Romania - Craiova Chemical Project

Document of The World Bank FOR OFFICIAL USE ONLY iE Copy Report No. 2144-RO STAFF APPRAISAL REPORT ROMANIA CRAIOVA CHEMICAL PROJECT October 30, 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.  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 18 Lei 1 = US$0.06 Lei 1,000 = US$55.56 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) = 39.37 inches 1 cubic meter (mi) = 35.31 cubic feet PRINCIPAL ABBREVIATIONS AND ACRONYMS USED The Borrower - Banca de Investitii (Investment Bank) The Central, CIICh - Central for Chemicals and Fertilizers DANUBEXIM - Danubiana Export Import Agency for the Chemical Industry IITPIC - Technological Engineering and Design Institute for Chemical Industry ROMCHIM - Import Agency for Chemical Equipment and Technology under the Ministry of Chemical Industry CIF - Cost, Insurance and Freight FOB - Free on Board tpd - Metric To-s per Day tpy - Metric Tons per Year ROMANIAN FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ROMANIA APPRAISAL OF CRAIOVA CHEMICAL PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ......................................... ............. 1 II. THE CHEMICAL INDUSTRY AND THE BORROWER ................. 1 A. Ministry of Chemical Industries ..... .............. 1 B. Development of the Chemical Industry Based on Methane Gas Processing .......................... 3 C. The Central and the Enterprise .................... 4 D. Financial Situation and Prospects of the Central .. 5 E. The Romanian Financial System and the Borrower .... 6 III. MARKET AND MARKETING . ................... .................. 7 A . The Romanian Market * .......... 8 B. Domestic Markets and Exports for Downstream Products ..... oo.o ....... 9 1. Methanol *........... o ... ........ 9 2. Acetic Acid and Derivatives ... ........ 11 C. Domestic Production, Consumption and Exports of Craiova Chemicals ..... 12 D. The Western European Market ....... o..... 16 E. Domestic and Export Prices ...o...... .... 19 Fo Marketing ...... .............................. oo... ........o..... 19 IV. THE PROJECT ..........-..... ....... ..... ........ 22 A. Project Scope ... 22 B. Location, Raw Materials and Utilities ....... 24 C. Technology, Employment and Training .. ............. 25 D. Ecology and Safety .. ........... .......*. 26 E. Project Implementation .......... 26 V. CAPITAL COSTS AND FINANCING PLAN ............ ... 27 A. Capital Costs ... ...... .......... 27 B. Financing Plan ... ...................................... ..o.... 29 C. Procurement ..........o .... o..o..oo ....... ...... 30 D. Allocation and Disbursement of Bank Loan . ....... 31 This report has been prepared by Messrs. David Caplin, Philippe Lietard and Eus Tortorelli of the Industrial Projects Department and Mr. David Steel of the EMENA Country Programs 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.  TABLE OF CONTENTS (Continued) Page No. VI. FINANCIAL ANALYSIS ...................................... 31 A. Revenue and Operating Cost Estimates ............ .. 31 B. Financial Projections ..... ........................ 32 C. Financial Rate of Return . ......................... 34 D. Auditing and Reporting ..... ....................... 34 VII. ECONOMIC ANALYSIS ..................................... 34 A. Economic Costs and Benefits .... ................... 34 B. Economic Rates of Return and Major Risks .......... 35 C. Other Benefits ...... ................... ........... 37 VIII. AGREEMENTS ........ ..................................... 37 ANNEXES 1 Glossary 2-1 Chemical Enterprises Under the Central (CIICh) 2-2 Organization Chart of the Craiova Central and Craiova Enterprise 2-3 Summarized Financial Statements of the Central and the Enterprise 3-1 Domestic Consumption of Project Products 3-2 Domestic Consumption of Methanol, Acetic Acid, Vinyl Acetate and Ethyl Acetate, the Project Products, by End Use 3-3 Production, Domestic Consumption and Exports of End Use Products 3-4 Planned Supply/Demand Balance of Project Products in Romania 1980-85 3-5 Romanian Estimates of Export Potential of Project Products 1980-85 4-1 Plant Layout 4-2 Raw Materials and Utilities Requirements 4-3 Acetylene Technology and Uses of Acetylene 4-4 Water Pollution Standards 4-5 Overall Project Construction Schedule 5-1 Project Cost and Financing Required - Assumptions 5-2 Equipment and Services to be Financed by Bank Loan 5-3 Estimated Disbursement Schedule for Bank Loan A 6 Assumptions Used in the Financial Analysis 7 Assumptions Used in the Economic Analysis MAP IBRD No. 13591  DOCUMENTS CONTAINED IN PROJECT FILE 1. Preliminary Techno-Economic Study regarding "The Development of the Chemical Complex - Craiova during 1976 - 1980", April 1977 (prepared by IITPIC). 2. Questionnaire prepared by IBRD, listing information requirements for Appraisal (May 1977). 3. IBRD Project Preparation Report, June 1977 (prepared by Preparation Mission). 4. "Revised Techno-Economic Study", September 1977 (prepared by IITPIC). 5. File containing all statements and tables prepared by the Romanians concerning appraisal of this project (various dates). 6. "Market Prospects for Methanol and Acetic Derivatives", the Pace Company Consultants and Engineers (consultant, June 1977). 7. "Environmental and Safety Aspects of Craiova" - J. Tixhon (IBRD Memo, MIarch 1978). 8. Technical Report from Mr. F. Pederzani, ANIC (consultant, April 1978).   I. INTRODUCTION 1.01 The Government of Romania has requested a Bank Loan of US$40 million equivalent for the expansion and modernization of the Craiova Chemical Complex, located about 10 km west of Craiova (Map 13591). The expansion will produce about 350,000 tons per year (tpy) of a variety of chemical products, such as methanol, acetic acid, acetic anhydride, vinyl acetate, polyvinyl acetate and ethyl acetate, using locally produced gas as feedstock. A glossary of the technical terms used in this report is given in Annex 1. The plant's output is destined mainly for the domestic market. Except for the acetic acid and an auxiliary carbon-monoxide (CO) separation unit, technology will be based on know-how previously purchased and adapted to Romanian conditions or on know-how locally developed. Preliminary work for the implementation of the Project has begun, and commissioning of the various plants will be spread over a period of two years, from December 1979 to December 1981. 1.02 Total financing required for the Project is estimated at Lei 2,819 million (US$157 million), including Lei 1,075 million (US$60 million) in foreign exchange. The proposed Bank Loan would, therefore, provide 26% of the total and 67% of the foreign exchange financing needs. US$12.9 million equivalent will be provided through a supplier's credit from the Federal Republic of Germany and will be used to finance the acetic acid plant. The Government will provide the remainder of the funds required. The Project was approved by the Council of Ministers in October 1977. 1.03 The Project was first identified by a Bank mission to Romania in May 1976, which, from a list of nine industrial projects, gave this project, together with three others, priority for Bank support. A Project Preparation Mission in June 1977 recommended that further design work, including some change of scope, be carried out before appraisal. The Project was appraised in March 1978 by a mission consisting of Messrs. E. Tortorelli (Chief) and P. Lietard, of the Industrial Projects Department, and Mr. F. Pederzani, Consultant. Additional work on the Project's market aspects was carried out in June 1978 by Mr. D. Caplin, also of the Industrial Projects Department. II. THE CHEMICAL INDUSTRY AND THE BORROWER A. Ministry of Chemical Industries 2.01 In Romania, manufacturing of chemicals comes under the Ministry of Chemical Industries. The organizational structure of the chemical industry has the same three-step hierarchy as all industrial sectors in Romania, com- prising of 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. The  -2- Industrial Central directs the operations of all enterprises in its partic- ular 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 materials and domestic sales. Also under the Ministry of Chemical Industries are the following agencies: The Technological Engineer- ing and Design Institute for Chemical Industry (IITPIC), the Import Agency for Chemical Equipment and Technology (ROMCHIM), and Danubiana Export Import (DANUBEXIM), the agency for the exportation of many chemical products. 2.02 The chemical industry has been one of Romania's most dynamic sectors. Since 1950, it has attained an average growth of 21% a year and ranks now in third place with a share of about 12% of total industrial out- put, behind the machine building and metal working industries (33%) and the food industries (13%). It absorbed about 13% of total industrial investment and employed 7% of the industrial labor force in 1976. Romania - Selected Indicators for the Chemical Industry 1950 1960 1965 1970 1975 1976 Gross Output Indices (1950 = 100) Total Industry /a 100 340 650 1,140 2,100 2,300 Chemical Industry 100 660 2,070 5,450 11,340 13,000 Petroleum 100 270 380 480 590 650 Methane Gas 100 370 860 1,320 1,740 1,900 Average Annual Growth Rate /b n.a. 45.9 25.7 21.4 15.8 15.8 % Share of Chemical Industry in: Total Gross Industrial Output 3.1 6.1 6.7 10.1 11.3 11.7 Total Industrial Employment 2.6 4.2 5.4 6.5 6.8 6.8 Total Country Exports 1.7 2.2 6.4 7.0 10.8 8.3 Total Country Imports 4.5 7.4 6.3 6.7 6.5 6.8 Total Investments in Industry 3.3 12.6 12.3 11.3 14.7 13.0 /a Including electric energy and fuels. /b For chemical industry during preceding five years. Source: Anuarul Statistic al Republicii Socialiste Romania. The development strategy for the chemical industry has been largely designed to increase the value added to the country's petroleum and methane gas resources. Accordingly, the fastest growth has occurred in fertilizers, plastics and synthetic rubber and fibers. Long-term plans continue to attribute a high priority to petrochemicals which are expected to account for three-fourths of  - 3 - the chemical industry output by 1990 against about one-half today. Romania's main competitive advantages in the chemical field are the availability of local hydrocarbon resources, considerable experience in chemical engineering, research and development, and the excellence of its manpower development programs. 2.03 The industry is largely concentrated in the center and the south of the country, where large refinery and petrochemical complexes have been developed around Ploesti and Pitesti to produce a broad range of refinery products, petrochemical intermediates, and end-products. The Government is making an effort to locate downstream industries, such as fertilizers, tires, and synthetic fibers, away from these traditional industrial centers, partly to promote a more balanced regional development (thus also avoiding indus- trial congestion) and partly because of greater availability of labor and housing. B. Development of the Chemical Industry Based on Methane Gas Processing 2.04 Romania has had an established chemicals industry since the last decades of the 19th Century, based on its large petroleum and gas extraction industry. But it is only in the last 15 years that methane gas processing has become important. This is largely a result of the policy efforts de- scribed above under which the Government has restricted new gas connections solely to the chemical industry and is in the middle of a program converting utilities and industries from gas-based to coal and lignite-based primary fuels. As a result, the proportion of methane used as feedstock for the chemical industry has grown rapidly, and the trend is expected to continue until 1985 when about 30% of the projected more or less constant total production of methane gas will be used for processing purposes. Romania - Production and Consumption of Methane /a (million m ) Consumption Year Production as Fuel as Feedstock 1960 6,710 6,250 460 1965 13,040 12,150 890 1970 19,970 17,950 2,020 1975 27,000 24,300 2,700 1980 27,700 21,000 6,700 1985 28,000 19,400 /b 8,600 /b /a Methane production accounts for about 90% of total gas production, including associated gas. lb Mission estimates.  2.05 In the 1960s, methane gas was primarily used to produce ammonia (for nitrogenous fertilizer production) and carbon black. But recently, while ammonia production has remained predominant, production of methanol and a wide variety of specialized chemicals has become significantly more important, and production of carbon black has declined in percentage terms. This trend is expected to continue in the future with an even stronger combined emphasis on ammonia and methanol production by 1980, as the table below shows. Romania - Chemical Uses of Methane Gas ('000 tons) 1970 % 1975 % 1980 % Ammonia 790 85 1,460 88 2,930 84 Acetylene 42 5 71 4 86 2 Methanol 70 7 107 6 446 13 Carbon Black 24 2 10 1 14 - Other Uses 6 1 15 1 25 1 Total 932 100 1,663 100 3,501 100 2.06 These five methane-based intermediate products and the many end products derived from them account for all production of such products in Romania. There is one ethane-based plant in Romania, which, however, produces other ethylene-based intermediate and end products, which do not compete with the methane-based products outlined above. But it is expected that this situation will change in the future as Romania begins to rely to an increasing extent on ethylene based products from naphtha derived from imported crude oil. A major new petrochemical complex at Midia for production of ethylene based chemicals is planned for 1980. This is both because methane output is not expected to increase in the future (para 2.04) despite extensive efforts at secondary and tertiary recovery and because ethylene-based derivatives are expected to remain cheaper than methane-based processes for the foreseeable future. This trend will not affect intermediate and end products derived from methanol and acetic acid, however, on which the proposed Project is based. C. The Central and the Enterprise 2.07 The Industrial Central for Chemical Fertilizers (CIICh, or the Central) was established in its present form in 1973, with a head office in Craiova responsible for eleven enterprises (plants) in Romania, including the project plant at Craiova. The two most recent plants are at Arad and at Bacau and were completed in 1971 and 1974, respectively. In addition to the proposed Project, the Central is responsible for executing six other expansion projects, among which is the Bank financed fertilizer project at Bacau 1/ and two new projects, all to be completed before the end of the current Five-Year Plan (1976-80). Details of the existing and new plants are set out in Annex 2-1. The Central produces a very wide range of products, over 200 in all, but fertilizer production is overwhelmingly important. The 1/ Loan 1020-RO of June 28, 1974.  -5- organization chart for the Central is shown in Annex 2-2. The Central con- forms to the standard pattern of industrial organization in Romania with four functional departments (production, technological, commercial and financial) and a number of staff departments, including personnel, which are also directly under the General Manager. The Central's senior staff, under the Deputy Manager, also acts in responsible positions in one of the enterprises, in this case the Project Enterprise at Craiova. The Central also provides technical assistance to all the enterprises under its authority. 2.08 The Project will be an expansion of the existing Craiova Chemical Complex, the Enterprise at which the head office is situated and Romania's largest center of methane based chemicals production. The Enterprise is an established organization with the legal authorities and jurisdictions normal under Romanian law. An organization chart for the Enterprise is shown in Annex 2-2. Decision making power at the Enterprise level formally belongs to the Enterprise's General Assembly which includes all the workers and normally meets twice a year. A Working People's Executive Committee, chaired by the Enterprise's General Manager and consisting of elected workers' representatives and some members of the management, is responsible for opera- tions. The General and Technical Managers of the Enterprises are responsible for implementing the decisions of the Executive Committee. This type of organization has worked satisfactorily in the day-to-day operations of the Craiova plant to date and is expected to be adequate for the future. D. Financial Situation and Prospects of the Central 2.09 The Central is the focus for consolidation of the financial results of the individual enterprises, the overall surplus or deficit of the Central then being absorbed within the Ministry's accounts and eventually emerging in the State budget. As mentioned in previous Bank appraisal reports on Romania, financial analyses and projections as generally applied by the Bank to eval- uate the performance and prospects of industrial enterprises are of limited value in the Romanian system. However, to illustrate the scope of operations under present price and cost relationships, actual and projected financial statements for the Central and the Enterprises are shown in Annex 2-3. Those for the Central are summarized below. Romania - Summary Financial Indicators for the Central (CIICh) (million Lei) -------Actual ------ ------Projected---- 1973 1976 1977 1978 1979 1980 Sales 6,466 10,010 13,699 17,585 18,730 20,060 Benefits Before Tax 888 1,298 4,494 6,074 6,833 7,521 Net Benefits (After Tax) 631 908 3,227 2,981 3,545 3,425 Net Fixed Assets 9,792 16,114 20,119 23,735 25,783 26,054 Net Benefits/Sales (%) 10% 9% 24% 17% 19% 17% Net Benefits/Net Fixed Assets (%) 6% 6% 16% 13% 14% 13%  -6- 2.10 The figures indicate that the Central's profitability is satisfac- tory, although the latter reflects not only efficient operations but also Romanian pricing policies. E. The Romanian Financial System and the Borrower 2.11 The State determines all prices, and annual financial plans are made by the Enterprises and the Industrial Centrals so as to meet the targets contained in the Annual and Five-Year Plans. Since the primary responsibility of an Enterprise is to meet established physical targets and inputs and out- puts are calculated at fixed prices, financial profitability for an Enter- prise - as related to capital employed and output - is established under the direction of the Central, and the efficiency of an Enterprise's management is measured by the achievement of the assigned production and profitability targets. There has been a historical tendency for prices to remain stable over long periods of time. This implies not only that there is a lack of close correlation with shifting supply and demand relationships but also that relationships between costs and prices become distorted as industry expands and technology and productivity improve. To remedy these distortions, periodic price resettings are undertaken for the whole economy, each sector being reviewed separately. The last such price resetting (since 1963) was undertaken in 1974-76, and the present internal prices for chemicals - which are now more closely in line with international prices - are expected to be in force at least through the end of this Five-Year Plan period (1980). 2.12 The Investment Bank (the Borrower) administers and controls all investment funds of the State Budget (except for agriculture, water resources and food processing) and acts as the channel for all sources of major domestic investment financing in industry. Since 1970, the Investment Bank has also made credits on its own, though funds available for this purpose are rela- tively small. The President of the Investment Bank is responsible to the Minister of Finance, who has wide authority in the planning and financing of all investments. The Investment Bank has wide ranging responsibilities in the implementation of projects, reviewing the Techno-Economic Studies before either approving those projects within its authority or submitting all other projects to either the Council of Ministers or for Presidential approval by decree, depending on the size of the investment to be undertaken. It also controls the flow of funds during project implementation. The Investment Bank has no specific legal authority that enables it to bring its views to bear directly on the management of an Enterprise, but it can recommend necessary operational actions to the Ministry of Finance, which in turn can act through the Ministry concerned with the project. 2.13 Certain aspects of the management and financial planning of Centrals and their Enterprises may change in 1979 as a result of Romania's new economic policy of some greater decentralization of economic and financial planning responsibility for which guidelines were announced in a major policy speech by the President of Romania in March 1978. Under the new system, various new indicators will be introduced to reflect the efficiency of each Enterprise  - 7 - and provide greater incentive to each Enterprise to increase productivity. Each Enterprise will have greatly expanded responsibility for planning pro- duction and marketing of output, for concluding import and export contracts, and for providing housing and other social amenities for its workers, taking into account its need to meet the new general indicators outlined earlier. Each Enterprise will also become financially more self-sufficient and will enter into borrowing and lending relationships and will be responsible for repayment of all credit obligations, including those in foreign exchange. The role of the central Government agencies such as the Centrals, Foreign Trade Enterprises and the Investment Bank will also change. Details of all these changes and the timing of their implementation remain to be worked out. However, the Government has indicated that they will not affect the arrange- ments negotiated for the proposed Project between the Bank and the Investment Bank. III. MARKET AND MARKETING 3.01 The products to be manufactured by the complex are methanol, acetic acid, vinyl acetate monomer (VAM), polyvinyl acetate (PVA), ethyl acetate and acetic anhydride. All are intermediates which are used in the manufac- ture of a wide variety of chemicals, which in turn are further processed before appearing in products in the capital goods or consumer markets. Methanol, for instance, is a starting material for formaldehyde, which domi- nates the thermosetting plastics field; methanol is also used in the manu- facture of polyisoprene rubber and for dimethyl terephthalate (DMT), a basic intermediate in the synthetic fibre industry. Recently attention has been focused on some promising new uses for methanol - as a substitute for gasoline and as a boiler fuel, and as a substrate in the production of single cell protein for animal feed. The Project will utilize a new process which uses methanol as raw material for the production of acetic acid. 3.02 Acetic acid, besides being the raw material from which acetic anhydride, VAM, PVA and ethyl acetate are manufactured, is a basic chemical intermediate, and has many applications in dyeing and bleaching of textiles, and in the manufacture of cellulose acetate; this has long dominated the artificial fibre industry and is a basic input for the manufacture of photo- graphic stock. Acetic anhydride also finds outlets in the cellulose acetate market as well as in the manufacture of aspirin. VAM and PVA are major growth products, being used in the production of synthetic fibres and textile coat- ings. The major growth areas have been in the formulation of water-based paints, which have to a major extent eliminated the older lacquer-based products, and in the production of a variety of adhesives used in such widely disparate activities as the manufacture of shoes, furniture, industrial con- struction and transportation equipment. Ethyl acetate is a versatile solvent used in chemical processes, and in the paints and coatings industries.  -8- 3.03 The Romanian market for chemicals is still relatively small; the capacities being installed in the Craiova Project are of a minimum economic size and exceed current domestic requirements in anticipation of a buildup of domestic demand. It is therefore expected that part of the Project's output will have to be exported, at least in the early years of operation. Of total production over the first three years of operation, about one-third will be exported, much of it to Comecon countries; by 1985, however, only 8% of output will be exported. A. The Romanian Market 3.04 Domestic consumption of the chemicals produced by the Craiova Project has grown at about the same rate as the total chemical industry, itself one of Romania's most dynamic sectors (para 2.02). In terms of methanol and acetic acid, consumption grew at an annual rate of 20% from 1965-77. This rapid growth rate reflects the Romanian authorities' desire to establish a firm industrial base for the development of basic end use industries. A logical policy was adopted by first encouraging the develop- ment of basic intermediates such as methanol and acetic acid, but by the early 1970s the consumption of more sophisticated secondary products such as PVA was already established. For the chemicals to be produced by the Project, the Romanian authorities plan a rate of growth in consumption of an average of 16.1% until 1983, with ambitious plans for major new outlets for methanol in the period 1983-1985 which would bring the overall annual growth rate from 1977-85 close to the growth rate in the last decade (Annex 3-1). Romania - Domestic Consumption of Project Products a/ ('000 tons) Average Annual ----Actual----- Projected Growth Rates (%) Product 1965 1970 1977 1983 1985 1965-77 1977-83 1977-85 Methanol 21.3 53.3 214.4 572.2 1,096.4 21.2 17.8 22.6 Acetic Acid 6.1 20.1 32.1 74.8 77.3 14.8 15.1 11.6 VAM c/ - 4.8 17.3 35.0 36.0 20.1 b/ 12.5 9.6 PVA c/ - 2.5 12.8 18.0 20.0 26.3 5.8 5.7 Ethyl Acetate c/ 1.1 1.8 3.2 4.8 5.6 9.3 7.0 7.3 Acetic Anhydride c/ 0.4 0.4 0.4 5.0 6.6 - 52.3 42.0 a/ Source: Ministry of Chemical Industry. b/ 1970-77. c/ Derivatives of acetic acid.  -9- As the above table indicates, Craiova's output can be classified into two groups: (i) methanol, and (ii) acetic acid and its derivatives, i.e., vinyl acetate monomer (VAM), polyvinyl acetate (PVA), ethyl acetate and acetic anhydride. The following section describes the domestic market (both past and future) for the major downstream products which can be made from these two product groups of intermediate chemicals in preparation for the discussion (starting with para 3.13) of the past and future Romanian pro- duction, consumption and exports for Craiova's chemicals themselves, i.e., methanol as well as acetic acid and their derivatives. B. Domestic Markets and Exports for Downstream Products 1. Methanol 3.05 The major uses for methanol in the Romanian market are synthetic resins (via formaldehyde and methyl methacrylate), synthetic rubber (via polyisoprene) and synthetic fibres (via dimethyl terephthalate (DMT)) as given in Annex 3-2. A major new outlet for methanol is the planned manu- facture of single cell protein. The following table shows a summary of end use patterns for methanol. Romania - Domestic Methanol Consumption by End-Use a/ ('000 tons) Average Annual Actual Projected Growth Rates (%) 1965 1977 1983 1985 1965-77 1977-83 1977-85 Acetic Acid b/ - - 16.0 37.2 n.a. n.a. n.a. Synthetic Resins 18.0 84.2 159.0 169.0 13.7 11.1 9.1 Synthetic Fibers 0.1 32.0 99.6 133.7 16.4 c/ 20.8 19.6 Synthetic Rubber 0.1 62.4 109.6 135.2 n.a.d/ 9.8 9.8 Single Cell Protein - - 45.0 450.0 - n.a. n.a. Other 3.1 35.8 143.0 148.1 22.6 26.0 19.4 Total 21.3 214.4 572.2 1,073.2 21.2 17.8 22.3 a/ Source: IBRD estimates based on data supplied by Craiova Central. b/ Excludes direct exports of Craiova Project products. Until the Project comes on stream in 1980, all acetic acid is produced from acetaldehyde. c/ 1970-77. d/ Full scale production of polyisoprene from methanol began in 1975.  - 10 - 3.06 The future growth rate for methanol consumption in synthetic resins is lower than in the past, reflecting a gradual shift towards thermoplastics rather than thermosetting resins. Romanian per capita consumption of syn- thetic resins (excluding polyvinylchloride and polyethylene) is projected to reach 7 kg in 1985, which is comparable to current per capita consumption in developed countries. Exports of synthetic resins are planned to increase at a slightly faster rate than local consumption, so that exports will repre- sent 60% of total production in 1985 compared with 56% in 1977 (Annex 3-3). 3.07 The use of methanol in synthetic fibres will grow at a faster rate than total synthetic fibre production as the importance of polyester fibre in the product mix increases. The Bank is financing one of the new polyester fibre facilities, which require DMT as a raw material (Cimpulung-Muscel Report No. 1436-RO dated 5-24-77). That report estimated that Romanian mill con- sumption of synthetic fibres would reach 231,000 tons in 1985, compared with the current Romanian projection of 205,000 tons (Annex 3-3). The report also pointed out that, unless new polyester plants were to be built after those projected in 1977, substantial fibre imports would be required by 1985. The Government has now initiated new synthetic fibre projects to come on stream in the early 1980s with the objective of reducing the net fibre deficit, and maintaining an export position in synthetic fibres. Planned 1985 exports are small compared with gross imports into the E.E.C. even during the recent slump conditions which have been prevailing in Western Europe. Thus, it can be seen that the projections for methanol requirements in the domestic market, as far as these end uses are concerned, are reasonable. 3.08 The large tonnage of methanol devoted to synthetic rubber pro- duction arises from the production of polyisoprene rubbers, which are good substitutes for natural rubber. Romania is following the precedent of the USSR in reducing drastically its import of natural rubber and replacing it with indigenously produced polyisoprene. All methanol from the Craiova Project will be absorbed by the domestic market by 1983; methanol require- ments for single cell protein production will come from other methanol units unconnected with this Project. 3.09 Several industrial scale plants for the manufacture of single cell protein (SCP) have already been commissioned in the USSR, Japan and Italy. All these units use alkanes as the substrate and yeast as the microorganism. The SCP produced, however, is about three times as expensive as the protein contained in soya bean meal. Controversy has also arisen over the presence of small quantities of unreacted alkanes in the product. In an attempt to overcome these disadvantages, I.C.I. (UK) are constructing a plant (to be commissioned in 1980) to produce 55,000 tons per year of SCP using methanol as a substrate and a bacterium as the microorganism. Any unreacted methanol should be completely removed from the SCP during the drying stage; bacteria have a higher protein content than yeast and reproduce more quickly. Although the cost of production of SCP from methanol is considerably lower than from alkanes, it is still higher than that of protein contained in soya bean meal at current prices. There is no doubt that the Romanian market could absorb the projected production of SCP if it could be produced efficiently. Romania  - 11 - has a pig population of about 10 million, which will increase to about 15 million by 1985. Their protein requirements would approach 400,000 tons by 1985, compared with a planned production of at most 200,000 tons of SCP. The principal uncertainties about the SCP project relate to whether methanol- based SCP will be able to compete with soya bean protein and whether tech- nical know-how will have reached a stage where a plant of such large capacity could be brought on stream by the planned date of 1983-84. 2. Acetic Acid and Derivatives 3.10 A similar analysis of end uses for acetic acid and derivatives has been attempted (Annex 3-2). For the sake of simplicity, all derivatives have been converted back into acetic acid, although Craiova ethyl acetate is manu- factured via acetaldehyde rather than acetic acid. Since D. P. Solventul, another Romanian chemical enterprise, uses acetic acid as the raw material for ethyl acetate and because of the flexibility in use between ethyl and butyl acetates as paint solvents, with the latter being manufactured from acetic acid, ethyl acetate end uses have been included in the following table. Romania - Domestic Acetic Acid and Derivatives Consumption by End Use a/ b/ ('000 tons of Acetic Acid Equivalent) Average Annual Actual Projected Growth Rates (%) 1965 1977 1983 1985 1965-77 1977-83 1977-85 Paints & Lacquers 1.0 5.4 11.2 14.3 14.7 12.9 12.9 Furniture & Timber 0.1 0.6 1.2 1.4 17.0 12.0 12.0 Synthetic Fibres - 2.2 4.0 4.9 10.2 c/ 10.4 10.4 Artificial Fibres 0.6 0.6 6.0 9.2 - 46.8 42.0 Other Textile Uses & Footwear 0.9 4.5 7.6 9.1 14.1 9.1 9.1 Misc. Adhesives - 0.5 0.8 1.0 5.8 c/ 9.1 9.1 Other 5.0 19.3 25.8 28.5 12.0 4.9 4.9 Total 7.6 33.1 56.6 68.4 23.4 9.3 9.5 a/ Source: IBRD estimates based on data supplied by Craiova Central and Investment Bank. b/ Excludes direct exports of Craiova project products, but includes ethyl acetate. c/ 1970-77. 3.11 Because of the multifarious uses of acetic acid (over 30 primary derivatives alone are produced in Romania), it has not been possible to assign a large part of the current production to specific end uses; it is likely,  - 12 - however, that part of this unassigned quantity will in fact be utilized in one or other of the end uses identified. For future incremental production, on the other hand, more certainty exists at least as to the plans for utili- zation of these derivatives. The major identified outlets for acetic deri- vatives are for paints and lacquers and in textiles and footwear. Romania also plans to complete by 1983 a triacetate plant which will utilize a sig- nificant proportion of acetic anhydride produced by the Craiova Project and which will manufacture the raw material for certain textiles and photographic stock which are currently imported into Romania. As shown in the table in para 3.04, this will help to increase domestic consumption of acetic anhydride from about 400 tons per year today to over 6,000 tons per year by 1985. 3.12 The Romanian projection for domestic consumption of paints and lacquers in 1985 is equivalent to a per capita consumption of 13.3 kg com- pared to a projected 1985 per capita consumption in the F.R. of Germany of 25.9 kg and about 14.3 kg in the UK and Belgium. The Romanian projection for artificial fibre consumption in 1985 is 30,000 tons higher than the IBRD projection contained in the Cimpulung Appraisal Report, thus about balancing out the lower Romanian projection for synthetic fibre consumption which is 26,000 tons less than the IBRD estimates for 1985. Thus, the pro- jected domestic consumption of acetic acid derivatives appears attainable. A lower proportion of end use products from acetic acids are destined for export than is the case for end use products of methanol (Annex 3-3). C. Domestic Production, Consumption, and Exports of Craiova Chemicals 3.13 The table on the following page summarizes the Romanian production, consumption, exports and imports of the chemicals the Craiova Project will produce for the past (1965-77) and the future (1980-85) (Annex 3-4). As can be seen from this table, domestic production of acetic acid, vinyl acetate and polyvinyl acetate has more or less kept pace with domestic consumption, al- though acetic acid imports, which in 1977 accounted for 12% of domestic consumption, are expected to rise until the Craiova Project comes on stream. Acetic anydride, which has had a static domestic consumption of about 400 tons per year, is not yet produced in Romania, while production capacity of ethyl acetate is inadequate and imports are now at a level of about 2,000 tons annually. Methanol has been exported during several years in the past, although in 1975 and 1976 some imports were required to supplement domestic production. Romanian production of all project products grew on average at about 18% per year between 1965 and 1977, and Romania is planning an equiva- lent rate of growth through 1983. By the mid-1980's, most of the Project's output will be absorbed domestically, and any exportable quantities will be small compared with European consumption and trade in these products (para 3.17). 3.14 While domestic consumption growth as planned appears in general reasonable, there is, however, some uncertainty in the opinion of Bank staff about the methanol projections. By 1985, methanol production is planned almost to double over its 1983 production level to meet the requirement for single cell protein production. Three new methanol units would have to be  Romania - Production/Consumption Balance of Craiova Chemicals (000 tons) 1965 1970 1977 Export Export Export Export Export Export Historical Prod. Cons. (Imp.) ShareAa Prod. Cons. (Imp.) Share Prod. Cons. (Imp.) Share Methanol 34 21 13 38% 90 53 37 41% 237 214 23 10% Acetic Acid 3 6 (3) - 20 20 - - 28 32 (4) - Vinyl Acetate (VAM) - - - - 5 5 - - 17 17 - - Polyvinyl Acetate (PVA) - - - - 3 3 - 15 13 2 13% Ethyl Acetate 1 1 - - 1 2 (1) - 1 3 (2) - Acetic Anhydride - 0.4 (0.4) - - 0.4 - - - 0.4 (0.4) 1980 1983k/ 198_5___ Export Export Export Export Export Export Projected by Romanian Prod. Cons. (Imp.) Share Prod. Cons. (Imp.) Share Prod. Cons. (Imp.) Share Authorities MIethanol 477 377 70 16% 616 572 44 7% 1,191 1,096 95 8% Acetic Acid . 69 53 16 23% 89 75 14 16% 89 77 11 12% tVinyl Acetate (VAM) 20 17 3 15% 40 35 5 12% 40 36 4 10% Polyvinyl Acetate (PVA) 10 9 1 10% 23 18 5 22% 23 20 3 13% Ethyl Acetate 1 3 (2) - 0 5 4 '44% 9 6 3 33% Acetic Anhydride 6 5 1 16% 10 5 5 50% 10 7 3 30% a/ Export share as a % of production. b/ If the single cell protein project (para 3.09) is postponed to later than 1985 and no further methanol capacity is added beyor.d what is now firmly planned, methanol production in 1983 will be only 526,000 tons and consumption 527,000 tons. Under the same assumption, methanol consumption in 1985 would be only about 618,000 tons, requiring imports of about 90,000 tons.  - 14 - brought on stream, and 80% of their combined capacity is planned to be dedi- cated to this use. Bank staff are of the opinion that commitment of such a substantial capacity may be premature in view of the current state of technology for single cell protein production and, without such use, it is expected that methanol requirements will only be 700,000 tons in 1985 rather than the 1.1 million tons projected by the Romanian authorities. If the decision is delayed to go ahead with the single cell protein plant, then the corresponding plants for the production of methanol feed would also be delayed, since methanol exports are not envisaged in the Five-Year Plan except for some short term balancing requirements. Without the addition of further methanol production capacity beyond what is already existing or planned for the Craiova Project, methanol capacity in 1983 will stand at about 526,000 tons as compared to domestic consumption of 527,000 tons in that year. Under such an assumption, all Craiova methanol will have been absorbed by the domes- tic market by the time the single cell protein project may be undertaken. In view of uncertainties concerning the methanol projections, the Government has agreed to prepare and submit to the Bank, by December 1979, an update of the data made available to the Bank during appraisal with respect to the projected domestic methanol demand and supply and of the export marketing development plans, and to exchange views with the Bank on these data, their basis and con- clusions thereof. 3.15 Assuming alternatively that (a) no further methanol units are built nor the single cell protein plant and that (b) the single cell protein plant is undertaken and with it the construction of three further methanol units, the following table gives the quantities of Romanian products of the type produced by the Project that are planned for export between 1980 and 1985 and their general destinations (Annex 3-5).  - 15 - Romania - Planned Exports of Products also Produced by the Project ('000 tons) 1980 1981 1982 1983 1984 1985 (a) (b) (a) (b) (a) (b) Methanol COMECON & China 15 14 8 - 13 - 10 - 17 Other 55 56 10 - 31 - 42 - 78 Total 70 70 18 - 44 - 2 - 95 Acetic Acid COMECON & China 2 5 3 3 4 6 Other 14 22 14 11 9 6 Total 16 27 17 14 13 12 Vinyl Acetate (VAM) COMECON & China 2 2 2 2 2 2 Other 1 3 4 4 3 2 Total 3 5 6 6 5 4 Polyvinyl Acetate (PVA) COMECON & China 1 - 3 3 2 2 Other - - - 2 2 1 Total T 5 4 3 Ethyl Acetate COMECON & China - - 2 3 3 3 Other - - - 1 1 - Total - - 2 4 4 3 Acetic Anydride COMECON & China 3 7 7 4 3 3 Other 2 1 2 2 - - Total 5 8 9 6 3 a/ Assuming no further methanol units are built. b/ Assuming SCP is undertaken and 3 further methanol units are built. 3.16 It can be seen from the above table that, with the exception of methanol and acetic acid, most of the export surpluses are expected to be absorbed by COMECON countries and China. Exports of VAM and PVA are also planned to neighboring countries such as Yugoslavia, Greece and Turkey, so it is unlikely that any significant quantities of those products will have to compete in Western European markets. The Romanian export organization DANUBEXIM, after preliminary market contacts, estimates that up to 10,000 tons per year of acetic acid can be placed in countries with which Romania  - 16 - has established special trading relationships, such as Israel, Singapore and Malaysia. Thus in 1981, the year in which the largest export surplus is expected to be available, a maximum of about 12,000 tons of acetic acid and 55,000 tons of methanol will have to find markets in Western Europe (assuming that the construction of further methanol plants is postponed). D. The Western European Market 3.17 The market for chemicals in Western Europe, which had grown more or less steadily until 1974, suffered a serious setback in 1975 with consump- tion falling 15-20% in the space of a year. 1976 showed a return to 1974 levels for acetic acid derivatives while methanol did not reach its 1974 consumption level again until mid-1977. As noted above, the three principal export items from the Craiova Project are methanol, acetic acid and vinyl acetate; exports (other than trade with COMECON countries) of each of the other Project products is not expected to exceed 2,000 tons per year (in all cases less than 1% of W. European consumption), and no difficulty is antici- pated in disposing of such small quantities. The following table summarizes the demand and supply picture for the three principal export products. To put these figures in perspective, methanol exports would represent 1.4% and acetic acid exports 1.2% of Western Europe's consumption in the peak export year of 1981, while peak vinyl acetate exports in 1983 would amount to 0.6% of Western European consumption.  17 - Demand/Supply Balance of Principal Pro ect Export Products in Western Europe - (million tons) Average Annual Growth Rate (%) 1970 1974 1976 1980 1983 1985 1970-74 1970-76 1976-85 -----Actual----- ---Projected---- Consumption Methanol 2.12 2.96 2.80 3.70 4.40 5.00 8.7 4.7 6.7 Acetic Acid 0.65 0.83 0.81 1.01 1.16 1.39 6.3 3.7 5.0 Vinyl Acetate 0.36 0.42 0.45 0.58 0.65 0.72 3.9 4.0 5.0 Production Methanol 1.94 3.01 2.90 3.60 3.80 3.90 11.6 6.9 3.3 Acetic Acid 0.55 0.81 0.80 1.03 1.16 1.31 10.2 6.4 5.6 Vinyl Acetate 0.30 0.40 0.40 0.55 0.65 0.75 7.5 4.9 7.2 Production Surplus (Deficit) Methanol (0.18) 0.05 0.10 (0.10)(0.60) (1.10) Acetic Acid (0.10) 0.02 (0.01) 0.02 - (0.08) Vinyl Acetate (0.06)(0.02)(0.05)(0.03) - 0.03 a/ Methanol consumption and production forecasts have been based on estimates provided by several consulting firms (including SRI International and the Pace Company Consultants). Projections for acetic acid and vinyl acetate are based on a study prepared by the Bank's consultant (ANIC). In reconciling these different estimates a conservative view has been taken in estimating the future production deficit. 3.18 As the above table indicates, the 1970-76 growth rates for consump- tion of methanol and acetic acid are influenced by the 1975 market set back; the growth rates for the consumption of these products in the period 1970-74 were considerably higher. The estimated future growth rates of consumption are well below the pre-1975 growth rates. Vinyl acetate consumption, while  - 18 - suffering a fall in 1975, recovered in 1976 and slightly surpassed the pre-1975 trend line. As stated in para 3.02, the use of vinyl acetate in paints and (via PVA) in adhesives is a major growth area, and this is reflected in the somewhat higher rate of growth of consumption projected for this product in the future. Production and consumption in Western Europe of acetic acid have been reasonably balanced on the whole, with only net marginal import require- ments; however, trading opportunities have led to both exports and imports of these products out of and into this region; therefore the disposal of the relatively small quantities of Romanian acetic acid into this market should not cause any problems. Vinyl acetate has been imported for a long period into Western Europe; although plans have been announced to increase Western European production capacity (and these have been included in the above table), there is already some evidence that some of these capacity additions will be delayed, in which case Western Europe will remain a net importer of vinyl acetate to about 1985. 3.19 The methanol picture is rather different, however. By 1980 name- plate capacity in Western Europe will stand at about 4.2 million tons. The consensus of opinion is that, except in unusual circumstances, an industry wide effective and sustainable capacity utilization of about 85% is realistic; this would give a production of about 3.6 million tons. Western European producers are discouraged from planning any major capacity extensions because of the anticipated change in the supply pattern, with OPEC countries and the USSR entering the market with large capacity units. Saudi Arabia is planning to erect more than 1 million tons per year of methanol capacity; this however will not come on stream until the mid 1980s at the earliest and most of the production is destined for the Japanese and the US markets. Two large methanol plants (each of nameplate capacity of 825,000 tons per year) are under construction in the USSR using British design and equipment from the Federal Republic of Germany; the plants will be paid for from the proceeds of methanol sales abroad. Although the output from these plants will have a significant effect on the European market, their effect on exports of methanol from the Project are likely to be small; although these units were originally scheduled to come on stream in 1981, recent information indicates that the first unit (at Gubaha in the Urals) will not now be completed until mid-1982, while the second (at Tomsk in Siberia) will not start up until towards the end of 1982, i.e. close to 1983 when no further methanol would be available from Romania for exports, unless in fact the single cell protein plant and all three methanol plants were built (paras 3.14 and 3.15). 3.20 Furthermore, Romanian methanol undoubtedly enjoys a freight advan- tage over these plants. The Russian methanol will be moved in rail-tank cars to Ventspils on the Baltic or to Odessa on the Black Sea. The rail distance from Gubaha to these ports is about 2,600 km, while the distance from Tomsk is at least 4,300 km; these freight costs must outweigh the economics of scale enjoyed by the Russian plants. Romanian material, on the other hand, can be moved up the Danube at a cost of about US$25/ton to North Western Europe.  - 19 - E. Domestic and Export Prices 3.21 Domestic prices are Government controlled in Romania and are essen- tially based on financial (i.e. controlled) cost of production (raw materials, utilities, labor, depreciation, etc.) plus a margin which is fixed for the industry as a whole (para 6.01). Raw materials may be charged at an arbitrarily low price in order to encourage their use in specific industries (as is the case with natural gas so that it is used for chemical processing, rather than as fuel). Part of the margin is retained by the enterprise to pay bonuses and to finance reinvestment, but the greater part is returned to the Central Government and added to the State Budget. Some changes are expected in this system when the new economic guidelines will have been translated into rules for practical implementation. All prices are quoted on an ex- works basis. Products destined for exports are transferred at the prevail- ing domestic price, i.e. the enterprise receives the same revenue whether it produces for exports or the home market. 3.22 Because of the current depressed state of the European chemical market, prevailing European prices for certain products do not reflect the prices which could be expected to be realized in the long term. There- fore, long term prices have been estimated by the Bank with the assistance of consultants (including SRI International, the Pace Company Consultants and ANIC) and have been used for the purpose of evaluating the Project. The table on the next page shows these long-term equilibrium prices (based on full recovery of cost plus profit) and compares them with long term prices used in the economic evaluation of the Project, current list (delivered) prices, prices provided by manufacturers in Germany, the Netherlands and Italy, and Romanian domestic (ex-factory) prices. 3.23 The following major conclusions can be drawn from the table: Firstly, as can be expected in the present depressed market situation for chemical products in Western Europe, actual market prices are on the whole, though not consistently, below list prices; secondly, long-term equilibrium prices have been assumed to be below current list prices (with the exception of methanol) even when taking into account that the equilibrium prices are quoted ex-factory while list prices are given on a delivered basis; thirdly, the prices used in the report's economic evaluation have been derived on a conservative basis; a discount ranging from 5% to 40% has been applied to the equivalent long-term equilibrium (delivered) prices; and, fourthly, the Romanian domestic prices are not too far off international prices, except for methanol (the price of which is only about half the Western European price) and for ethyl acetate (the price of which is between 50% and nearly 100% above Western European prices). F. Marketing 3.24 Domestic sales are basically determined through the medium of the Five-Year Plan which effectively sets production offtakes to other enter- prises. An annual plan is developed to which modifications may be intro- duced to the provisions within the Five-Year Plan for the year in question.  Chemical Product Prices (US$/ton)/a Long-term Prices Used F.R. Germany Holland Italy Equilibrium for Economic (Delivered) (Delivered) (Delivered) Prices Evaluation Manufac- Manufac- Manufac- (ex-factory in Appraisal turers turers turers Romania Western%, (Delivered c Informa- Informa- Informa- Prices Europe)- EEC) List-/ tion List-/ tion List-/ tion ex-factory Methanol 130-137 125 120-122-/ 132-151 120-122 / - 120-122-= 115-125 59 123-130-/ 123-130e/ 123-130-/ Acetic Acid 400-404 375 423-529 441-465 450 389-435 334-403 374-409 322 Vinyl Acetate 490-630 480 698 490-514 639 - 518 - 544 Polyvinyl Acetate 520-554 510 770 - - - 564 - 500 Acetic Anhydride 626 600 548 - 654 - 697 - 500 Ethyl Acetate - 510 650 - 665 - 506 - 998 a/ Prices are expressed in 1977 dollars, but reflect mid-1978 price levels. b/ Source: Various Consultants c/ Source: European Chemical News, 5/12/78 (single deliveries). Tank cars 10-20 tons, except PVA which is in 5-10 ton lots. d/ Spot e/ Contract Industrial Projects Department October 1978  - 21 - The modifications may be made because of availability of new resources or because of variations in the rates of growth of domestic or external mar- kets from those assumed in the Five-Year Plan. After the Annual Plan has been drafted, it is made concrete through the arrangement of supply and mar- keting contracts. Since equilibrium in material balances is crucial to plan implementation, enterprises must complete contracts for the purchase of in- puts and sale of outputs which are consistent with the Plan. The enter- prises are legally bound to their procurement contracts and, in general, changes in an enterprises' targets cannot be made without prior negotiation of the procurement contracts and the consent of the suppliers. 3.25 Export marketing of Craiova chemical products will be carried out by DANUBEXIM, a Foreign Trade Enterprise under the Ministry of Chemical Industry which is currently trading in fertilizers, explosives, tires, plas- tics, rubber, and fibres. DANUBEXIM becomes the formal owner of the goods which are transferred to it from the individual enterprises and undertakes to sell all the materials of which it takes possession. Some technical service is provided by the individual enterprises via DANUBEXIM to cus- tomers. Although preliminary contacts have been made with potential cus- tomers abroad, no firm commitments can yet be entered into because start-up dates are still too far in the future. In addition, although DANUBEXIM has several partnerships with distributors in the main European markets (Federal Republic of Germany, France, UK and Italy), it has limited market intelligence capabilities. 3.26 As noted above, Romanian authorities recently announced plans for giving greater responsibility to individual enterprises, including in the field of foreign trade. If Romania is to export Craiova products at economic prices it will need an efficient export marketing organization with a rapid market intelligence service in order to enable it to establish a continuing preseace in the extremely competitive international marketplace. In the case of certain products, there may well be a need for some form of techni- cal service to customers. DANUBEXIM and the Craiova enterprise are already cooperating both on technical service and identifying markets. Agreement has been obtained that an export marketing development plan for Craiova's products will be prepared and submitted to the Bank by December 1979. 3.27 Most of the Enterprise's products for export will be shipped via the Black Sea port of Constanza, with which good rail communications exist, and where bulk storage for liquids has already been installed. Besides normal shiploading facilities, there will also be facilities for pipeline loadings of barges of 500-3,000 tons whose products are then in turn transferred to larger ships for movement to Western Europe and elsewhere. Because of berth limita- tions, the maximum ship size is 5-6,000 tons capacity today, but extensions are being made to receive ships up to 10,000 tons capacity. Some barge move- ments to Western Europe via the Danube are also planned; loading will take place at the Iron Gates, not far from Craiova.  - 22 - IV. THE PROJECT A. Project Scope 4.01 The Project, which consists of the expansion and modernization of the Craiova Chemical Complex, will produce the products at annual capaci- ties as shown in the flowsheet on page 23 and summarized below: Project Unit Capacities and Net Production Capacities for Sale (tpy) Net Production Sales Capacities as Products Capacity for Sale / % of Unit Capacities Acetylene 3 30,000 14,331 47 Carbon Monoxide (m /h) 5,000 - - Methanol 210,000 172,200 82 Acetic Acid 60,000 27,946 47 Acetic Anhydride 10,000 10,000 100 Vinyl Acetate 20,000 18,825 94 Polyvinyl Acetate 13,000 13,000 100 Ethyl Acetate 8,025 7,965 99 /a Net production for sale to other units of the Craiova Complex or outside; the balance is internally consumed in the Project. The net production capacities for sale shown above represent the optimal mix, given the proposed size of the units and the projected market requirements. The Project, however, has some flexibility to adjust this mix to changing market prospects, with minimal impact on operating costs. For instance, production of acetic anhydride could be reduced or eliminated altogether, with a corresponding increase in the production of acetic acid, in the ratio of 1.0 ton to 1.3 ton. 4.02 The Project comprises the following major elements: 1/ (i) The core of the Project lies in the installation of a 30,000 tpy acetylene unit based on methane feedstock; the unit will: replace the production of the Complex's old 16,000 tpy acety- lene plant based on carbide which will be taken out of commis- sion; provide additional acetylene intermediate to new or expanded downstream units (see below); deliver offgases for use in an existing ammonia reactor and in the new acetic acid plant; and allow the full utilization of an existing acetaldehyde unit. 1/ The Romanian authorities have been considering for some time the possibility of adding a 5,000 tpy polyvinyl alcohol plant and a 10,000 tpy butyl acetate plant to the Craiova expansion program. No firm decision has been taken so far in view of their marginal profitability (see Annex 7). Therefore, the Project as described in this report does not include these two plants; the Bank will not finance them should the Romanians decide on their implementation.  ROMANIA - CRAIOVA CHEMICAL PROJECT PROCESS FLOW SHEET E3025 TYP Ethyf A-etaht ACETIC etHYL 7sr.s TPY 6419TPY tEXISTING) 967b TP CEAE 6 Tt Y '9~y 825 TPY _ A-rVytene -e! aJtoTPY _ __ I " | Polavinva Ace ACETYLENE 6175 TPYf POLYVINYL |13,000TPY _ 2b 000 TPY Ocff G., : LM TP_| a 3G5 t 106 _ N V L _ N-P.,- Nm pv ACETATE Not., I Gas 82% Hvd ce 5 m0TP 106.4 X10 Nr , I,Pr yri 216 . 106 rn- u __P Nnrc Pm Year C _ sEPARAT411c/ N _ C t-bor\ tnonU7>t . l _ ACET IWC Acet ic Anhydrk -t 210 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~1.0 TPYTP .~ ~ ~ ~~~~~~~~~~~~0 le AceHYOn ot 3E A __ __ 1e3.4 ^ 1d6 Nrnr p P . , v o w 0 e rT y z 220 ~~~~~~5 Xs 106 A.., Akl0 " Nntc~ ~ ~ ~~~~ f Y., A-1,, A,i TI Wtsrl Tn-Y54  - 24 - (ii) The capacities of the existing vinyl acetate and polyvinyl acetate units will be expanded. (iii) New acetic acid, acetic anhydride, ethyl acetate, and methanol units will be built. In the case of acetic acid, new technology will be introduced and acquired abroad. (iv) A new plant for the separation of carbon monoxide (CO) will provide CO to the new acetic acid plant and hydrogen to the existing butanol plant. 4.03 The Project will divert about 360 million m3 of methane gas from fuel to chemical feedstock uses, thus increasing the amount of gas processed in Romania into higher value chemicals by 11%. The Project has been very ingeniously designed so as to achieve the best possible utilization of the feedstock. About half of the methane stream will be directed to the new acetylene unit; one-third of the carbon contained in this stream of gas would thus be transformed into acetylene and from there into a variety of high value organic chemicals. The remaining two-thirds of the carbon will be transferred in the form of offgas to other units, mainly to the existing ammonia/urea facilities; the composition of the offgas permits direct use by the ammonia reactor and thus allows the replacement of pure methane gas. The other half of the original methane stream will be used for the production of methanol. 4.04 The Project's location and design concept have been planned to make the best possible use of pre-existing investments in the Complex. The exist- ing methane gas pipeline and many infrastructural facilities will be shared by the new units, which will be closely integrated with existing process streams. Spare capacity in some existing units will also be absorbed. Standardization of plants is to take place wherever possible so as to maximize the benefits of existing expertise in building and operating similar units. B. Location, Raw Materials and Utilities 4.05 The Craiova Chemical Complex is located near the village of Isalnita, about 10 km west of Craiova, at the confluence of the Jiu and Amarandia rivers. The Complex hosts facilities for the production of nitrogenous and complex fertilizers (270,000 nutrient tpy capacity) as well as for the production of acetylene (49,000 tpy) 1/ and a range of acetylene-based organic chemicals. The inclusion in the Project of methanol and methanol-based products will diversify the range of products manufactured in the Complex, away from acetylene and fertilizer products. The plant layout is shown in Annex 4-1. 4.06 There is sufficient room on the Craiova site to accommodate the facilities to be built under the Project. Some storage facilities will be moved closer to the railway at the outskirts of the plant. Water is avail- able from the nearby Jiu river, and chemically impure water will be processed 1/ a. Acetylene via partial oxidation: 33,000 tpy b. Acetylene via carbide : 16,000 tpy  - 25 - through a biological treatment unit. The plant units (mainly the methanol unit) will generate part of the steam required for the Project, and residual needs will be filled by existing facilities. Power is available from the national grid as well as from the Complex network. Methane is readily avail- able through an existing pipeline which connects the site to the Transylvania gas fields, some 250 km away, and which has adequate capacity to meet the demand of the Project. No difficulties are expected to meet the Project's raw materials and utilities requirements, detailed in Annex 4-2, which, with the exception of a few chemicals, will all be locally supplied. C. Technology, Employment and Training 4.07 The transfer of new technologies from abroad will be sought for one major plant unit to produce acetic acid and for the CO separation unit. Local equipment suppliers will be involved as much as possible to facilitate such transfers. At the same time and as mentioned previously, the existing acetylene unit, which is based on carbide, will be phased out and replaced by a more modern partial oxidation unit using methane. The technology for this unit has been developed in Romania on the basis of foreign know-how. 4.08 Acetylene has been used in metal cutting and welding for many years and since the early part of the 20th century, has played an important role as a chemical intermediate. Its maximum utilization was reached in the mid-1960s; since then, technologies based on lower cost ethylene and propylene from large naphtha and ethane crackers have to a large extent replaced the processes based on acetylene. However, for countries such as Romania, with an indige- nous source of natural gas (methane) and insufficient petroleum feedstocks, such as naphtha, the use of acetylene-based processes can still be attractive. Since acetylene is produced typically in units with much smaller capacities (10,000-80,000 tpy) than have become common for olefines production (300,000- 500,000 tpy), the acetylene-based processes continue to receive attention when domestic demands for derivatives are at levels which do not justify large-scale production and where the technologies employed to produce these derivatives do not exhibit significant economies of scale (Annex 4-3). 4.09 Estimated personnel requirements of the Project amount to about 1,110 people, out of whom 600 are operators, 450 are auxiliary workers, and 60 are engineers and technicians. The latter will be found among graduates of chemistry schools (which work in close collaboration with the chemical industry) and/or are trained in the Complex. The number of existing adminis- trative staff does not need to be expanded for the Project. In line with the Government's objectives on industrial employment, up to 80% of the per- sonnel will be recruited in the judet of Dolj where the plant will be located. Detailed training programs for the expansion have been submitted to and found acceptable by the Bank. Training for selected personnel has already begun in the existing facilities at Craiova to fill the needs of those plant units which will be commissioned first.  - 26 - D. Ecology and Safety 4.10 The most important pollutants are organic compounds likely to be washed away with the cooling water, particularly in the methanol and acetylene plants. Water pollution, therefore, presents some potential risks. Hence, the Project authorities have decided to install biological treatment facil- ities to control the quality of the effluent water discharged into the Jiu river (Annex 4-4). No problems are anticipated with regard to air pollu- tion levels on account of the particular process technology selected. 4.11 A variety of different chemicals, hot fluids, and high pressure fluids will be used in the new plants at Craiova. Such chemicals and fluids present a potential hazard if not properly handled. However, the operating standards already employed at the Complex are in line with the most up-to- date standards elsewhere in the world resulting in safety records which are remarkably good. No major hazards are expected with regard to the oxygen separation plant. The two air inlets to the oxygen separation plant are 3 km apart and so located that one inlet is always upwind from the Complex, what- ever the direction of the wind, thereby eliminating any risk of presence of dissolved hydrocarbons in liquid oxygen due to air pollution above the chemical Complex and thus diminishing any potential risk of explosion. 4.12 Furthermore and also with the objective of avoiding any explosion risks, the existing acetylene furnaces are fitted (and so will the new fur- naces) with proper vent and shut down instrumentation according to the present safety standards of all modern acetylene technologies. Purge acetylene is handled and transferred according to safety standards which are even more conservative than those of the USA and Germany. Higher acetylenes dissolved in diesel oil and liquid ammonia are safely burned without exceeding the maximum concentration which is actually allowed in similar acetylene plants. The originally proposed CO cryogenic separation process has been abandoned and substituted by the COSORB 1/ process which should be quite safe due to the non-corrosive absorbent liquor it employs. High and medium pressure units, such as to be used in producing methanol and acetic acid, will be designed according to a proper and modern technology. 4.13 The engineering and operational standards adopted on safety were reviewed by a Bank expert and a consultant 2/ and found satisfactory. Agree- ment has been obtained that the Project facilities will be designed, con- structed, and operated with due regard to ecological, environmental, and safety standards. E. Project Implementation 4.14 The Project will be implemented under the supervision of the manage- ment of the Craiova Chemical Complex and the Craiova Central. The Central has 1/ Absorbtion process based on technology developed by KTI (Netherlands). 2/ Messrs. J. Tixhon (IBRD) and F. Pederzani (ANIC).  - 27 - considerable experience in the implementation of new projects and is providing experienced project management and senior staff to the Enterprise. The Central, together with the Enterprise, has also direct responsibility for the procurement of local equipment and raw materials and for the recruitment and training of personnel. In line with the Romanian system of project imple- mentation, several areas of Project execution have been delegated to other organizations which are well versed in their respective tasks. Engineering and design is the responsibility of the Technological Engineering and Design Institute for the Chemical Industry (IITPIC), which was established on February 1, 1977, by joining several design institutes (IPROCHIM, IPUC, and CPRP). ROMCHIM, the foreign trade enterprise of the Ministry of Chemical Industries, is responsible for the procurement of imported goods and services. Construction and erection will be carried out by enterprises of the Ministry of Industrial Buildings. The Ministry for the Chemical Industries supervises the work and coordinates the tasks of the other ministries involved. This scheme for project implementation is standard practice in Romania and has proven itself in the past. Except for foreign technical assistance required for the acetic acid plant, overall and detailed plant layout will be done by IITPIC and the Central. Given the experience the organizations involved have been gaining on expansion projects over the last ten years, project implemen- tation arrangements are judged to be adequate. 4.15 Implementation schedules for the various plant units are given in Annex 4-5. These schedules have been reviewed by the Bank and found satis- factory. Site preparation is underway. Preliminary process design of some of the units has been completed. For the acetic acid plant, a contract for the supply of license and major equipment has been concluded with BASF (Germany) and will be financed through bilateral credit arrangements. Long delivery items, such as methanol compressors and the CO separation unit, have been ordered (para 5.08). The commissioning dates of the various plants are spread over a period of two years, from December 1979 to December 1981. V. CAPITAL COSTS AND FINANCING PLAN A. Capital Costs 5.01 Total financing required for the Project is estimated at US$156.8 million equivalent, including US$59.7 million in foreign exchange. Details of the capital cost estimate and of the assumptions made are given in Annex 5-1 and summarized below:  - 28 - Summary of Capital Costs Lei Million US$ Million /a lb /a lb Local- Foreignr- Total Local- Foreign- Total % Land 3.6 - 3.6 0.2 - 0.2 - Equipment, Materials & Spares 802.8 712.8 1,515.6 44.6 39.6 84.2 65 Freight & Insurance 16.2 12.6 28.8 0.9 0.7 1.6 1 Erection 115.2 3.6 118.8 6.4 0.2 6.6 5 Duties & Other Expenses 36.0 19.8 55.8 2.0 1.1 3.1 2 Buildings & Civil Works 437.4 10.8 448.2 24.3 0.6 24.9 19 Engineering, Licenses & Technical Assistance 63.0 34.2 97.2 3.5 1.9 5.4 4 Training 19.8 - 19.8 1.1 - 1.1 1 Administration & Pre- operating Expenses 57.6 - 57.6 3.2 - 3.2 3 Base Cost Estimate (BCE) 1,551.6 793.8 2,345.4 86.2 44.1 130.3 100 Physical Contingencies (3.2% of BCE) 48.6 27.0 75.6 2.7 1.5 4.2 Price Escalation (6.3% of BCE + Phys.Cont.) 19.8 133.2 153.0 1.1 7.4 8.5 Total Installed Costs 1,620.0 954.0 2,574.0 90.0 53.0 143.0 Working Capital 109.3 43.7 153.0 6.1 2.4 8.5 Expected Project Cost 1,729.8 997.2 2,727.0 96.1 55.4 151.5 Interest During Construction 14.4 77.4 91.8 0.8 4.3 5.1 TOTAL FINANCING REQUIRED 1,744.2 1,074.6 2,818.8 96.9 59.7 156.6 /a Includes US$14.5 million in non-convertible foreign exchange costs. /b Includes US$16.0 million in indirect convertible foreign exchange. 5.02 The estimates were prepared by IITPIC and the Central in January 1978. Equipment costs for the imports required for the Project are based on prevailing world market prices and on fixed price contracts already signed for the acetic acid plant, methanol compressors, CO separation unit and other long delivery items representing together 18% of the Base Cost Estimate. Local costs for equipment, civil works, and erection were estimated by IITPIC. A physical contingency of 3% has been added to the base cost estimate (equivalent  - 29 - to 4% of BCE not yet covered, by fixed price contracts) and is considered adequate in view of the advanced stage of Project preparation. Price esca- lation has been calculated on the basis of 1% annual increase for local costs and 7.5% annually for foreign exchange costs. B. Financing Plan 5.03 The Project is part of the Central's current Five-Year Plan (1975-80). In establishing its investment and financing plan, the Central aggregated all approved investments of its enterprises and set them against the availability of funds from its enterprises' cash generation. However, for the Plan period, the investment requirements exceed CIICh's cash generation by about 20%. To ensure that the funds required for the investment program are available when required, the Central, in accordance with common practice in Romania, agreed with the Ministries of Chemical Industries and Finance that CIICh's enterprises will not retain any funds for their individual investment purposes but transfer nearly all internally generated cash to the State. The only funds that will be retained are for paying bonuses to workers and for the reserve fund for working capital increases, together totalling about 2% of total annual cash generation. In turn, the Central's entire investment requirements will be funded by the State budget and allocations made as required. 5.04 Interest during construction, which does not exist under the Romanian system of industrial financing but which will accrue on the foreign loans, i.e., IBRD loan and supplier's credit, will be borne by the State and not charged to the Central or to the Enterprise. The financing plan will, therefore, be as follows: Financing Plan Lei US$ % (in million) IBRD Loan 720 40.0 26 German Supplier's Credit 232 12.9 8 State Funds for - Fixed Assets 1,622 90.1 58 - Working Capital 153 8.5 5 - Interest during Construction 92 5.1 3 Total State Funds 1,867 103.7 66 Total Funds Available 2,819 156.6 100  - 30 - 5.05 The Council of Minister's approval of a project automatically includes the provision of funds required for it in the Romanian budget. The Romanian budget system has no simple mechanism for providing additional funds once this approval is given, since the Council of Minister's decision is law and another decision of the Council would be required to authorize addi- tional funds. Agreement has been obtained that funds will be provided as needed for carrying out the Project, including prompt allocation of State funds to cover any cost overrun. 5.06 The Bank loan is proposed to be extended to the Investment Bank for 14 years, including 3-1/2 years of grace, and at a 7.35% interest rate. As in the case of other Bank projects in Romania, the Investment Bank will pass on the loan proceeds to the Enterprise, together with the State funds. There is no formal on-lending arrangement from the Investment Bank to the Enterprise, but agreement has been obtained that all actions needed will be taken to ensure that annual remittances of funds by the Enterprise to the State budget will be sufficient to at least equal payments of interest and principal on the Bank loan on terms assumed to be identical to those due to the Bank, except for a notional interest rate of 10%. This arrangement is in line with our practice in all previous industrial projects in Romania and the 10% interest rate is the normal rate currently paid by our borrowers in Bank-financed industrial projects in other countries. The supplier's credit from the Federal Republic of Germany, providing US$12.9 million to finance the acetic acid plant will be extended over 8 years, including 2-1/2 years of grace and at a 7.5% interest rate. Signing of the supplier's credit will be a condition of effectiveness of the Bank loan. C. Procurement 5.07 Equipment and materials to be financed by the Bank will be procured according to Bank's guidelines in the following manner: (i) international competitive bidding (ICB) will be used for procuring imported equipment, mate- rials and the know-how and services connected with such equipment estimated at US$12.0 million; 1/ (ii) imported long-delivery items available from a limited number of suppliers and estimated at US$10.0 million may be purchased through prudent international shopping, subject to prior approval by the Bank of such procurement procedure and of the list of items involved; (iii) imported items costing less than US$100,000 each (and up to a total of US$2.0 million) may be purchased through international shopping on the basis of suitability, availabiltiy, and price considerations, subject to prior approval by the Bank of the list of items involved; and (iv) US$16.0 million of equipment and sub- assemblies which will also be subject to ICB and for which qualified Romanian suppliers exist and may be expected to bid; for these items, Romanian suppliers will be accorded a preference of 15% or the applicable custom duty, whichever is the lower. Procurement of the remaining equipment and services will be handled in Romania by the agencies responsible for the Project's implementa- tion (para 4.14). 1/ Services are an integral part of the equipment cost and no reliable man-month cost can be estimated.  - 31 - D. Allocation and Disbursement of Bank Loan 5.08 The Bank loan would cover 26% of the Project's total financing and about 67% of its estimated foreign exchange requirements. A detailed list of equipment and services proposed to be financed by the Bank is given in Annex 5-2 and is summarized below in the following allocation of the Bank loan: Allocation of Bank Loan (in US$ million) Amount Disbursement 1. Imported equipment and services 22 100% of foreign expenditures 2. Imported items costing less than 2 100% of foreign US$100,000 expenditures 3. Equipment and sub-assemblies 16 100% of foreign expenditures and 100% of local expenditures ex-factory. Total 40 It is expected that awards for most of the equipment and sub-assemblies listed under item 3 in the above list will go to Romanian suppliers after ICB. Changes in this list will be made only by prior agreement between the Bank and the Borrower. The Bank loan is expected to be completely disbursed by the end of 1981. A disbursement schedule is given in Annex 5-3. As already discussed in para 4.15, advanced contracting of about US$7.0 million is expected for long-delivery items. VI. FINANCIAL ANALYSIS A. Revenue and Operating Cost Estimates 6.01 As discussed (paras 2.11 and 3.21), chemical product prices are set by the State using a pricing principle which takes into account actual production costs and provides for a margin to cover taxes and benefits which in the case of the chemical industry amount to 30-35% over production costs, including depreciation. Prices for all inputs and outputs are administered  - 32 - by the Government and have remained constant for long periods of time; most prices were reset in 1974-76. In any case, whatever adjustments in input and output prices may be made, they are not expected to affect the Project's financial viability adversely in view of the Government pricing policy out- lined above. For chemical products exported, the Enterprise will receive domestic prices for identical products and DANUBEXIM will absorb any price difference between Romanian and export prices. 6.02 Detailed assumptions used in the financial analysis are given in Annex 6. Based on input prices prevailing in Romania and conservatively assumed quantity requirements, the following cost structure results for the Project: Product Cost of Full Capacity of the Project (in constant 1980 terms) Variable Costs Million Lei Methane (Feedstock & Fuel) 37.9 7.7 Fuel and Diesel Oils 24.2 4.9 Utilities 123.5 24.9 Chemicals 84.2 17.0 Total 269.8 54.5 Fixed Costs Labor 45.0 9.1 Maintenance and General 64.8 13.0 Depreciation 115.8 23.4 Total 225.6 45.5 Total Product Costs 495.4 100.0 Sales Revenue 1,095.2 221.1 Variable costs account for about 55% of total product costs before financial charges, which are not levied at the Enterprise level. The financial cost of methIne, the Project's main raw material, is Lei 60 (or about US$3) per 1,000 m . Depreciation charges, which under the Romanian system are the only costs reflecting the value of the initially required investment, are relatively small with an average depreciation period of about 22 years. B. Financial Projections 6.03 Financial projections for the Project are summarized below from Annex 6:  - 33 - Summary of Financial Indicators of the Project (in million constant 1980 Lei) Year ending December 31 1980 1981 1982 1983 1984 Income and Cash Flow Statements Sales Revenues 347.6 597.4 964.8 1,073.4 1,095.2 Cash Operating Costs Variable 80.8 125.8 227.9 261.6 269.8 Fixed 109.8 109.Q 109.8 109.8 109.8 Depreciation 53.5 115.8 115.8 115.8 115.8 Gross Benefits (before interest) 103.5 246.0 511.3 586.2 599.8 Cash Flow (before interest) 157.0 361.8 627.1 702.0 715.6 Balance Sheet Working Capital 30.0 94.5 153.0 153.0 153.0 Net Fixed Assets 2,326.1 2,371.3 2,288.9 2,173.1 2,057.3 Bank Loan 558.0 702.0 720.0 654.5 589.0 Supplier's Credit 233.0 209.7 163.1 116.5 69.9 Equity 1,565.4 1,555.3 1,561.5 1,559.3 1,557.1 Ratios Current Ratio 1.2 1.7 1.3 1.3 1.4 LT Debt/Equity Ratio /a 33/67 35/65 33/67 30/70 26/74 Debt Service Coverage /a 2.6 3.5 4.8 3.7 3.9 /a For this calculation, the Bank loan and the supplier's credit to the Investment Bank have been assumed to be the Enterprise's debt in spite of lack of formal on-lending. The projections are based on a normal production build-up for each individual product (75% capacity utilization in the first year (12 months) of operation, 95% in the second year, and 100% in the third year and thereafter) and the gradual coming on stream of individual plant units between December 1979 and December 1981. This build-up is considered achievable (i) because this type of plant can normally reach full rated capacity fairly quickly after its successful start-up; and (ii) because of Romania's history of rapid production build-up and high capacity utilization. The uncertainties of the export mar- kets (paras 3.14 and 3.26) have been reflected in the sensitivity tests of the economic analysis; for the purpose of the financial statements of the Enterprise, the sales revenues are based on posted Romanian prices, inde- pendently of domestic or export destination of the products. 6.04 The expected financial ratios of the Enterprise are satisfactory. Projects in Romania are financed fully on a "non-interest bearing capital" basis, but funds are recovered by the State through payments from the enter- prises into several State funds. However, the amount of interest and principal on the Bank loan and on the supplier's credit is shown in the projected cash  - 34 - flow statement as a "notional" debt service coverage, relating benefits (before taxation) plus depreciation to debt service. 6.05 The Craiova Central enterprises retain only 2% of their generated funds, and the remainder is transferred to the State which in turn finances through the Investment Bank the investment program of the Central. The finan- cial projections are made in accordance with these arrangements. These arrange- ments ensure that the total remittances by the Enterprise to the State will be sufficient to cover the equivalent in Lei of the interest (at a notional rate of 10%) and principal to be paid by the Investment Bank in that same year to the Bank and agreement to that effect has been obtained from the Government. The table on page 7 of Annex 6, showing the net impact of the Project on the State budget, demonstrates the net flow to the State budget becoming positive in 1984. C. Financial Rate of Return 6.06 The financial return of the Project, calculated in Annex 6 and based on present Romanian prices, is 21% and is most sensitive to changes in sales revenues: lowering them by 10% would reduce the financial return to 17%. Given the Romanian pricing system, however, this return is not very meaningful for judging the Project's viability, which is obtained through the economic rate of return (para 7.04). D. Auditing and Reporting 6.07 Romania has an elaborate audit system under which enterprises sub- mit periodic operational and financial reports to their Central, technical Ministries, the Investment Bank, and other banks concerned. These reports serve to ensure achievement of Plan targets and proper use of funds. Though the contents and presentation of these reports differ from those normally received by the Bank, it has been possible to adjust them to provide suffi- cient information for the Bank to adequately monitor the progress of Project implementation and operations. Agreement has been obtained that the Bank will receive from the Investment Bank quarterly progress reports prepared by the Enterprise and annual financial statements in a form satisfactory to the Bank and, within six months after the end of each year, copies of annual audit reports of the Enterprise prepared by the Ministry of Finance. VII. ECONOMIC ANALYSIS a A. Economic Costs and Benefits 7.01 All economic benefits and costs for tradeable items have been deter- mined by using expected long-term international prices estimated to prevail in the mid-1980s (Chapter III). For non-tradeable items, domestic prices have been taken and, where applicable, adjusted to reflect the economic price of  - 35 - their internationally traded components. Detailed assumptions are given in Annex 7. 7.02 About half of the Project's total economic cost comes from methane. As mentioned in para 6.02, the domestic cost of methane is about US$3 per 1,000 m , but such a cost does not reflect its most attractive alternative use, i.e., as fuel in power plants. In such use, methane would replace either locally available lignite or residual fuel oils. Lignite accounted for about 28% of the power produced in Romania in 1975, and its share is expected to increase to about 48% by 1985; based on a lignite production cosS of US$9- 12 per ton, the corresponding value of methane is US$40 per 1,000 m . Fuel oil accounted in 1975 for only 4% of the power produced, and its share will increase to about 16% by 1985. 1/ Based on an international price of fuel oil of US$75 per ton, equivalent to US$13 per ~arrel of crude oil, the corresponding value of methane is US$60 per 1,000 m. As a base cost of the analysis presented in this report, the higher value of methane correspo5ding to the highest substitution cost at the margin, i.e., US$60 per 1,000 m , has been retained. 7.03 About 17% of the economic revenues expected from the Project are in offgases; these will substitute for methane in other units of the Craiova Complex and have been priced in the same way as the methane input, i.e., on the basis of their energy content. Another 12% of the Project's revenues comes from acetylene; this acetylene will replace the acetylene currently produced from carbide, whose economic price is based on the international price of carbide. The remaining 71% of the economic revenues are due to methanol and acetylene-based products. Expected long-term economic prices for these products were discussed in Chapter III. For four major products representing 59% of the Project's total revenues (methanol, acetic acid, vinyl acetate, and polyvinyl acetate), specialized consultants 2/ supplied the Bank with information on capital and operating costs and on future demand and supply data, and an assessment of long-term equilibrium prices. As mentioned in paras 3.22 and 3.23, the product prices used in the analysis presented in this report are based largely on this information, but have been decreased (conservatively throughout the Project's life) depending on the product by 5-40% to reflect the worldwide oversupply situation which is expected to prevail in the early 1980s. B. Economic Rates of Return and Major Risks 7.04 Using the above assumptions, the Project's economic rate of return was calculated in 1977 terms, and is 16% versus a financial return of 21%; the drop stems mainly from a reduction in revenues proportionally higher than the corresponding reduction in feedstock cost, when substituting inter- national for Romanian prices. Sensitivity tests (Annex 7) are summarized below: 1/ During the same period, gas' share in power generation is expected to drop from 50% in 1975 to 15% in 1985. 2/ SRI International, the Pace Company Consultants and ANIC.  - 36 - Economic Rates of Return Overall Methanol Acetylene Project Plant Based Plants Base Case 16.2% 16.5% 16.0% Capital Cost up to 10% 14.3% 14.5% 14.2% Operating Cost up to 10% 12.1% 12.2% 11.6% Product Prices down 10% 11.8% 9.6% 12.0% Like the financial rate of return, the economic return is most sensitive to changes in product prices: it would decrease to 12% should chemical product prices drop by 10%, while a 10% increase would raise it to 20%. The return is less sensitive to investment and manufacturing costs, but is sensitive to delays in Project completion: were, under adverse circumstances, Project cost to increase by 10% and the Project suffer a 6-month delay, the return would drop to 14%. Should the domestic market develop at a slower pace than anti- cipated and the Project have to export 2.5 times more, the return would drop to 15%. Should, however, the Project not be able to export at all and the domestic market be equally unable to absorb the respective quantity, the corresponding drop in capacity utilization (by 10%) would decrease the return to 14%. 7.05 The major risk faced by the Project concerns the export of some of its production in the early years of operations (para 3.15) since DANUBEXIM is expected to face stiff competition from other suppliers in Western Europe and will have to absorb - as assumed in the export price assumptions - EEC tariffs, at present equivalent to 10% of products prices on average. Since the quantities that can, or may have to, be exported will depend on the growth rate of consumption in Romania and most importantly on the pace of the addi- tional capacity which will come on stream both in Romania and elsewhere after the Project start-up, assurances have been obtained from the Government that it will review the supply and demand projections before the Project's commis- sioning (para 3.14). This risk will be partly reduced by the operating flexibility inherent in the Project design of switching production from one product to another without affecting its overall profitability (para 4.01). It has been calculated that, should the export market for acetic anhydride not materialize to the extent envisaged at present, additional acetic acid could be produced and the rate of return would drop by only 0.3%. 7.06 A second potential risk, related to the first, refers to the limited market intelligence capabilities of DANUBEXIM (para 3.25). Since an efficient marketing organization with a rapid market intelligence service is critical if Romania is to export part of the Project output at economic prices, assurance has been obtained that DANUBEXIM, possibly with the cooperation of Craiova, will set up a suitable marketing group and develop an appropriate export strategy before the various plants of the Project are commissioned (para 3.26).  - 37 - C. Other Benefits 7.07 Although most of the benefits have already been largely or entirely accounted for in the economic rate of return, the following benefits from the Project should also be highlighted. The Project will result in a transfer of technology in the chemical sector (paras 4.07-4.08). Direct industrial employment will increase by about 1,110 persons, corresponding to an invest- ment per person of about US$141,000. VIII. AGREEMENTS 8.01 The following major assurances and agreements have been reached: (i) The Investment Bank will cause to be prepared, by December 31, 1979, or such later date as the Bank and the Investment Bank may agree, and furnish the Bank with an update of the data made available to the Bank during appraisal with respect to the projected domestic methanol demand and supply (para 3.14) and of the export marketing development plans for all Project's products manufactured in Romania (para 3.26), and shall exchange views with the Bank on these data, their basis and conclusion thereof; (ii) Project facilities will be designed, constructed and operated with due regard to ecological, environmental and safety standards acceptable to the Bank (para 4.13); (iii) funds will be provided as needed to implement the Project and to meet any cost overruns (para 5.05); (iv) goods and services will be procured on the basis of lists agreed upon (para 5.08); (v) total annual remittances by the Project Enterprise to the State will be adequate to cover debt service (para 6.05); and (vi) the Investment Bank will submit quarterly project pro- gress reports and annual financial statements in a form satisfactory to the Bank. Also, the Bank will receive within six months after the end of each year copies of annual audit reports of the Enterprise prepared by the Ministry of Finance (para 6.07). 8.02 Based on the above agreements reached, the Project is suitable for a Bank loan of US$40 million to the Investment Bank to be repaid over 14 years, including 3-1/2 years of grace. Signing of the supplier's credit from the Federal Republic of Germany to finance the acetic acid plant, will be a condition of effectiveness of the Bank loan (para. 5.06). Industrial Projects Department October 1978  - 38 - ANNEX 1 Page 1 ROMANIA - CRAIOVA CHEMICAL PROJECT GLOSSARY Acetaldehyde (CH3 - COH). It is a stable and non-corrosive liquid, much used as an intermediate in chemical synthesis. It may be obtained by a fermentation process or from charcoal distillation, but most processes use ethylene or acetylene as a feedstock. Among the synthetic routes, the acetylene based one continues to lose ground since ethylene represents a cheaper feedstock. Acetaldehyde is obtained at Craiova in the existing production facilities by low pressure addition of water to acetylene. Mercuric sulphate is used as a catalyst. Acetic Acid (CH3 - COOH). An organic acid, liquid at room temperature, obtained by oxidation of acetaldehyde or by synthesis of methanol and carbon monoxide. Major outlets for acetic acid are vinyl acetate, acetic anhydride, various esters, monochloroacetic acid and terephthalic acid production, where it is used as a solvent. The catalytic combination of methanol and carbon monoxide was first used at BASF's plant in a high pressure process. Then MONSANTO's technology introduced lower pressure synthesis. A high pressure process will be used at Craiova. Acetic acid is a highly corrosive chemical and requires the use of special materials in equipment required to handle it. No major hazards or environmental problems are due to the acetic acid production. Acetic Anhydride (CH3 - CO - 0 - CO - CH3). It is a highly reactive liquid, used as an intermediate chemical for cellulose acetate fibers, film, plastics and acetylsalycylic acid production. It will be produced at Craiova by reaction of liquid acetic acid with ketene. Acetylene (HC - CH). A gas which can be produced by reaction of calcium carbide with water or by high temperature cracking of natural gas and higher hydrocarbons (see "Acetylene Furnace Gas"). Acetylene, possessing a triple bond, is a highly reactive chemical and can be used as the raw material to produce a large number of common organic chemicals. It has been used in metal cutting and welding for many years and since the early part of the zOth century has played an important role as a chemical intermediate. Its principal end products are vinyl chloride, vinyl acetate and acetaldehyde. Acetylene is not chemically dangerous nor may cause more environmental problems than other hydrocarbons. On the other hand, being a very unstable chemical, it must not be compressed at more than 0.5 bar without especiallv designed equipment nor heated up to 150