Romania - Roman Seamless Pipe Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2090 RO STAFF APPRAISAL REPORT ROMANIA ROMAN SEAMLESS PIPE PROJECT December 15, 1978 Industrial Projects Department 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.  CURRhICY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Romanian Lei and US dollars. For all calculations, the fol- lowing conversion rate has been used: US$1 = Lei 18 Lei 1,000 = US$55.55 WEIGHTS AND MEASURES 1 kilogram (kg) = 2,205 pounds (lb) = 1,000 grams 1 metric ton = 1,000 kilograms 1 kilometer (km) = 0.621 miles 1 meter (m) = 39.27 inches 1 cubic meter (m ) = 35.31 cubic feet PRINCIPAL ABBREVIATIONS AND ACRONYMS USED API - American Petroleum Institute CIF - Cost, Insurance, Freight CIPM - Industrial Central for Metallurgical Processing DIN - Deutsche Ingenieur Normen FOB - Free on Board IB - Banca de Investitii (Investment Bank), the Borrower IPROLAM - Design Institute for Rolling Mills IPROMET - Design Institute for Steel Works METALIMPORTEXPORT - Export and Import Agency for Steel and Metallurgical Products METAROM - Importing Agency for Metallurgical Equipment and Technology MW - Megawatt tpy - metric tons per year ROMANIAN FISCAL YEAR January 1 - December 31 Industrial Projects Department December 1978  ROMANIA FOR OFFICIAL USE ONLY APPRAISAL OF ROMAN SEAMLESS PIPE PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ................................................ 1 II. THE SECTOR AND SUBSECTOR .................................... 1 A. The Industrial Sector ................................... 1 B. The Steel Industry in Romania ........................... 3 C. The Steel Pipe Industry in Romania ...................... 4 1. Past Development of the Steel Pipe Industry .... ..... 4 2. Steel Pipe Industry Organization .................... 6 3. Capacity and Future Developments ..................... 7 4. Availability of Steel Product Inputs .... ............ 9 II. ROMAN ENTERPRISE AND THE BORROWER ........................... 9 A. Introduction ........................... . 9 B. Plant Facilities ........................................ 9 C. Organization and Management ............................. 10 D. Financial Performance .......................... 11 E. Investment Bank - The Borrower .......................... 13 IV. THE MARKET .................................................. 14 A. Introduction ............... 14 B. Overall Steel Pipe Consumption/Demand in Romania .... .... 14 C. Overall Pipe Supply and Demand Balance .................. 17 D. Large Seamless Pipe Consumption/Demand in Romania .... ... 19 E. Large Seamless Pipe Supply and Demand Balance and Exports ............................................... 22 F. The International Market for Large Seamless Pipes .... ... 23 G. International Prices of Large Seamless Pipes .... ........ 25 H. Marketing Arrangements .................................. 26 V. THE PROJECT ................................................. 27 A. Project Scope, Description and Location .... ............. 27 B. Process and Technology .................................. 27 C. Product Mix and Capacity ................................ 28 D. Raw Materials and Utilities ............................. 29 E. Environment .............. 29 F. Employment and Training ............................... 30 G. Project Implementation .................................. 30 This report was prepared by Michel Cognet and Donald Brown from the Industrial Orojects Department. 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.  - ii - Table of Contents (Continued) Page No. VI. CAPITAL COSTS AND FINANCING PLAN ............................ 31 A. Capital Costs ..................... ...................... 31 B. Financing Plan .................... ...................... 33 C. Procurement ...................... ....................... 34 D. Allocation and Disbursement of Bank Loan ....... ......... 35 VII. FINANCIAL ANALYSIS .................... ...................... 36 A. Production Buildup and Sales Forecast ......... .......... 36 B. Pipe Prices ...............*..................... 36 C. Operating Cost Estimates ............. .. ................. 37 D. Financial Projections ................. .................. 37 E. Financial Rate of Return and Break-even Point .... ....... 39 F. Auditing and Reporting ........ ......................... . 39 VIII. ECONOMIC ANALYSIS ......... .................................. 39 A. Economic Costs and Benefits ............ .. ............... 39 B. Economic Rates of Return and Sensitivity Analysis ....... 41 C. Risks ................................................... 41 D. Foreign Exchange Savings ............. .. ................. 42 E. Other Benefits .................... ...................... 42 IX. AGREEMENTS ................................................. 43 ANNEXES 3 Roman Enterprise Organization Chart 5-1 General Plant Layout 5-2 Detailed Production Process 5-3 Implementation Schedule 6-1 Capital Cost Estimates 6-2 Working Capital Estimates 6-3 List of Goods and Services Eligible for Bank Financing 6-4 Estimated Disbursement Schedule for Bank Loan 7-1 Assumptions for Product Mix, Product Prices, Ingot Cost, Scrap Value 7-2 Operating Costs at Full Production 7-3 Project Financial Projections 7-4 Roman Enterprise Financial Projections 8-1 Economic Analysis - Assumptions for Calculating Economic Prices of Carbon Steel Ingot 8-2 Economic Analysis - Assumptions for Product Prices, Ingot Cost, Scrap Value and Other Operating Costs 8-3 Foreign Exchange Effects of the Project Map IBRD 10895 R  DOCUMENTS CONTAINED IN PROJECT FILES A. Selected Reports and Studies on Sector and Subsector A - Study on home requirements and export possibilities for seamless, large diameter tubular products, IPROLAM, October 1977. A2 - Report on market aspects of large seamless pipes, John Partridge (British Steel Corporation), November 1977. A3 - Study on the international market for large seamless pipes - M. Lindstroem-Techint, April 1978. B. Selected Reports and Studies Relating to the Project BI - Manufacturing of large diameter tubular products. Preliminary study, IPROLAM, June 1977. B2 - Revised data for feasibility study, IPROLAM, March 1978. B3 - Data on costs of ingots in Romania, IPROMET and IPROLAM. September-January 1978. B4 - Report on joint IBRD - IPROLAM visit to Pilger Mill manufacturers; A. Scribbins (British Steel Corporation), January 1978. C. Selected Working Papers and Other Data C - Statistics on pipe production, exports and imports for selected - countries. C2 - Statistics on large seamless pipe international prices. C3 - Working papers on Financial and economic aspects of the project. Industrial Projects Department December 1978   I. INTRODUCTION 1.01 The Government of Romania proposes to build a seamless pipe plant at Roman, about 500 km northwest of Bucharest (Map IBRD 10895R). The project, to be operated by the existing Roman Enterprise within the Industrial Central for Metallurgical Processes, is designed for a capacity of about 130,000 tons of large diameter seamless pipes per year, with a diameter range of 270-680 mm, and a wide variety of wall thickness and steel grades. Technology will be based on the well-proven Pilger process. Preliminary work for the imple- mentation of the project has begun and commissioning is expected to take place in late 1981. 1.02 Large diameter seamless pipes are used primarily in petroleum drilling and transportation, and other energy related areas. The project is part of the Government's overall development strategy to promote rapid expan- sion of domestic industry, and thus minimize reliance on imports of critical products needed by the energy and industrial sectors. It will also earn critically needed foreign exchange as about half of the production will be exported. It is expected that half of exports will be destined to COMECON countries and the other half to the international market where it will account for about 3% of total trade. Although world market opportunities now appear favorable, in case they would fall below expectations, the COMECON countries and China could absorb the entire exports from the project. The total finan- cing required by the project is estimated at Lei 2,510 million (US$139 mil- lion), including Lei 1,340 million (US$74 million) foreign exchange. The proposed Bank loan would be US$40 million, equivalent to 54% of the foreign exchange cost of the project. The project was submitted to the Bank in May 1976 and reviewed by three preparation missions. Modifications of the project scope were made in early 1977 and the project was appraised in March 1978 by a mission consisting of Messrs. Michel Cognet and Donald Brown (from the Indus- trial Projects Department) and Albert Scribbins (consultant). In addition, two other consultants were used to review both the domestic and export markets for large seamless pipes. II. THE SECTOR AND SUBSECTOR A. The Industrial Sector 2.01 Industrial development is a key element in Romania's overall development strategy. The concentrated effort to expand industry has had impressive results. According to Romanian statistics, gross industrial production grew at an average rate of about 13% per year during 1951-77, a pace which was one of the highest among developing countries and is comparable with the rates in Japan, Spain and Greece. World-wide, only Korea, Singapore and Iran have shown significantly higher growth rates of industrial produc- tion. As a result, industry's share in social product, expressed in current  -2- prices, rose from about 47% in 1950 to 65% in 1977, and thus represented (in 1975) about five times the contribution of agriculture. Added to these achievements are the two million industrial jobs that have been created since 1950, with total industrial employment increasing to 3.4 million in 1977. The share of industrial labor in the total labor force grew from 12% in 1950 to 31% in 1977. Labor force absorption in Romanian industry has been greater than in countries with similar records of industrial growth although, in part, this may be due to overstaffing and a political philosophy which requires everyone to be employed. 2.02 To achieve maximum utilization of its natural resources as well as efficient use of its labor potential, Romania has placed great emphasis on the creation of basic industries that would use domestic raw materials and also provide a base for more specialized secondary industries with good potential for employment and improved labor productivity. In this context, the output of capital goods grew at an average annual rate of 14.2% during 1951-77, compared to 10% per annum for consumer goods during the same period. The leading growth sectors of industry were (i) chemicals utilizing the country's hydrocarbon resources and other chemical raw materials and (ii) metallurgical industries using available minerals and energy resources. A shift of priority is gradually taking place from basic industries to process- ing industries, notably engineering which grew at an annual rate of 18% over the last five years. 2.03 Industries oriented mainly to the domestic market have for some time been given priority since the achievement of certain levels of industrial self-sufficiency has long been an important objective of Romania. However, because of the rapidly growing import needs for equipment, technologies and material supplies, there has been an increasing urgency in recent years to develop industrial exports. Through energetic efforts, at times by suppressing domestic demand and by vigorously promoting exports, Romania succeeded in boosting its industrial exports from very low levels in the 1950's and early 1960's to US$1.7 billion in 1970 and US$5.1 billion in 1977. As a result, the share of industrial products in total exports increased from about 25% in 1960 to 55% in 1977. 2.04 The current Five Year Plan (1976-80) and the guidelines for Romania's economic and social development over the 1981-1990 period, call for continua- tion of the past industrial strategy with particular attention to the expan- sion of basic industries and of technologically advanced secondary industries. Gross industrial production is planned to rise at 10-11% a year during 1976-80 and at a somewhat lower pace of 8-9% during 1981-90. The highest growth is planned in the chemical and engineering subsectors, which are expected to increase their share of gross industrial production from about 44% in 1975 to 55-60% in 1990. With the economy moving more and more into a net importer position of energy and raw materials, the rapid growth rates in industrial production will require a continuing growth in imports. To finance and balance growing imports, total exports are required to grow at an average annual rate of 12-13% until 1980, and then at an average rate of some 6.7% until 1990. Four sectors are expected to take the lead in this expansion:  - 3 - machinery and equipment, steel, chemicals and, to a lesser extent, industrial consumer goods. All recent industrial projects in Romania financed by the Bank have been in these subsectors. Major issues and problems related to the future development of the industrial sector are discussed in more detail in the basic Economic Report (No. 1601-RO) dated March 31, 1978. B. The Steel Industry in Romania 2.05 In 1950, total crude steel production in Romania was only about half a million tons. During the 1950's, crude steel production increased at an annual rate of 13% and during the following decade at 13.7%. Since 1970, the growth rate has declined to about 9% per year. This growth pattern reflects the emphasis placed in Romania on the creation of basic industries that in turn will provide the base for more specialized secondary industries. Crude steel production reached 12.0 million tons per year (tpy) in 1977, accounting for about 8% of gross industrial output. The major indicators of the Romanian steel industry and their evolution over the past 15 years are given in the table below. Romanian Steel Industry - Major Indicators Production (million tons) 1960 1965 1970 1976 a/ Iron Ore 1.5 2.5 3.2 2.8 Crude Steel 1.8 3.4 6.5 10.7 Rolled Steel Products 1.2 2.3 4.5 7.3 Imports (million tons) Rolled Steel Products 0.8 1.1 1.4 1.9 Iron Ore 0.9 2.6 6.3 11.7 Exports (million tons) Rolled Steel Products 0.3 0.3 1.3 1.0 Per Capita Raw Steel Consumption (kg/capita) 132 180 318 504 Investments (US$ million) 40 130 170 377 Employment ('000 workers) 67 67 85 109 a/ 1977 figures are not yet available, except for crude steel production which increased to 12.0 million tons. 2.06 The Romanian steel industry developed based on domestic raw mate- rials, in particular iron ore and coking coal. However, production of iron ore did not keep pace with the expansion of the steel industry and Romania's dependence on foreign supplies has sharply increased from 35% in 1960 to 80% in 1976. To a lesser extent, a comparable evolution was experienced with coking coal production with imports now accounting for 55% of requirements as compared with 45% in 1960.  2.07 In Romania, per capita steel consumption was only 132 kg in 1960, but since then has increased to about 500 kg, i.e. to a level comparable with many industrialized nations. The development of the steel industry has been primarily oriented towards meeting the domestic market requirements. However, in spite of concerted efforts to bridge the gap between imports and exports, Romania is still a net importer of steel products, primarily high alloy and/or specialized steel, of about 1.0 million tpy, which is equivalent to 12% of domestic consumption. 2.08 As is typical of capital intensive industries, the share of the Romanian steel industry in total industrial investments has been well in excess of its share in job creation. With an average of 10% of industrial investment over the past 15 years, the steel industry provides direct employ- ment for about 100,000 workers, less than 4% of the industrial labor force. Early investments were located in the Western part of the country near iron ore and coking coal resources. More recent investments have been close to market areas and along navigable waterways to facilitate the transport of incoming raw materials and outgoing finished products. Although the major investments in steel expansion were made in recent years, an important share of production is still based on the old open hearth furnace. In Romania, this process accounts for 60% of production, whereas in the rest of the world, it has decreased on average to less than 20% and is further declining as old facilities are gradually being shut down. 2.09 In the current 1976-80 Five Year Plan, crude steel production is planned to increase from 12 million tpy in 1977 to 17 million tpy in 1980, through the further expansion of existing facilities and the development of a new integrated steel complex on the Danube river. Several factors will likely curtail or delay these ambitious expansion plans. Constraints may be imposed by the limitations of domestic raw material supplies (iron ore and coking coal) and a longer than planned implementation period of the new steel works. Also, from the steel demand side, factors may call for a slower pace of expansion. In particular, steel consumption per capita in Romania would have to reach 650 kg in 1980 as compared to the present range of between 450 and 700 kg in industrial nations. C. The Steel Pipe Industry in Romania 1. Past Development of the Steel Pipe Industry 2.10 Romania was one of the earliest producers of crude petroleum and the country's first pipe-rolling mill was installed in Bucharest in 1933 to produce seamless pipes for oil exploration, production, and transportation. By 1960, total pipe production (seamless plus welded) reached 300,000 tpy. Later on, Government policy towards rapid industrialization was a major factor for the expansion of the pipe industry. Between 1960 and 1977 total welded and seamless pipe production increased by an average 8% per annum to 1.3 mil- lion tons in 1977. During this period, production of welded pipes developed  - 5- faster than that of seamless pipes, in line with a world-wide trend of growing substitution from seamless to welded pipes, due to improved welding techniques and cheaper fabrication costs. Now, overall pipe production in Romania is equally split between the two types of pipes, as shown in the table below: Romania - Evolution of Pipe Production, Imports, Exports and Consumption (000 tons) Growth Rate (%) 1960 1970 1977 1960-1977 Production Welded - 195 630 14.0 a/ Seamless 338 572 690 4.5 Total 338 767 1,320 8.0 Imports Welded 20 b/ 9 25 1.3 Seamless 63 97 66 0.3 Total 83 106 91 0.6 Exports Welded - 31 186 N/A Seamless 151 269 186 1.0 Total 151 300 372 5.0 Consumption Welded 20 173 469 10.8 a/ Seamless 250 400 570 5.0 Total 270 573 1,039 8.2 Production as a % of Consumption 70 82 91 - Exports as a % of Production 45 39 27 a/ 1965-1977 bi/ Estimated 2.11 Although traditionally Romania has supplied pipe products to the CO4ECON countries to which in 1977 about 80% of exports went, the development of the industry has been primarily aimed at meeting the domestic requirements. As shown above, imports have been kept at the same level of about 100,000 tpy since 1960, and production now meets more than 90% of domestic requirements, as compared with 70% in 1960. Although exports doubled in volume, their share of production declined from 45% in 1960 to 27% in 1977. Yet, with 372,000 tons of exports in 1977, Romania remains an important pipe exporter.  - 6 - 2.12 The development of the pipe industry in Romania has been favored by important advantages the country enjoys. First, the domestic market has been large enough to support viable production in economic terms for various pipe specifications. Second, Romania has a large number of skilled and disciplined workers available at a fraction of the cost of the wages paid in developed countries. Third, steel pipes being standard products, their production utilizes relatively simple machinery and equipment; interestingly enough, Romania has developed a capacity to fabricate certain types of equipment for pipe production and some recent mills have been almost entirely built in Romania. Fourth, steel products, the main input for pipe production, have been available in the country since an early stage. Finally, the centralized planning system has brought an element of certainty to demand and supply, permitting production facilities to work generally at full capacity, a crucial advantage for a capital intensive industry such as the pipe industry. Taking these factors into account, and also the considerable experience accumulated over the last 40 years, Romania has been well placed to develop a competitive pipe industry. It will continue to do so provided further investments are based on a realistic assessment of domestic and international market require- ments (see Chapter IV). 2. Steel Pipe Industry Organization 2.13 In Romania, manufacturing of pipes comes under the Ministry of Metallurgical Industries which also deals with the steel industry. The orga- nizational structure of the pipe industry has the same three-step hierarchy as all industrial sectors in Romania, comprising the Technical Ministry, the Industrial Central, and the Enterprise. The Ministry is responsible for the planning and performance of its sector for which it also approves proposed investments for subsequent submission to the Council of State , the highest authority, for final approval. Also under the Ministry of Metallurgical Industries and relevant to the pipe industry are the following: IPROLAM, the institute for engineering of rolling mills; METAROM, the import agency for metallurgical equipment and technology; and METALIMPORTEXPORT, the agency for the exportation of steel products, including steel pipes. 2.14 The Industrial Central of Metallurgical Processing (CIPM) is respon- sible for the production and domestic sales of steel pipe and wire-drawn products. All enterprises engaged in the manufacturing of these products fall under the jurisdiction of CIPM, which has been acting so far, in a sense, as a holding company, allocating production programs and financial resources, coordinating local purchases and domestic sales and monitoring performance. However, the Central's role and responsibilities are expected to be redefined as a consequence of the recent move in Romania towards giving more autonomy to enterprises (para. 3.05). CIPM's headquarters are located in Bucharest, with a staff of about 200, under five functional departments (production, techno- logical, commercial, finance, and personnel). CIPM senior staff generally also act in similar functions in one of the enterprises and provide opera- tional technical assistance to all enterprises. Steel pipe-producing enter- prises, which account for most of CIPM's activity are described below.  3. Capacity and Future Developments 2.15 Steel pipes are produced by three enterprises, employing a total of about 15,000 workers. Republica, located in Bucharest, produces both seamless (220,000 tpy) and welded (127,000 tpy) pipes, Iasi, in the northeastern corner of the country, specializes in welded pipes (503,000 tpy); and Roman, located in the same area, specializes in seamless pipes (470,000 tpy). Existing and future pipe production facilities, capacity, and production are outlined in the following page. 2.16 The welded pipe facilities were built more recently and they use modern technology with the majority of the large pipes being manufactured by the helicoidal process. Seamless pipe mills are older and are mostly based on the "Stiefel" process (plug mill) which is an old technology, but still widely employed around the world. Overall, production facilities are well maintained and they appear to be run efficiently. Some minor damage was caused in Republica by the 1977 earthquake, but the adverse effect on production was marginal. Except for facilities which have been recently commissioned, pipe works now operate at full capacity. 2.17 The product mix of the Romanian pipe industry is comprehensive (except for the large seamless pipes which will be produced by the proposed project) and covers a wide range of diameters, wall thicknesses and steel grades. Product quality is recognized as an important factor and most of the pipes are produced according to international standards such as those of the American Petroleum Institute (API) for casings and line pipes and Deutsche Ingenieur Normen (DIN) for boiler tubes. Romania is authorized to use the API monogram and compliance with API standards is regularly checked by TUBOSCOPE, a reputed international inspecting agency. 2.18 Expansion plans for the pipe industry are very ambitious. They call for almost a doubling of capacity by 1985 for seamless pipes and a 50% increase for welded pipes. Investments before 1980 have already been decided and are included in the National Five Year Plan (1976-80). In line with the regional development policy, the Plan foresees the creation of two new enter- prises, one at Zalau (northwest) and the other at Zimnicea (south). At Zalau, a 300,000 tpy continuous mill is already being installed for the production of small diameter seamless pipes. This is a large volume and highly productive project, using latest technology (mandrel mill). At Zimnicea, the new pipe works will include two helicoidal welded lines, with a capacity of 35,000 tpy each to produce very large diameter welded pipes. Except for the proposed project, other investments in the Five Year Plan are minor and they will be undertaken by existing enterprises. Projects to be started after 1980 are still at the planning stage and no decision will be made until the Five Year Plan (1981-85) is completed and approved. The major projects which were tentatively contemplated at the time of appraisal include expansion of the Zalau continuous mill by 100,000 tpy small diameter seamless pipes and instal- lation of two longitudinal welded lines at Zimnicea for small diameter pipes  ROMAINIA- EXISTING AND IFUTURE PIPE PRODUCING FAGILITIES AND PROI9JCTION (000' tpy) Welded Seamless Production Diameter Year of Actual i977 Projected Production Actual 1977 Projected Production Enterprise Line RanRc (o-) Co-niosioning Capacity Production 1980 1985 Capacity Production 1980 1985 A. Exiitina Plants 1. Iasi Longitudinal 17-114 1964 122 122 125 135 - - _ _ Longitudinal 34-74 1964 15 10 15 17 Longitudinal 16-22 1964 5 5 5 5 Longitudinal 48-50 1967 18 18 1B 25 Longitudinal 9-50 1970 25 25 25 25 - - - - Longitudinal 48-219 1975 200 140 200 200 - - Longitudinal 17-44 1975 108 100 108 115 - - Longitudinal 10-25 1975 3 3 3 3 - - Longitudinal 17-70 1975 120 80 120 120 - - - - Sub-total 616 503 619 645 - - - - 2. Republics Helicoidal 520-1020 1961 70 70 70 70 Helicoidal 250-1600 1974 40 40 40 40 Helicoidal 250-1600 1976 40 17 40 40 - - - - Stiefel 42-168 1987 - - - - a0 80 80 80 Stiefel 25-168 1968 - - - - 90 90 90 90 Stoasbank 20-90 1951 - - - - 50 50 50 50 Sub-total 150 127 150 150 220 220 220 220 3. Roan Stiefel 168-406 1957 - - - - 340 340 340 340 Stossbank 100-168 1969 - - _ - 110 110 110 110 Stiefel 89-168 1977 - - - - 110 20 110 110 Sub-total - - - - 560 470 560 560 Total 766 630 769 795 780 690 780 780 3. Projects Decided 1. Republics Extrusion press 20-150 1979 - - - 20 26 2. Rman StoNsbank 25-176 1978 - - _ _ _ _ 80 80 0 Pilger 270-520 1981 - - - 117 *l Sub-total - - 100 223 3. Zalau Continuous mill 60-88 1979 - - - - - - 200 300 4. Zijnice-r Helicoida1 508-1422 1978 - - 35 35 - - - Relicsida1 508-1422 1979 - - 35 35 - _ _ _ Sub-total - 70 70 - l Total -0 - 300 523 C. Proiects at Plamsina Stage 1. Republic Extrution Press (expansion) 20-150 1983 -- - 20 H-licoidal 520-1020 1983 - - - 10 - - - - Stainless n-1982 2 - _ 2 Sub-total - - - 12 - - - 20 2. Zalau Continuoos d1ll (expansion) 80-88 1985 - - - - - - - 100 3. Zimnice Longitudinal 16-76 1982 - - - 110 - Longitudinal 16-76 1983 - l _ 110 - - _ _ Helicoidal 508-1422 1983 - - _ - Sub-total 230 - - - - Total - - - 242 - - - 120 D. RAID TOtAL 766 630 839 1107 780 690 1080 1423 s/ 130,000 tpy in 1986 at full prodction  - 9 - with a capacity of 110,000 tpy each. Were these projects to proceed, seamless pipe capacity would be further expanded betwen 1981 and 1985 by 10% and welded pipe capacity by 30%. 2.19 According to Romanian data, all new investments in pipe production will be geared towards the domestic market. However, the Bank's analysis indicates that the domestic market will not be large enough to sustain the investment program outlined above, as discussed in detail in Chapter IV. 4. Availability of Steel Product Inputs 2.20 Most of the steel products used for pipe production are available in the country. However, for historical as well as regional development considerations, none of the pipe-producing enterprises is located close to a steel plant, resulting in additional transport costs. From an organiza- tional point of view, pipe works and steel plants are also separated, each being under a different enterprise and a different central. Coordination is exercised by the Ministry of Metallurgical Industries, under which the steel and the pipe centrals are placed. 2.21 Steel coils, which are used for welded pipe production, are produced at the Galati steel complex (Map 10895R). Rolled round bars and squares which are used in the "Stiefel" and "Stossbank" seamless mills are produced at Hunedora for the small and medium diameter pipes. Raw materials for the large diameter pipes are temporarily imported from Russia. The proposed project, which is to produce the upper range of large diameter pipes, will be based on the Pilger technology, and it will use cast steel ingots to be manufactured in the country at Tirgoviste. Detailed arrangements for ingot production are discussed in paragraph 5.07. III. ROMAN ENTERPRISE AND THE BORROWER A. Introduction 3.01 In the Romanian system, responsibilities for new investments are split between various agencies. The enterprise is responsible for local procurement and eventually operation of a project, whereas project design and engineering as well as foreign procurement are handled by other agencies placed under the same ministry as the enterprise. As the project will be located adjacent to the existing pipe works at Roman (para. 5.02), Roman Enterprise has been chosen to carry out the project and thereafter operate it. B. Plant Facilities 3.02 Roman Enterprise was established in 1957, to produce seamless pipes. At that time, the plan was to create a large steel complex at Roman,  - 10 - which would supply the raw materials for the pipe works. The pipe mill was built first and, pending the construction of the steel plant, it was planned to import rolled steel bars from neighboring Russia and, in exchange, export pipes. The steel complex was eventually located in Hunedora, some 650 km away from Roman, and currently supplies most of the rolled bars to Roman Enter- prise. Adjacent to the pipe works is now available a large piece of land with sufficient infrastructure to accommodate the expansion of the existing facilities. 3.03 Roman Enterprise started operations with a 400 mm Stiefel mill, producing 340,000 tpy of seamless pipes, out of which 115,000 tpy are large pipes (above 270 mm). The mill was designed to produce pipes with a diameter ranging from 168 to 400 mm. However, due to the impossibility of obtaining large rolled bars (above 270 mm diameter), actual diameter of pipes is limited to 377 mm, with the 340-377 mm range being produced with great difficulty. As discussed, the proposed Pilger mill will use cast ingots as feedstock which can be obtained without limitation in diameter. Since the diameter range of the project (270-520 mm) will partially overlap that of the existing mill, the part of production which now cannot be easily obtained on the 400 mm Stiefel mill will be transferred to the new Pilger mill. The Stiefel mill will then concentrate on diameters smaller than 340 mm. Existing facilities at Roman also include a 170 mm Stiefel mill with a capacity of 110,000 tons per annum and a diameter range of 100 to 170 mm. This mill was built in 1969 by Romanian suppliers. Another 170 mm Stiefel mill with the same capacity and diameter range has just been commissioned. A smaller mill with a capacity of 86,000 tons per annum is under construction, and it will produce small seam- less tubes (25-76 mm diameter). 3.04 Except for the 170 mm Stiefel mill commissioned in 1977, the present pipe works at Roman operate at full capacity, they are well main- tained and are run efficiently. Operations are on a three shift basis, with production continuing through Saturday and part of Sunday. On this basis, the number of working hours is 25% higher than what is considered as normal in Western Europe and the USA. Productivity and yield factors (labor, output, energy and raw material consumption rates, etc.) are comparable to those experienced in OECD countries. Product quality is also satisfactory. C. Organization and Management 3.05 Roman Enterprise, as other industrial enterprises in Romania, has so far been primarily a production-oriented organization with only limited autonomy and decision-making reponsibilities outside production. While it has its own production plans based on targets set by the Five Year Plan, prepares separate financial statements, and can borrow from designated banks, any substantive changes in its organization structure, investment programs, production targets, or in product mix has to be approved by its ministry and ultimately by the Council of Ministers. With the recent move towards more decentralization, the involvement of Roman Enterprise in the  - 11 - planning process will be accentuated. Based on market requirements, it will prepare its own investment plans and operating budget for subsequent approval at the Government level. Roman Enterprise will also receive in- creased autonomy in managing its financial resources with a view of becoming financially self-supporting. For the procurement of local and foreign supplies, Roman Enterprise will also have increased responsibility. All these policy changes have been officially announced in broad terms during March 1978 and are scheduled to become effective in 1979. However, their specific setting and implementation framework have still to be worked out, and little immediate practical effect is expected from these new economic measures on actual implementation and operation of Bank-financed projects in Romania. 3.06 Roman Enterprise employs 5,000 persons and its organizational structure, shown in Annex 3, is adequate for fulfilling production func- tions. Technically, the ultimate decision-making authority lies with the Workers' General Assembly, which normally meets twice a year to examine the operating results and review the performance of the working people's Execu- tive Committee. This Executive Committee, consisting of elected represen- tatives of workers and also some key members of the management, is chaired by the General Director of the Enterprise, who is normally appointed by the Minister of Metallurgical Industries. In practical terms, the General Director is responsible for overall management including the day-to-day operations and implementation of the decisions taken by the Executive Committee, through a team of key managers, such as for production and other technical matters, sales and procurement, as well as finance and accounting. The General Director and the Technical Director of Roman Enterprise have been associated with the pipe industry in various senior positions for a long period of time. They are well-versed in the technical developments in the industry outside Romania, and they are supported by a group of experienced and dedicated technicians. Overall, the Enterprise appears well-managed. D. Financial Performance 3.07 The conventional financial analysis applied by the Bank to evaluate the performance of commercial organizations has been so far of limited signi- ficance in the case of Romanian enterprises. Since their primary responsibility has been to meet the physical production targets set by higher authorities, with product mix and prices of all inputs and outputs being also predetermined, the financial profitability neither reflects an enterprise's efficiency nor has been an important factor in investment decisions. The following evaluation of Roman Enterprise's past and present performance should be viewed in this context. 3.08 The major indicators of Roman Enterprise's financial performance in the recent past are summarized below:  - 12 - Roman Enterprise - Financial Indicators 1973-1977 (in billion lei) Year Ending December 31 1973 1974 1975 1976 1977 Capacity (000 tons) 450 450 450 450 560 Sales Volume (000 tons) 445 459 455 442 470 Capacity Utilization 99 102 101 98 83 Income Statement Sales Value of Production 1.85 2.01 2.97 3.07 2.36 a/ Production Costs 1.66 1.76 2.55 2.67 2.10 a! Benefits 0.20 0.44 0.42 0.44 0.28 Cash Generation 0.27 0.51 0.51 0.55 0.34 Benefits as a % of Sales 10.60 21.80 14.10 14.30 11.00 Production Cost/Ton (000 lei) 3.70 3.80 5.60 6.00 4.40 a/ Balance Sheet Net Fixed Assets 0.63 0.76 1.14 1.15 1.48 Projects Under Construction 0.36 0.47 0.27 0.52 0.54 Working Capital 0.15 0.33 0.25 0.23 0.48 State Funds for Investment 1.12 1.40 1.62 1.90 2.18 a/ Reflects downward adjustment of pipe and input prices. 3.09 Over the last few years production has been maintained at full capacity with some variations resulting from changes in product mix. In 1977, the utilization rate of capacity dropped to 83%, due to the start-up of the new 170 mm Stiefel mill, the production of which is progressively building up. Sales value of production and benefits have widely fluctuated over the recent years following adjustments in input and output prices. A general resetting of prices in Romania was undertaken between 1973 and 1975 and pipe and raw material prices were increased by about 60%. However, due to changes in the taxation system, pipe and input prices were further adjusted downwards by 40%, effective March 1977. 3.10 In line with the objectives for the pipe industry, profits generated by Roman Enterprise have been maintained at 10 to 15% of sales. Compared to Western European pipe producers, production costs (i.e. after depreciation but before financial charges) of Roman Enterprise are on the average 50 to 70% lower. This must be interpreted cautiously since Romanian financial systems (input and output prices set by Government, low interest charged on loans) and accounting practices (low depreciation rates) differ significantly from those prevailing in Western Europe. However, production costs should reflect the facts that in Romania as compared to Western Europe (i) the number of working  - 13 - hours is 25% higher, (ii) labor is equally skilled but more disciplined and considerably cheaper, (iii) overhead costs are kept at a minimum, and (iv) all other factors (raw materials and energy consumption rates, product quality, etc.) are similar. 3.11 As for most of the enterprises in Romania, all investments of Roman Enterprise have been financed by State funds and except for working capital requirements, the Enterprise has not incurred any debt. The cash flow is not being retained in the Enterprise, but is used through the Central to finance investments in other enterprises of the same sector and to contribute to the State budget. E. Investment Bank - The Borrower 3.12 The Investment Bank (IB) administers and controls all investment funds of the State budget (except for agriculture and food processing) and acts as a channel for all sources of major domestic investment financing in industry. Recently, IB has also started to make credits on its own, though funds available for this purpose are still relatively small. Traditionally, all Bank loans to Romanian industry have been channelled through the IB, with the proceeds of the loan passed on to the project beneficiary as State Budget funds. The IB will also be the borrower for the proposed project, and the Government has indicated that the recent institutional changes in Romania towards more autonomy to enterprises, will not change in any major way the present arrangement for the proposed project. 3.13 The IB has wide-ranging responsibilities in the implementation of projects and plays an important role in project evaluation, procurement and execution. For all projects, the IB reviews the "Nota de Commanda", a highly summarized version of the technical-economic study, before submission to the Council of State for formal approval, and later ensures that the projects are executed accordingly. It also reviews all orders for equipment before they are placed, comments on any contract changes, and can impose penalties on defaulting parties. During the operational phase of the project, the IB's functions are limited to checking whether the enterprise is meeting the targets set in the Investment Plan. The IB has no legal authority to bring its views to bear directly on the management of an enterprise. In practice, however, the IB can recommend necessary operational actions to the Ministry of Finance, which, in turn, can act through the ministry concerned with the project. As in the case of previous Bank loans, the IB has agreed to submit its audited financial reports to the Bank in an agreed form and within agreed dates. The "Nota de Commanda" for the proposed project is expected to be approved by the Council of State in January, 1979 and this approval is a condition for the Bank loan effectiveness.  - 14 - IV. THE MARKET A. Introduction 4.01 Steel pipes are so widely employed that a comprehensive list of their applications is almost impossible to establish. They are used in many sectors of the economy, with the industrial (capital goods in particular), energy (oil, gas, electricity) and construction sectors being the leading consumers. The many uses to which steel pipes are being applied require a great diversity of product specifications, which can be classified in many ways such as diameter, wall thickness and steel grade composition. The fabrication technique is also a differentiating factor with welded pipes being distinct from seamless pipes both in terms of physical properties and market applications which are determined by technical and economic considera- tions. 4.02 The proposed project will produce large diameter seamless pipes whose applications are more restricted and are found in oil and gas explora- tion, the subsequent production, transportation and transformation of these energy and feedstock products (refineries and chemical plants) and in the manufacture of equipment. The following paragraphs discuss the overall pipe market in Romania, with a specific focus on the market for large diameter seamless pipes. Because a substantial portion of the project's production will be exported, the international market and prices for large seamless pipes is also discussed. B. Overall Steel Pipe Consumption/Demand in Romania 4.03 Steel pipe consumption/demand in Romania is shown below, compared with investments in industrial, enerqy and construction sectors: Romania- Steel Pipe Consumption as Compared With consuming Sector Indicators (000 tons) Average Annual Growth Rate (%) 1965 1970 1975 1977 1980 1985 1985 1965-70 1970-75 1975-80 1980-85 1975-8,