 50%. For electric power, which has a Romanian price of USJ 1.5 per kwh, the economic price has been assumed to be USJ 2.25 per kwh (+50%). For natural gas, for which the Romanian price is Lei 0.2 per Nm3 (USe 28 per MMSCF), the economic price has been estimated to be Lei 1.4 per Nm3 (US$1.96 per MMSCF) or plus 600% on the basis of the current import price of crude oil. On this basis, the economic production costs amount to 117% of the financial production costs (Annex 7-2). 7.02 As discussed earlier (para. 3.06), Romanian import prices in 1976 were slightly below domestic prices in the USA, Western Europe and Japan, but  - 23 - are expected to increase to the same level as the existing surplus production capacity in the three main markets disappears. In order to determine the competitiveness of the Project, its projected production costs for Section I (expressed in economic prices) have been compared with those of an existing plant in Western Europe which started production in 1976 (Annex 7-3), and both have been found to be very close (see below). This is so since prac- tically all raw materials for the Project come from Romanian sources, and Romanian labor costs are below those in more developed countries and offset slightly higher cost of investment and of maintenance materials. At full capacity operation, the Western European plant (which has a production capacity of 13,000 tpy) has average production costs, including a return on investment, of US$1.92 per kg of roving and yarn as compared to US$2.03 for the Project, both in the product mix as planned for Section I (4,000 tpy of roving and 2,000 tpy of yarn). Annex 7-4 shows that the current average ex-factory price in the USA, Western Europe and Japan is about US$2 per kg whereas it is US$1.73 in Romania. As indicated by the cost analysis of the Western European plant, world market prices will have to be at a level of about US$2.00 per kg in 1976 terms (c.i.f. Romania) in order to yield a satisfactory return on investments. Using this price level, the Project yields an economic rate of return of 16.5% (Annex 7-5). 7.03 The sensitivity of the economic rate of return is shown below: Sensitivity of Economic Rate of Return Base Case 16.5 Import Prices Equal Romanian Prices 10.2 Production Cost up 5% 15.4 Project Cost up 5% 15.5 Delay of 6 Months in Start-up 14.7 Delay of 6 Months in Reaching Full Capacity 14.0 As in the case of the financial rate of return, a delay in reaching full capacity utilization due to operator inexperience is the most likely cause of a reduction in the economic rate of return. However, during preparation of the training program by the suppliers and the Enterprise, care will be taken to minimize this risk through extensive training of Romanian staff. B. Employment and Foreign Exchange Effects 7.04 The Project will employ about 1,200 persons representing an invest- ment of about US$38,000 per person employed. Therefore, the Project can be considered as relatively labor-intensive. At full capacity it will yield net annual foreign exchange savings (before amortization of the Bank loan) of about US$12 million.  - 24 - C. Transfer of Technology and Future Possibilities 7.05 The Project will introduce in Romania the new technology of glass fiber production by the direct-melt process. The supplier of the technology will also undertake to provide for a period of five years after start-up free of additional charge information of all improvements in design or operation that become freely available to him from the operation of his own plants or other plants using his technology. The Romanians in turn will undertake to provide similar information to the supplier. This creates a link between the operation of the Project and the operation of other plants using the same technology. The exchange of information excludes improvements which are patented or could fundamentally change the technology or operating economy of the plant, but in the case of such latter information, the Romanians will be notified of its existence and will have the option to purchase it. 7.06 The start of large-scale glass fiber production in Romania is only the first step in introducing this material. As has been discussed above (para. 3.08) there are important applications for glass fiber not yet considered in Romania but already very important in more developed countries, where the use of glass fiber reinforced plastic would provide superior perfor- mance or replace more expensive materials. It is, therefore, the intention of the Romanians to build additional glass fiber production facilities soon after completion of this important Project to meet increasing demand. VIII. AGREEMENTS 8.01 Agreement has been reached as follows: (i) the Investment Bank will supervise the execution of the Project and the procurement of goods and services required for it (para. 2.05); (ii) the Enterprise will submit by December 31, 1977, a de- tailed training program that is acceptable to the Bank (para. 4.09); (iii) the Enterprise will operate the pollution control facil- ities with due regard to ecological, environmental and safety factors (para. 4.10); (iv) the Government will make available the funds needed for the Project (para. 5.07); (v) the Enterprise will remit to the State in any given year after 1980 an amount of benefit and depreciation at least sufficient to cover the Lei equivalent of interest and principal due in that same year on the Bank loan except that an interest charge of 10% shall be applied (para. 6.13);  - 25 - (vi) the Enterprise will submit quarterly progress reports and annual financial statements in a form satisfactory to the Bank, and the Ministry of Finance will submit within three months after the end of each year its annual audit report of the Enterprise (para. 6.15). 8.02 With the above agreements the Project is suitable for a Bank loan to the Investment Bank, equivalent to US$18.3 million for 15 years, including 3 years of grace, at an interest rate of 8.2% p.a. Industrial Projects Department April 1977  I  ANNEX 1 Page 1 ROMANIA BUCHAREST GLASS FIBER PROJECT GLOSSARY OF MAIN TECHNICAL TERMS BUSHING Small electric furnace of platinum/rhodium alloy, having a number of orifices in its bottom. Fibers are obtained from the stream of glass exuding from these orifices. CHOPPED STRAND : Strands chopped to lengths of 3 to 30 mm. DIRECT DRAWING OR DIRECT-MELT : The process in which glass is drawn directly into fibers and involving basically three phases: (1) weighing and blending of raw materials; (2) melting and fining of glass and (3) fiber forming. "E" GLASS : Type of glass commonly used for glass fibers. "E" stands for electrical, since the glass has high electrical resistance. FIBERGLASS Sometimes used to describe glass fiber or glass reinforced plastic (GRP). In fact, it is a trademark. FILAMENT : A fiber of indefinite length. FINISHING Thermal, chemical and other treatment to modify fabric and make it more capable of fulfilling its specific purpose. FOREHEARTH : Channel in which molten glass is prepared for passage to bushings and conversion into fibers. GLASS FIBER : Proper generic term for glass that has been drawn into (continuous) glass fibers. GLASS REINFORCED PLASTIC (GRP) Products obtained from the combination of polymers and glass fibers. GLASS WOOL : Glass converted into short (discontinuous) fibers and exclusively used for sound and heat insulation.  ANNEX 1 Page 2 LOOM : A machine for producing cloth by weaving. MARBLE PROCESS OR TWO STAGES PROCESS : The process in which glass is first manufactured in the form of marbles, which are then remelted and fed to bushings for conversion into fibers. MAT Chopped strands in non-woven random matting. PACKAGE : A length of yarn or roving wound on a carrier or bobbin. PIRN A filling package which is inserted into a shuttle. PLYING Twisting together of several yarns. ROVING : Rope-like bundle of continuous, untwisted strands. SHUTTLE : A pirn carrier that is projected through the warp shed to insert the weft yarn during weaving. SHUTTLELESS LOOM : Loom where the weft is reached through the warp by means of spears, one length of weft at a time. This type of loom is used to weave roving which because of its high weight cannot be thrown forth and back with a conventional shuttle. SIZE Solution of adequate composition to give filaments a protection against abrasion during subsequent handling and machining and to improve glass/resin adhesion. SIZING : Application of size to fibers. SPINNING (1) General: The process of making yarns or cordage from fibers, tow, or liquid materials; (2) yarn from fiber: The formation of a yarn by a combination of drawing or drafting and twist- ing operations applied to prepared fiber masses such as rovings. STRAND : A bundle of filament collected by means of a gathering device and an adhesive, as filaments come out of the orifices in the bushing. TAPES Strips of fabric in varying width. Tapes of unidirectional strength have yarn as warp and roving as weft.  ANNEX 1 Page 3 TEX : Unit of measure of the fineness of textile yarns, expressing the weight in grams of 1,000 meters of yarn. TUBES : Tubes of varying diameter made by braiding of yarn. TWISTING Imparting a twist onto yarn WARP : The longitudinal yarn in woven fabric. WEFT : Yarn which is interlaced with warp threads to make a fabric. WOVEN ROVING : Cloth woven from roving. YARN Twisted strands with afterfinish. Industrial Projects Department April 1977  ANNEX 2-1 Page 1 ROMANIA BUCHAREST GLASS FIBER PROJECT THE MINISTRY OF LIGHT INDUSTRY Introduction 1. There are ten "technical" ministries in Romania, each of them responsible for the preparation and implementation of the annual plan, the Five-Year-Plan and the Long-term (Perspective) Plan for a major sector of the economy. Each ministry has under it industrial centrals which direct the operations of a group of enterprises of related activity. Centrals can be considered as "holding companies" of all enterprises in one particular subbranch of the economy. Besides the centrals, the ministries have spec- ialized design institutes and foreign trade enterprises for their respective sectors. The Centrals 2. The Ministry of Light Industry controls the following eight centrals: (i) Central for Glass and Fine Ceramics Production of consumer goods and technical goods made of glass, china and ceramics, the operation of sand pits for quartz sand, and research in the field of glass and fine ceramics technology. This central will be responsible for the Bucharest Glass Fiber Project (for details see Annex 2-2). (ii) Central for Cotton Products Production of cotton yarn, and cotton and blended fabrics. (iii) Central for Silk, Flax and Hemp Products Processing of silk cocoons, the production of silk, flax and hemp yarns and pure as well as blended fabrics of these. (iv) Central for Wool Products Production of woolen yarns and pure as well as blended fabrics. (v) Central for Knitwear Production of knitted goods.  ANNEX 2-1 Page 2 (vi) Central for Ready-made Clothes Production of ready-made clothes. (vii) Central for Leather and Rubber Products and Footwear Processing of raw skins, production of artificial leather, of leather and rubber goods. Research in the field of leather and rubber technology. (viii) Central for Household Goods Production of household goods made of metal and plastic, accessories for textile goods and footwear. The Design Institute 3. The Design Institute for Light Industry (IPIU) is responsible for the preparation of feasibility studies, and the general and detailed design, as well as construction and erection supervision of projects carried out by any of the centrals under the Ministry of Light Industry. The Foreign Trade Enterprises 4. The Ministry of Light Industry has two Foreign Trade Enterprises. ROMSIT is responsible for the import of know-how and machinery and equipment for the centrals under the Ministry. ROMANOEXPORT is responsible for the export and import of light industry products. Industrial Project Department April 1977  ANNEX 2-2 Page 1 ROMANIA BUCHAREST GLASS FIBER PROJECT THE CENTRAL FOR GLASS AND FINE CERAMICS Responsibility and Organization 1. The Central for Glass and Fine Ceramics (CISCF) is responsible for the planning and production of glass products such as glass containers, table glass, flat glass, technical and optical glass, the production of chinaware and pottery. It directs the operations of its constituent enter- prises. The Central prepares the development and production plan for its industrial branch, based on proposals from the enterprises, passing it on through its ministry (in the case of CISCF, the Ministry of Light Industry), to the Council of Ministers for coordination of and incorporation in the national (five-year or annual) plan. The Central coordinates the purchase of raw materials and the sale of products. It decides over the research program of its Research Institute for the Glass and Ceramics Industry. The seat of CISCF is Bucharest. 2. CISCF employs about 40,000 people in its 26 production enterprises, which are 16 enterprises to manufacture glass containers and table glass, 4 enterprises to manufacture flatglass and flatglass products, 3 enterprises to manufacture chinaware and pottery, 2 enterprises operating sand pits, and I semi-commercial plant for glass fiber. 3. Summarized financial statements for CISCF are shown in Table 1 for 1974 and 1975 (actual) and 1976 to 1980 (the current Five-Year-Plan period). The Semi-Commercial Plant for Glass Fiber 4. In 1974, a plant designed to produce 1,000 tpy of glass fiber was commissioned. This plant has been designed by the Design Institute of the Ministry for Building Materials with assistance from an Italian engineering firm and has a design capacity for 300 tpy of roving and 700 tpy of mat. Most of the equipment is manufactured in Romania. The plant currently uses imported marbles, but these are in short supply since the marbles process is gradually being replaced by the direct-melt process (see Annex 4-1), and a unit to make marbles was recently bought from the People's Republic of China and is currently being supplied for start of production in late 1977. In 1974, the glass fiber plant produced a total of 76 tons, in 1975 a total of 436 tons, and in 1976 about 500 tons. Lack of platinum/ rhodium, of which the marbles process requires about twice as much per ton of plant capacity as the direct-melt process, kept the production at this low level of capacity utilization. It is planned to produce at full capacity in 1977. However, because of the higher energy requirements, Pt/Rh requirements and higher material losses, the production costs of this small plant are about 40% above those of the Project. The plant employs 110 people. Although the technology of this plant is much simpler, it will be useful for the training of operating staff for the Project. Industrial Projects Department April 1977  ANNEX 2-2 ROMANIA BUCHAREST GLASS FIBER PROJECT CENTRAL FOR GLASS AND FINE CERAMICS SUMMARIZED FINANCIAL STATEMENTS (Million Lei) Actual PLan 1974 1975 1976 1977 1978 1979 1980 Gross Sales 2,673.6 3,465.8 3,509.6 3,691.2 3,965.5 4,423.9 4,898.4 Less: Sales Tax 102.8 10.4 12.4 91.2 115.5 128.9 188.4 Net Sales (of which) 2,570.8 3,455.4 3,497.2 3,600.0 3,850.0 4,295.0 4,710.0 - Household Glass ani Glass Containers, Domestic 1,012.1 1,386.6 Export 323.0 333.8 - Flat Glass and Other Glass Production, Domestic 645.1 902.3 Export 225.5 258.9 )-------------------------n.a.--------------------- - Chinaware, Pottery, Faience, Domestic 249.4 442.5 Export 29.8 34.3 - Sand, Domestic 86.9 97.0 (Total Export in Percent) (22.5%) (18.1%) Manufacturing Cost - Materials 882.5 1,069.1 1,042.1 1,026.8 1,082.3 1,185.3 1,268.3 - Fuel 120.7 126.3 128.5 130.9 138.4 151.5 162.1 - Power and Water 73.2 82.9 86.1 90.8 95.4 104.4 111.7 - Labor 764.1 915.2 974.5 949.8 999.7 1,094.4 1,171.0 - Depreciation 203.9 226.1 236.9 240.8 252.2 276.1 295.4 Total 2,044.4 2,419.6 2,468.1 2,439.1 2,568.0 2,811.7 3,008.5 Non-Operating Costs - Selling and Administrative Expenses 191.0 428.8 390.9 472.0 498.3 545.5 583.7 - Research 10.7 8.3 8.6 8.7 9.8 10.1 10.8 Total 201.7 437.1 399.5 480.7 508.1 555.6 594.5 Other Income - Changes in Inventory of Finished Goods & Receivables 27.5 51.0 1.3 (8.0) (10.5) (13.0) (14.5) - income from other Activities 1.8 (1.6) (0.5) 3.0 3.5 4.0 4.5 - Income from Previous Periods 4.1 (9.9) 2.8 5.0 7.0 9.0 10.0 Total 33.4 39.5 3.6 - - - _ Benefit 358.3 638.3 633.2 680.2 773.9 927.7 1,107.0 Current Assets 881.5 951.3 971.9 1,000.4 1,070.2 1,193.7 1,309.2 Net Fixed Assets 3.138.7 2.969.9 3,035.8 3,125.0 3,342.3 3,728.2 4.088.5 Total Assets 4,020.2 3,921.2 4,007.7 4,125.4 4,412.5 4,921.9 5,397.7 Benefit/Total Assets (%) 8.9 16.3 15.8 16.5 17.5 18.8 20.5 Industrial Projects Department December 1976  ANNEX 3-1 ROMANIA BUCHAREST GLASS FIBER PROJECT GLASS FIBER PRODUCTS AND THEIR APPLICATION Name of Typical Glass Content Product Description Applications Process in GRP (%) Chopped Strands cut to lengths of Electrical and Premix molding, 15-40 Strand approximately 3 to 30 mm appliance parts, wet slurry pre- sold in bulk industrial parts forming, thermo- plastic injection molding Roving* Rope-like bundle of Pipe, automobile Filament winding, 25-80 strands of glass fibers bodies, rod stock, continuous panels motor cases matched die molding, sprayup, pultrusion, centrifugal casting Mat Chopped stands, in non- Marine applica- matched die molding, 20-45 woven random matting tions, translucent hand layup, centri- consolidated by means of sheets, truck and fugal casting an adhesive auto body panels Yarn* Twisted strand (also Rods Weaving, filament 50-70 plied) winding, unidirec- tional reinforcement Fabric* Woven cloth from yarn Used as such or 45-100 for upholstery, carpet backing, electrical and high insulation, air- craft pressure laminating struc- tures Woven Woven cloth from rovings Large containers, Hand layup 40-70 Roving* (coarser and heavier than marine applica- fabrics) tions *Products to be produced by project. SOURCE: Reinforced Plastics, 1976 Industrial Projects Department April 1977  ANNEX 3-2 Page 1 ROMANIA BUCHAREST GLASS FIBER PROJECT WORLD MARKET FOR GLASS FIBER General Outline 1. Production and consumption of continuous glass fiber is concentrated in the USA, Western Europe and Japan which account for 85 to 90% of the total world market. Some minor production capacity also exists in Canada, Latin America and Eastern Europe. The technology to produce continuous glass fiber was developed in the USA in the 1930's. After World War II, some companies in France, UK and Japan developed their own technology (starting with licenses purchased from the USA), but today there are still only half a dozen companies in the world with a well-established technology in this field. Therefore, these companies are in a position to control the interna- tional market, either through participation or licensing agreements with most producers (Table 1). Table 2 lists the number of glass fiber plants in each country. World Capacity, Production and Consumption 2. Table 3 shows the world capacity in 1975 at 780,000 tons per year led by the USA with 390,000 tpy (50%), followed by Western Europe with 222,000 tpy (29%), Japan with 120,000 tpy (15%) and the remaining producing countries with 48,000 tpy (6%). Table 4 shows the production in 1970 to 1975 for major producing countries and their estimated production capacity in 1976 and 1977. It shows that while production increased steadily from 1970 to 1974 (from an estimated total world production of 400,000 tons in 1970 to 610,000 tons in 1974), world production fell off sharply in 1975 to an estimated level of 460 to 500,000 tons, indicating a level of capacity utilization of only about 60%, which was caused by the general recession in the synthetic fiber industry in that year. Total world production capacity in 1976 is estimated to have been about 800,000 tons, and expected to increase to 875 to 900,000 tons in 1977. 3. Consumption figures for some countries in 1975 are shown in Table 3. They show that in that year of relatively depressed consumption levels, the per capita consumption in Western Europe ranged from 0.3 kg in Italy, Spain and Austria to 0.7 kg in Western Germany and Netherlands. This compares with a 1975 per capita consumption in Japan of 0.4 kg and the USA of 1.0 kg. The increase in per capita consumption with passage of time is indicated in Table 5 which shows shipments by US producers to the domestic and export market, and US imports and estimated US consumption of glass fiber for the period 1960 to 1976. During that period, US per capita consumption in- creased from 0.37 kg to 1.45 kg in 1973 after which it fell off to 1.33 kg in 1974 and 1.00 kg in 1975, due to the general recession in those latter years, but returned to 1.28 kg in 1976.  ANNEX 3-2 Page 2 4. Table 6 compares US production capacity as reported by the industry with actual production during the years 1970 to 1976. It shows that during that entire period, reported production capacity was in excess of actual production, with average capacity utilization reaching a maximum of 93% in 1973, falling to only 60% in 1975 but returning to 73% in 1976. 5. Table 7 shows the actual consumption of glass fiber in the main consuming areas in 1973 and 1975 and the projected consumption level for 1980. This projection is based on an analysis of the GRP markets by end-use sector and their development trends, as shown in Table 8. Glass fiber con- sumption in the main consuming areas is expected to grow from about 523,000 tons in 1973 and about 430,000 tons in 1975 to about 800,000 tons in 1980, representing an expected annual growth rate of 6.25% over the level of 1973 or 10.5% over the depressed level of 1975. Japan is expected to show the highest growth rate in 1973 to 1980 (11% per year) and to more than double the level of consumption, from 67,000 tons in 1973 to about 140,000 tons in 1980. Western Europe is expected to have a growth rate of 8% per year, versus 4% per year for the USA. Western Europe is expected to increase its level of consumption to about 250,000 tons and the USA to 410,000 tons in 1980. Per capita consumption in 1980 will continue to be highest in the USA, at 1.4 kg, while Japan will overtake Western Europe in per capita con- sumption, estimated to reach 1.1 kg against 0.8 kg in Western Europe. The growth rates projected for 1973 to 1980 are below the rates experienced prior to 1973. They reflect the uncertainty surrounding future growth rates for the economies in the developed world. The estimated 1977 production capacity in the USA, Western Europe and Japan is about 820,000 tons. A consumption level of 800,000 tons in 1980 would, therefore, nearly fully utilize this capacity. No demand projections for countries outside the USA, Western Europe and Japan are available, but total consumption in these countries is unlikely to exceed 150,000 tons in 1980. The total world production capacity is estimated to be 875 to 900,000 tons in 1977, indicating that additional capacity of 50 to 75,000 tpy needs to be built between 1977 and 1980 to meet projected world demand in 1980. World Market Prices 6. Prices of glass fiber products differ in the three largest markets, USA, Western Europe and Japan. Lowest prices are found in USA, while in Japan and especially in Western Europe quotations for the same articles are normally higher. The explanation is found in the lower cost of raw materials and, in particular, natural gas in the USA. During the recent gas curtail- ments, source manufacturers in the USA had to shut down their plants or operate at reduced levels of capacity utilization. Other plants which were able to switch to other fuels, such as propane, raised their prices by a special energy surcharge of about US54 per kg. Average 1976 prices within the three markets are shown below:  ANNEX 3-2 Page 3 Average 1976 Domestic Prices (Ex-Factory) (US$/kg) Western USA Japan Europe Roving 1.20 1.25 1.30 Woven Roving 1.55 1.60 1.60 Mat 1.50 1.65 1.60 Yarn 1/ 1.80- 5.15 2.00-8.00 2.30-11.50 Yarn Fabric 2/ 4.40-11.60 3.00-9.00 3.50- 8.70 1/ Minimum quotation for 68 micron yarn; maximum quotation for 5 micron yarn. 2/ Minimum quotation for heavier fabrics; maximum quotation for lighter fabrics. 7. In the past, domestic prices in the main markets have steadily risen to reflect increasing raw material, labor and energy costs, even in times of reduced capacity utilization such as 1975, as shown below for two products in Italy and Federal Republic of Germany. The high level of con- centration in the industry most likely accounts for this resistance of prices against downward pressure. Prices for Roving and Mat in Italy and Germany (F.R.) 1972-1976 (ex-factory) Italy Germany F. R. (Lit/kg) (DM/kg) Year Mat Roving Mat Roving 1972 980 730 3.85 2.90 1973 1,000 750 4.05 3.05 1974 1,050 790 4.40 3.25 1975 1,150 875 4.70 3.45 1976 1,400 1,060 n.a. n.a. 8. Exports prices for products originating from the three main market areas were in 1976 below domestic prices, and, on an average, Romanian import prices have been somewhat below domestic prices in the three main markets. However, as it is projected that the current level of excess capacity will gradually be reduced through increasing demand, Romanian import prices are expected to move towards the level of domestic prices. Romania is currently importing roving, yarn, woven roving, tapes and tubes from Japan, France, Belgium, Sweden, and fabrics from Czechoslovakia (CSSR). The table below summarizes current import prices.  ANNEX 3-2 Page 4 Import Prices (1976) of Glass Fiber Products into Romania (franco border) Product Origin Import Price (US$/kg) Roving Japan 0.75 to 0.93 Woven Roving Japan 1.05 to 1.66 Woven Roving Belgium 1.73 Yarn CSSR 2.60 to 3.44 Yarn France 4.65 Yarn Fabric CSSR 3.00 to 14.44 Tapes Germany, F.R. 4.14 to 18.39 Tubes France 5.76 Industrial Projects Department April 1977  ROMANIA BUCHAREST GLASS FIBER PROJECT MAIN OWNERS AND/OR LICENSORS OF CONTINUOUS GLASS FIBER PLANTS (1975) (Tons per year capacity) Owens-C rning PPG St. Gobain Johns-Manville Nitto Boseki TBA-Bishop Coutr Gou SA) Group (USA) roup (France) Group (USA) Group (J Other Total Germany - - 35,000 o 5,000 40,000 France 10,000 - 30,000 - _ 10,000 50,000 Belgium 25,000 - - - 25,000 Italy - - 20,000 - - - 20,000 UK - - _ - 15,000 16,000 31,000 Netherlands - 20,000 15,000 - - - 35,000 Sweden 10,000 - - - - - 10,000 Spain - - 3,500 - - - 3,500 Finland 2,500 - - _- - 2,500 Norway 3,000 - - - 3,000 Switzerland , - - ___ - 2,000 2.000 Total W. Europe 50,500 20,000 103,500 - 15,000 33,000 222,000 USA 200,000 100,000 - 36,000 - - 54,000 390,000 Japan 30.000 i- 140,000 - L6 ooo 38.000 120,000 Grand Total 280,500 120,000 103,500 50,000 32,000 21,000 125,000 732,000 Percent 38 16 14 7 5 3 17 100 Source: Bank's consultant and licenwora Industrial Projects Department February 1977  ANNEX 3-2 Table 2 ROMAN1IA BUCHAREST GLASS FIBER PROJECT NUMBER AlD LOCATION OF GLASS FIBER PLANTS Number of Country Plants W. Europe Belgium 1 Finland 1 France 3 Germany, F.R. 2 Italy 4 Netherlands 2 Norway 1 Spain 1 Sweden 1 UK 4 Total W. Europe 20 E. Europe Czechoslovakia 2 Germany, D.i?L 1 Poland 2 Romania 1 Total E. Europe Americas Argentina 1 Brazil 1 Canada 1 Columbia 1 Mexico 1 USA 13 Total Americas