Romania - Tire Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE CO" P Y Report No. 1779-RO STAFF APPRAISAL REPORT ROMANIA TIRE PROJECT February 23, 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 20 leu 1 = US$0.05 lei 1,000 = US$50.00 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 (m3) = 35.31 cubic feet PRINCIPAL ABBREVIATIONS AND ACRONYMS USED The Borrower - Banca de Investitii (Investment Bank) The Central, - Centrala Industriala de Prelucrare Cauciuc Si Mase CIPCMP Plastice (Central for Rubber and Plastic Processing) 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 Tons per Day TPY - Metric Tons per Year OTR - Off-the-Road ROMANIAN FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ROMANIA APPRAISAL OF TIRE PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ......................................................... 1 II. THE TIRE INDUSTRY AND THE BORROWER ...................... 1 A. Ministry of Chemical Industries .................. '. I B. Development of the Tire Industry ................... 3 C. Organization of the Tire Industry ........... ....... 6 D. Financial Situation and Prospects of the Central ... 8 E. The Romanian Financial System and the Borrower ..... 8 III. THE MARKET .............................................. 9 A. World Markets and International Trade 9 B. The Romanian Tire Market .....Rr................e..... 13 C. Exports ............... ............................. 15 D. Balance of Production, Consumption, Imports and Exports ....... ............................... 17 E. The Project Output . .................... ............. 18 F. Domestic Prices ......... . . . .. . . . ................. 18 G. Export Prices ... .................................. . 19 IV. THE PROJECT .......... ........................................... . 20 A. Project Scope, Location and Product Mix ..... ........ 20 B. Project Technology ............... .. ................ 20 C. Project Implementation ............................. 21 D. Domestic Equipment .......... ...................... 22 E. Raw Materials and Utilities ........................ 22 F. Employment and Training ................. ........... 23 G. Ecology and Safety .. ................................ 23 V. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND ALLOCATION OF BANK LOAN .. ...................... .... 24 A. Capital Costs ................................. ........... 24 B. Financing Plan ..... ....... 25 C* Procurement .... .... .......... ...... ...... 26 D. Allocation and Disbursement of Bank Loan .... ....... 27 This report has been prepared by Messrs. Antonio S. Tarnawiecki and Neithard Petry of the 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.  -2- Page No. VI. FINANCIAL ANALYSIS . ............. . ....... .................... 27 A. Revenue and Operating Cost Estimates ................ 27 B. Financial Projections ................ ................***** 29 C. Financial Rates of Return .......................... 31 D. Auditing and Reporting ............................. 31 VII. ECONOMIC ANALYSIS AND RISKS ..... ...................... 31 A. Economic Costs and Benefits ..... ................... 31 B. Economic Rates of Return ........................... 32 C. Other Benefits ...... ............................... 33 D. R-isks ......................................................... .. 33 VIII. AGREEMENTS ............................................... 34 ANNEXES 1 Glossary 2-1 Existing and Planned Enterprises of CIPCMP 2-2 Organization Chart for CIPCMP 2-3 Proposed Organization Chart for Zalau and Turnu Severin Enterprises 2-4 CIPCMP Summarized Financial Statements 3-1 Historical Tire Production, Consumption, Imports and Exports 3-2 Projected Tire Production, Consumption, Imports and Exports 4-1 Layout Zalau 4-2 Layout Turnu Severin 4-3 Proposed Product Mix and Representative Tire Sizes 4-4 Tire Production Flow Diagram 4-5 Implementation Schedule 4-6 Utility Requirements and Sources of Supply 5-1 Assumptions Made for Estimation of Capital Costs 5-2 Equipment and Materials to be Financed by Bank Loan 5-3 Estimated Disbursement Schedule for Bank Loan 6 Assumptions Used in the Financial Analysis 7 Assumptions Used for Calc:ulating the Economic Rates of Return 8 Documents Contained in Project File MAP IBRD 13109 Location of Tire and Major Raw Material Plants Industrial Projects Department February 1978  I. INTRODUCTION 1.01 The Government of Romania has requested a Bank loan of US$85 mil- lion equivalent for the construction of two tire plants at Zalau and Turnu Severin (the Project), 1/ about 450 km northwest and 350 km west of Bucharest, respectively (Map IBRD 13109). The Zalau plant will produce about one million all steel radial truck tires 2/ per year, of which half will be destined for the export market mainly to other COMECON countries. The plant at Turnu Severin will produce about 150,000 tractor tires and 20,000 giant or off-the- road (OTR) tires per year mostly for the domestic market. Except for the OTR tires, technology will be based on know-how previously purchased and adapted to Romanian conditions. Preliminary work for the implementation of the Project has begun, and commissioning is expected to take place in early 1980 for the Zalau and early 1981 for the Turnu Severin sub-project. 1.02 Total financing required for the Project is estimated at lei 5,164 million (US$258 million), including lei 1,897 million (US$94.8 million) in foreign exchange. The proposed Bank loan would therefore provide 33% of the total and 90% of the foreign exchange financing needs. The Government will provide the remainder of the funds required. The Zalau sub-project was approved in March 1977 and funds allocated by a decision of the Council of Ministers. For the Turnu Severin sub-project, approval is expected in mid 1978. 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 two others, priority for Bank support. The Project was appraised in July 1977 by a mission consisting of Messrs. N. Petry (Chief) and A. Tarnawiecki of the Industrial Projects Department. In addition, two consultants were used to provide information on the export markets for Romanian tires and to review specific technical aspects of the Project. II. THE TIRE INDUSTRY AND THE BORROWER A. Ministry of Chemical Industries 2.01 In Romania, manufacturing of tires 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, comprising the technical ministry, the industrial central and the enter- prise. 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 1/ The Bank was recently advised that the name of the plant location had been changed to Drobeta-Turnu Severin. 2/ A glossary of the main technical terms used in this report is given in Annex .  approval. The industrial central directs the operations of all enterprises in its particular sub-branch of the economy (e.g., Central for Cotton Pro- ducts, 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 Tech- nological Engineering 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, including tires. 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 output, behind the machine building and metal working industries (31%) 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 100 270 380 480 590 646 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 16.0 % Share of Chemical Industry in: Total Gross Industrial Output 2.1 4.1 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 8.0 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 12.9 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 re- sources. Accordingly, the fastest growth has occurred in fertilizers, plastics and synthetic rubber and fibers. Long-term plans continue to  - 3 - attribute a high priority to petrochemicals which are expected to account for three-fourths of the chemical industry output by 1990, against about one-half today. 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 industrial congestion, and partly because of greater availability of labor and accomo- dations. B. Development of the Tire Industry 2.04 Production of tires in Romania started in 1939 when Goodrich (USA) established a private tire manufacturing company at Victoria (Floresti, 22 km northwest of Ploesti) with a capacity of about 100,000 tires per year. In 1950, the USSR, which exported trucks and tractors to Romania at that time, also supplied technology for the manufacturing of truck and tractor tires. Up to 1960, tire production increased only slowly, but considerable advances were made in developing purchased know-how and tire technology and adapting it to domestically available raw materials. 2.05 By 1962, production capacity was increased by about one millicn tires, when the plant at Victoria was expanded and a new plant was commis- sioned at Danubiana (on the outskirts of Bucharest). The increased produc- tion capacity was for diagonal passenger car, truck and tractor tires using Romanian technology and the equipment was supplied by an English consortium of machine manufacturers. Dunlop (UK) was used as consultant to ensure that the British equipment was compatible with Romanian technology. 2.06 Further expansions of the Danubiana and Victoria plants took place between 1967 and 1970 increasing the country's production capacity to about 2.4 million tires per year. This expansion was directed towards the introduction of radial passenger car and tractor tires in all textile and textile/steel construction with the new radial technology supplied by Pirelli (Italy). The equipment was procured through a British and German consortium with some of the process equipment being supplied by Pirelli. 2.07 The most recent major expansion took place in 1973-75 at the Victoria plant by adding facilities with an annual capacity of one million passenger car and truck tires in textile/steel and all steel radial construc- tion. The technology for this expansion was supplied by General Tire International (GTI, USA), which also acted as the general supplier for a large portion of the equipment and machinery. In 1977, Romanian tire pro- duction capacity was about 5 million tires, and production is estimated to have reached about 4.7 million tires.  - 4 - 2.08 Besides the two new plants included in the Project, Romania is planning three major investments to increase tire production capacity. The plant at Danubiana is presently being expanded to increase tractor tire production by 400,000 per year. Commissioning is expected at the end of 1978. At Victoria, expansion is planned in various stages mainly for passenger car tires. By 1981, an additional 1.5 million passenger car tires are expected to be produced there. Finally, a joint venture between Romania and Citroen (France) which is to set up production facilities for 150,000 passenger cars per year (to be expanded to 300,000 cars before 1985), will require additional quantities of passenger car tires, and a new plant at Caracal is planned with a capacity of 2 million car tires annually. Production of this plant is scheduled to start in 1981. 2.09 The table on the following page gives a breakdown of tire capacity and production for the past aLs well as the future indicating that production is expected to increase to 13.5 million tires by 1985, which is a nearly threefold increase of the 1977 production level of 4.7 million. The market implications of this are discussed in Chapter III. 2.10 At present, Romania has the know-how and technology for passenger car, truck and tractor tires in diagonal and radial construction, but still lacks the technology for OTR tires. The Project is designed to assist Romania in closing this gap. 2.11 Over the last 30 years, Romania has systematically developed indi- genous capability for supplying nearly all of the raw materials required for the tire industry. Of the more important inputs, only natural rubber and wire tire cord are imported, but a plant started producing the latter in mid-1977 to supply about 50% of domestic requirements. Expansions of this plant are scheduled to provide for all of the domestic requirements by 1985. Synthetic rubber, carbon black, fabric cord and most chemicals are produced in Romania, and tire technology has been adapted where necessary to the specifications of domestic materials.  5- ROMANIA - TIRE PROJECT TIRE PRODUCTION CAPACITY AND PRODUCTION (In millions) Planned or Actual (1977) Year of Production Capacity Commissioning 1965 1970 1975 1980 1985 -------Actual------- --Planned--- By Plant Existing Plants Danubiana 1.9 1962 0.2 1.5 1.8 1.9 1.9 Victoria 3.1 1939 1.0 1.0 1.9 3.1 3.1 Total 5.0 1.2 2.5 3.7 5.0 5.0 New Projects Firmly Planned Danubiana Expansion 0.4 1979 - - - 0.3 0.4 Victoria Expansion 1.6 1981 - - - 1.3 1.6 Zalau I 1.0 1980 - - - 0.6 1.0 Turnu Severin I 0.2 1980 - - - 0.1 0.2 Caracal 2.0 1981 - - - - 2.0 Total 5.2 - - - 2.3 5.2 Future Projectsl/ Zalau II 1.0 - - - - 0.6 Turnu Severin II 0.2 - - - - 0.2 Unidentified 2.6 - - - - 2.6 Total 3.8 - - - - 3.4 All Plants 14.0 1.2 2.5 3.7 7.3 13.6 By Type of Tire Passenger Car Tires Danubiana 0.5 0.2 0.5 0.5 0.5 0.5 Victoria 1.9 0.1 0.4 1.1 1.9 1.9 Victoria Expansion 1.5 - - - 1.3 1.5 Caracal 2.0 - - - - 2.0 Unidentified 2.6 _ - - 2.6 Total 8.5 0.3 0.9 1.6 3.7 8.5 Truck Tires Danubiana 0.8 0.6 0.7 0.8 0.8 0.8 Victoria 1.1 - 0.5 0.7 1.1 1.1 Zalau I 1.0 - - - 0.6 1.0 Zalau II 1.0 - - - - 0.6 Total 3.9 0.6 1.2 1.5 2.5 3.5 Tractor Tires Danubiana 0.6 0.3 0.4 0.5 0.5 0.5 Victoria 0.2 - - 0.1 0.1 0.2 Danubiana Expansion 0.4 - - 0.4 0.4 Turnu Severin I 0.2 - - - 0.1 0.2 Turnu Severin II 0.2 - - - - 0.2 Total 1.6 0.3 0.4 0.6 1.1 1.5 OTR Tires Turnu Severin I 0.02 - - - 0.01 0.02 Turnu Severin II 0.02 - - - - 0.01 Total 0.04 - - - 0.01 0.03 All Tires 14.0 1.2 2.5 3.7 7.3 13.6 1/ Expansions of Zalau and Turnu Severin are planned to be commissioned not later than 1983. Second stage of Zalau is part of Techno-Economic Study for Zalau I and has been approved in principle. Remaining production capacity is mostly for passenger car tires, but project has not yet been identified.  - 6 - 2.12 The table on the folLowing page gives an overview of the present and future raw material requirements and also compares these to Romania's overall production capacity. Location of the major raw material plants is also noted on Map IBRD 13109. Compared to Western Europe or North America, the use of rayon still accounts for a large share of fiber consumption, while polyester and glass fibers have not yet been introduced. This is explained by the desire of the Government to make full use of the country's rayon production capacity and by the fact that production capacity for nylon, polyester and glass fibers is not sufficient to also cover tire manufacturing. It is the intention of the Government to increase the share of these fibers, but so far concrete steps have only been taken for the expansion of nylon tire cord capacity. 2.13 With well-developed technology and a raw material base quite independent of imports, the future development of the tire sector is geared to keeping Romanian know-how up to date and to developing a machine building industry to substitute for imported equipment and machinery in order to save foreign exchange and to make the tire industry a more effective generator of foreign exchange. Considerable experience has been gathered by the Romanians in maintaining equipment imported from many different countries, including the manufacturing of spare parts and the complete rebuilding of worn-out machinery. Over the last two years, designs were developed for the less sophisticated equipment for which a considerable amount of expertise has been acquired from maintaining and rebuilding such equipment. Consequently, an intensive equip- ment manufacturing program is now under way. The project will receive a significant portion of the equipment from this program (para 4.10). C. Organization of the Tire Industry 2.14 CIPCMP, the Central responsible for the existing and future tire production, has existed in its present form since 1973. A total of 11 existing enterprises and 10 new, projects are presently under the responsi- bility of the Central. Two existing enterprises are for tires, four are for technical rubber goods (hoses, V-belts, etc.) and five are for plastic products (pipes, tubes, fillers, bags, etc.). A complete list of the ex- isting and firmly planned enterprises of the Central is given in Annex 2-1. Total employment within the Central in mid-1977 was 28,500. The organiza- tion chart of CIPCMP is given in Annex 2-2 which shows, as in most industrial centrals, four functional departments (production, technological, commercial, financial) and a number of staff departments, including personnel, which are also directly under the General Manager. The Central's senior staff also acts in responsible positions in one of the enterprises, in this case in Danubiana, and the Central provides technical assistance to all its enter- prises. 2.15 For the Project, two new enterprises are required, one for the Zalau sub-project, which was established in March 1977, and one for the Turnu Severin sub-project, which is expected to be established by mid-1978. Disbursement of the Bank loan on account of the Turnu-Severin sub-project will be limited to US$6 million until the enterprise is established; CIPCMP will assume all obligations of the new enterprise until the latter is established. A pro-forma organization chart identical for the two enterprises is shown in Annex 2-3.  ROMANIA - TIRE PROJECT PRINCIPAL RAW MATERIALS FOR THE TIRE INDUSTRY (In thousand tons) 1970 1972 1974 1976 1980 1985 -----------------Actual----------------- ---Projected----- Raw Material Requirements Natural Rubber 22 25 30 29 40 50 Synthetic Rubber 24 25 31 34 110 160 Carbon Black 21 25 29 32 80 122 Fabric Cord 11 12 14 14 18 20 Nylon - - - - 10 16 Rayon - 8 4 Metallic Cord - - 2 11 30