Romania - Second Livestock Project

Document of gm The World Bank FOR OFFICIAL USE ONLY Report No. 2279a-RO STAFF APPRAISAL REPORT ROMANIA LIVESTOCK II PROJECT February 27, 1979 Regional Projects Department Europe, Middle East and North Africa Agriculture III 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 Lei 18 = US$1 WEIGHTS AND MEASURES 1 hectare (ha) = 2.5 acres 1 kilogram (kg) = 2.2 pounds 1 kilometer (km) = 0.6 mile 1 cubic meter (m3) = 1.3 cubic yards 1 sq meter (m2) = 1.2 square yards 1 ton (t) = 2,200 pounds ABBREVIATIONS BAFI = Bank for Agriculture and Food Industry CAP = Agricultural Production Cooperative CC = Consumption Cooperative CRC = Credit Cooperative EEC = European Economic Community IAS = State Agricultural Enterprise ICA/ICAP = Intercooperative Association ICB = International Competitive Bidding ICRA = District Food Wholesale Enterprise (Subordinate to MFIT) LW = Liveweight MA/MAFI = Ministry of Agriculture and Food Industry MFIT = Ministry for Internal Trade MIC = Meat Industrialization Center MIT = Meat Industrialization Trust NB = National Bank of Romania ROMANIAN FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY APPRAISAL OF LIVESTOCK II PROJECT ROMANIA Table of Contents Page No. I. SECTOR ............................................... 1 A. Role of Agriculture in the Romanian Economy 1..... B. Constraints to Agricultural Production .... ...... 1 C. The Land Resource Base .......................... 2 D. National Planning and Investment in Agriculture . 3 E. The Role of Women ........................ . 4 F. Bank Experience in Agriculture .... .............. 5 G. The Pig Subsector ............................... 7 H. Price Formation and Marketing Margins .... ....... 14 I. Government Supporting Services .... .............. 17 II. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY .... ....... 22 A. Overview ........................................ 22 B. Fiscal Agency Operations ........................ 22 C. Financing Policies and Procedures .... ........... 23 D. BAFI Lending through the Credit Cooperatives .... 23 E. Sources of Funds ................................ 24 F. Financial Conditions ............................ 24 III. THE PROJECT .......................................... 25 IV. PROJECT COSTS AND FINANCING .......................... 26 A. Project Cost . .........I ... 26 B. Project Financing ............................... 28 V. DEMAND AND MARKET ASPECTS ............ .. .............. 29 VI. TECHNOLOGY, RESEARCH AND PLANT LOCATION ....... ....... 36 VII. PROJECT IMPLEMENTATION .............. .. ............... 39 A. Organization and Management ..................... 39 B. Lending Policies and Procedures .... ............. 39 C. On-Lending Terms ................................ 40 This report is based on the findings of an appraisal mission to Romania in May-June 1978 consisting of Mr. R. Hunt and Ms. M. Varkie (IBRD) and Messrs. G. Butcher, P. Harrison and M. Walshe (Consultants). 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. D. Procurement .................... 41 E. Disbursements ................................... 42 F. Accounts and Audit ............. .. ............... 42 C. Monitoring ............................. . 43 H. Environmental Impact ............................ 43 I. Risk ............................................ 44 VIII. PROJECT BENEFITS AND JUSTIFICAIION ................... 44 A. Production, Markets and Prices .... .............. 44 B. Financial Analysis .... ......................... 46 C. Economic Evaluation ............................. 47 IX. RECOMMENDATIONS ...................................... 49 ANNEXES 1. Procurement Table 1: Estimated Project Procurement ................... 51 2. Phasing and Disbursement Table 1: Phasing of Project Investments .... .............. 52 Table 2: Estimated Schedule of Bank Disbursements ........ 53 Table 3: Phasing of Project Commitments .... .............. 54 Table 4: Phasing of Pig Production under the Project ..... 55 Table 5: Phasing of Pig Numbers by Production, Slaughter Capacity and Purchase ........................... 56 3. The Bank for Agriculture and Food Industry .... ............ 57 Chart 1: Financial Institutions .......................... 70 Chart 2: Organization Chart .............................. 71 Table l: Head Office Staffing List ....................... 72 Table 2: Financing of Pig Production and Processing through BAFI and the State Budget ....................... 73 Table 3: Historical and Projected Balance Sheets ... ...... 74 Table 4: Comparative Balance Sheet Structure .... ......... 75 Table 5: Historical and Projected Income Statements ...... 76 Table 6: Structure of Income and Expenses .... ............ 77 Table 7: Selected Financial Ratios ....................... 78 4. Economic Analysis Table 1: Prices for Economic Analysis .................... 79 Table 2: Economic Rate of Return ........................ 80 5. Meat Consumption Table 1: Total Meat and Pigmeat per Capita Consumption for Selected Countries .......................... 81 6. Project Implementation File - Table of Contents ........... 82 7. Project Background File - Table of Contents . . 84 MAP S IBRD No. 13794 - Socialist Republic of Romania Location of Planned Project Investments  APPRAISAL OF LIVESTOCK II PROJECT ROMANIA I. SECTOR A. Role of Agriculture in the Romanian Economy 1.01 Agriculture plays an important role within the Romanian economy, even though the sector has traditionally ranked below industry in Government's allocation of investment funds. In 1976, agriculture accounted for 14% of social product 1/, 36% of the total labor force, 11% of the total fixed assets, and 23% of total exports. By providing an expanding food base for the in- creasingly urban population, raw materials for industrial production, a reserve labor pool for eventual utilization of other growth sectors, funds for capital investment, and convertible foreign exchange through exports, the agricultural sector has been an important contributor to the high rates of growth and capital formation recorded over the last decade. Over the 1965-76 period, social product in the agricultural sector increased by 78%, or by a compound rate of 5.4% p.a. Actual gross agricultural production in 1976 was more than three times that in 1950. Annual growth was 4.2% between 1965 and 1976 and 8.9% annually from 1970 to 1976. Expansion of agricultural produc- tion has been achieved with reduced labor intensity, infusions of capital and improved technology, and increased utilization of material inputs, e.g. fertilizers and pesticides. The labor force in agriculture declined from 6.2 million in 1950 to 3.6 million in 1976, while the labor force in non-agricul- tural sectors expanded from 2.2 to 6.6 million. Livestock production, growing at about 6.3% p.a., compared to 4.6% for crop production, represented 37% of gross total agricultural output in 1965 and 41% by 1976. Romanian agriculture displayed a positive trade balance over the 1950-76 period; the trade balance for agriculture rose from 371 million lei (US$18.5 million) in 1950 to 2,081 million lei (US$104.1 million) in 1976. These exports have provided substan- tial assistance in financing industrial development. Exports of agricultural products however declined as a percentage of total exports from 29% to 23% over the 1950-76 period as production and exports of relatively high value industrial commodities expanded. B. Constraints to Agricultural Production 1.02 The agricultural sector is underdeveloped relative to other sectors in terms of productivity and income levels. Agricultural productivity in 1/ Social product is a gross output indicator defined as the total output of material production generated at all stages of production. The pro- ductive sector comprises those branches of the economy in which materials are produced, circulated and distributed for final use.  -2- terms of value-added per worker is less than one third that of industry and about half that of all sectors combined. While there has been some growth in agricultural labor productivity which has provided sufficient resources to improve incomes of agricultural workers and to supply capital for agriculture and other sectors, incomes in the agricultural sector remain at least 10% below those in other sectors. Among the types of production units, production increases in State Agricultural Enterprises (IASs) over the period 1965-1975 have been more than twice those of the Agricultural Production Cooperatives (CAPs). This has been the result of a policy of greater investments per ha, a greater share of fertile land and farm machinery, more use of fertilizer and other inputs, and better management practices in the IASs than in the CAPs. It appears, nonetheless, that the marginal productivity of capital inputs has been higher on CAPs, thus indicating the potential for production expansion on CAPs. Furthermore, due to CAPs' larger share of production and employment, Government has recognized that the growth of the agricultural sector depends largely on the development of agriculture in cooperatives. Their potential is to be developed in the future by allocating an increasing share of agricul- tural investments to the cooperative sector. 1.03 The major constraint to the stabilization of crop production is the wide variation in yearly rainfall, particularly in the southern and eastern plains. Approximately 2.5 million ha in the flood plains of the numerous rivers are subject to flood damage, and inadequate drainage limits crop pro- duction on much of this area. Soil erosion is also a problem. Although long experience exists in building minor flood control and drainage structures, construction of large-scale irrigation and flood control works is relatively recent: irrigated area increased from 199,700 ha or 2% of arable land in 1960 to 1.9 million ha or 19% of arable land in 1977. Crop yields are also less than expected despite the adequacy of technology. Again this results from low levels of inputs, particularly fertilizers and pesticides and a lack of incentive for workers and managers. Fertilizer production continues to increase but much is exported. Technology is well established in the live- stock industry; nonetheless productivity is poor by comparison with Western Europe due apparently to relatively inferior quality inputs and lack of managerial and worker incentive. Thus such critical coefficients as feed conversion ratios and output per animal attend to be lower than would normally be expected of a country such as Romania. C. The Land Resource Base 1.04 Romanian agriculture benefits from relatively good soils, a climate seasonally suitable for production, and exploitable water resources. Out of a national total of 23.8 million ha, 14.9 million are employed in agricultural production. Of the agricultural total, arable land accounts for 65.2%, pas- ture 20.3%, meadowland 9.5%, and vineyards 5.0%. 1.05 Romania can be divided into three agroclimatic zones based on climatic factors, topography, soils, and other natural conditions influencing land use and agricultural performance (see Map). The Plains Zone, located in  the western and southern parts of the country, is especially well endowed with fertile soils and irrigation infrastructure; it contains approximately 53% of total arable land but only 18% of land under pasture and meadows. Crop yields tend to be highest in this region and grain-intensive livestock activities such as pig and poultry production as well as lamb fattening have been concen- trated in this major grain belt. In 1977, 58% of the national pig herd was located in the 12 districts of the Plains Zone. The Foothills Zone, situated mainly to the north of the Plains Zone, is characterized by shallow, less pro- ductive soils. About 28% of the total arable land and 32% of total pasture and meadowlands are situated in the Foothills. In 1977, 20% of the total pigs were in this zone. The Mountain and Tableland Zone, including districts in the northern and central parts of the country, accounts for 19% of total arable area but 50% of all pasture and meadowlands, and in 1977, supported 22% of the national pig herd. D. National Planning and Investment in Agriculture 1.06 National planning in Romania encompasses all aspects of production, marketing, investment, and finance. The State assumes the role of centralized manager-planner-coordinator to ensure that production activities satisfy centrally delineated requirements of society. The vehicles used for trans- lating State priorities into detailed production targets are the 5-Year and Annual Plans for socio-economic development. Directives in the plans are obligatory and carry legal authority. Technology choices for the major com- ponents of a national investment program are incorporated in standard designs that are replicated country-wide on the basis of model developed at the national level. 1.07 The 1976-80 Plan calls for an increase in gross agricultural produc- tion of 28-44% over the average for the 1971-75 period or, an annual growth rate of 5-7.5%. Based on past sectoral performance, growth equal to at least the lower bound target is considered feasible. With the adoption of the 1976-80 Development Plan, Romania renewed its commitment to substantial investment within the livestock subsector. Such an investment orientation reflects Romania's agricultural development objective of industrialization of the sector involving (a) production of high value agricultural commodities such as industrial crops, meat, and dairy products; (b) adjustments in arable land use to complement proposed changes to high value production; (c) substi- tution of capital-intensive for labor-intensive technologies to release labor for alternative, non-agricultural employment; and (d) substantial investment in irrigation infrastructure to boost overall land productivity, to minimize severe yield fluctuations caused by climatic vagaries, and to raise the productivity of workers remaining in agriculture. Achievement of these objectives will assist in achieving the concommitant objectives of increasing per capita food consumption and agricultural export earnings. Within this strategy, Romania proposes rapid development of the pig subsector through: (a) investments in large, industrial-type complexes conducive to continuous output flows, higher efficiency levels, faster turnovers, larger litter sizes, low mortalities, improved technology absorption, and use of quality managerial  - 4 - skills; (b) improvement of the performance of the national pig herd through a breeding selection and multiplication of imported stock; (c) modernization of older units to achieve performance parity with newer, more industrialized complexes; and (d) utilizing idle capacity (labor and housing) of the private rural individuals to fatten weaner pigs produced on cooperative farms. 1.08 In early December 1977 a Supplementary Program for 1976-80 to be implemented in 1979 and 1980 was approved which increased the originally planned growth rates of all major economic indicators. This was designed in part to permit the original Plan targets to be achieved despite the serious interruption as a result of the massive earthquake damage to the economy and in part to permit achievement of the increased standards of living targets (wage, housing, etc.) announced in July 1977. Investment financing for this Supplementary Program was developed out of a 1976/77 review of industrial effi- ciency and investment project costs which discovered existing spare capacity in industry as well as an over estimate of original project costs. 1.09 The final form of the original 1976-80 Plan targeted an increase in gross agricultural production of 39-51% in 1980 over 1975. With the addi- tion of the Supplementary Program this target now stands at 40 to 54%, requir- ing an annual growth rate of 7-9%. During the 1971-75 period gross agricul- tural production increased by 37% or 6.5% p.a. Consequently, performance will have to improve substantially to achieve anything significantly above the lower bound. During the years 1976 and 1977 the average growth rate was 9.25% p.a. which might appear to put them well on the way to reaching the upper bound of the target, but the 1976 growth is based on a poor performance base year, 1975, and there was an actual decline in 1977 over 1976. Obviously many of the projects now being started will not be in production much before the end of 1980 thus the main contribution will be from increases in variable inputs to existing production 1/ E. The Role of Women 1.10 The demographic structure by sex in urban and rural areas for all of Romania and for the lalomita and Timis districts in which, under the proposed project, large-scale pig production and processing complexes for export will be located is shown in the Project Implementation File (Annex 10, Table 1). The proportion of men and women in the urban and rural areas is virtually identical, 1/ It is here that a word of caution is required. The gross agricultural production figure is somewhat misleading as it includes increases in inputs, consequently the targets could be attained by a massive increase in inputs (material expenditures) and without any increase in net output. It is felt that this inclusion has been a positive source of recorded growth. Since no Plan or Supplementary Plan figures are available for net agricultural output, i.e. national income in agriculture, the gross output figure is the only indicator available for comparison of actual achievements and planned targets.  1.11 Women currently represent 36% of the entire working population compared with 27.8% in 1965. Not only has the proportion of working women to men increased, but also the distribution by profession and sector has changed. Women now make up 38% of the total population employed in industry compared with 32.4% in 1973. Employment by sex in various sectors of the Romanian econ- omy is given in Annex 10 Table 2 of the Project Implementation File. In 1977 women represented 35% of the working population employed by the State sector. Within the State sector there were a large proportion of women working in telecommunications (50%), trade (54%), education, culture and art (64%) and public health (72%). In the agricultural sector women represent 16% of the total number of people employed by the State. This figure does not include employment in Intercooperatives (ICAs), Cooperatives (CAPs) or the private sector, where women constitute the majority of the agricultural labor force. The percentage of women actively engaged in agriculture may range as high as 80 to 85% in certain communes, particularly in the CAPs, where women consti- tute the basic labor force nationwide. 350 out of about 4,400 CAPs have women presidents and women hold approximately 4,700 posts as farm chief engineers/ agronomists and 26,000 positions as team leaders in the CAPs. There is an awareness of the importance of women in achieving agricultural production targets, and of the need to train and integrate more women into positions of greater responsibility. The legal basis for equal opportunities exists. Certain services, such as day care centers, to facilitate the participation of women in agricultural production have been set up, but there is a need to improve and increase such services. 1.12 No component in the project is designed specifically to differentiate between beneficiaries by sex. From field observations and interviews, it is clear that women already do and will continue to play a major role in pig pro- duction and processing in Romania. In the pig production complexes about 50% of the workers in the pig houses are women and in the slaughterhouses about 50% of the auxiliary workers are women. There is no distinction in wages between the sexes. The project specifically recognizes the important role women can play in agricultural production. With the provision of a line of credit for individual pig production a most important resource of the individual producers, namely surplus labor, which is largely comprised of women, will be utilized. F. Bank Experience in Agriculture 1.13 The Bank has made twenty-one loans to Romania since it became a member in December 1972, for a total lending volume of US$1,102.8 million. 1/ Eight of these, totalling US$441.5 million, have been in agriculture, of which four are irrigation projects, one irrigation and agricultural development project, one agricultural credit project, one agricultural component of a flood recovery project, and one pig production and processing project.l/ The 1/ Including the $70 million loan for the Mostistea and Calmatui Irrigation and Drainage Project to be considered by the Executive Directors on the same date as the proposed project.  - 6 - agricultural projects are supervised about twice a year and are progressing satisfactorily with no major problems. A brief description and the current status of projects under supervision in the agricultural sector are summarized below: (a) Giurgiu-Razmiresti Irrigation Project 1082-RO: US$70.0 million; Board date: 1/28/75; Effective date, 5/5/75. The project will irrigate about 100,000 ha. Crops grown include maize, barley, soybeans, sunflower, alfalfa hay and maize silage. Progress is satisfactory. The Project Completion Date is December 31, 1978 and the Borrower is to prepare a Project Completion Report during fall 1978. (b) Sadova Corabia Agricultural Credit Project 1083-RO: US$30.0 million; Board date, 1/28/75; Effective date 4/29/75. The project provides for a wide range of on-farm investments under an existing irrigation scheme, including orchard and vineyard production, livestock/dairy production, agro- industrial development and technical assistance. Imple- mentation progress is satisfactory. Disbursements are running about 15% ahead of schedule. (c) Flood Recovery Project 1169-RO: US$40.0 million; Board date, 11/4/75; Effective date 12/2/75. The project provides for rehabilitation, drainage and flood control works, establish- ment of an early warning system for floods, and provision of agricultural credit to farms affected by the mid-1975 floods. All 248 subprojects for rehabilitation and repair of the irri- gation, drainage and flood control systems have been completed. The completion date has been extended by six months to June 1979 to allow for completion of the flood warning system component. (d) Rasova-Vederoasa Irrigation and Agricultural Development Project 1247-RO: US$60.0 million; Board date 4/27/76; Effective date 11/3/76. The project is the first of Bank loans to Romania in which irrigation and credit are combined in a single project. Irrigation works will supply water over about 65,000 ha for the production of feedgrains (maize, barley), soybeans, sunflower, alfalfa hay, and maize silage, as well as wheat, vegetables, fruits, and grapes. Other project components are 11 dairy units including 9,130 imported heifers, 2 beef fattening units, 1 grain storage silo, 1 feedmill, and 17 rural water supply schemes. Under the irrigation component works are progressing satisfac- torily. Under the agricultural development component, physical facilities at 4 dairy farms are finished, the feedmill and silo are 62% completed and contracts for all equipment and imported heifers have been awarded. (e) Ialomita-Calmatui Irrigation Project 1368-RO: US$60.0 million; Board date, 2/17/77; Effective date, 6/23/77. The project will  - 7 - irrigate about 148,000 ha for production of feedgrains, oil/ protein crops, and forages. Progress on construction of the irrigation infrastructure is satisfactory. (f) Pig Production and Processing Project 1479-RO: US$71.0 million; Board date, 7/12/77; Effective date, 9/15/77. The project represents the Bank's first participation in Romania in a devel- opment plan on a nationwide basis. It provides for the devel- opment of a large multiplier herd, establishment of testing and selection centers, expansion of industrialized swine production, and provision of slaughtering and processing facilities. Proj- ect implementation is proceeding satisfactorily. Disbursements are running ahead of appraisal estimates. 1977 commitments are expected to generate an incremental output of 1.13 million pigs in 1979 and about 1.65 million pigs in 1980 and thereafter. The 1978 project investment list has been finalized and commitments are over 80% of the total investment cost. ICB determined con- tracts of $43 million total over 60% of the loan amount and ICB tender documents for another $30 million of slaughter house equip- ment are now issued. Supervision missions have been uniformly favorable in their findings on detail of project implementation leaving no doubt as to the eventual success of the project. (g) Viisoara Irrigation Project 1509-RO: US$40.5 million; Board date, 2/19/78; Effective date, 5/15/78. The project will provide irrigation and drainage facilities over about 110,000 ha for pro- duction of maize, sugar beet, vegetables and fruits, soybeans, alfalfa hay, maize silage, and other fodders. Preliminary works have started in the field. G. The Pig Subsector Position 1.14 Pigmeat is the dominant source of meat in Romania. In 1976 it com- prised 47% of total meat output with beef in second place with 27%. Pigmeat's share of domestic consumption and of exports at 46% and 48% respectively in 1976 are similar to its share of output. This dominant position in the livestock subsector is long-standing phenomenon resulting from the Romanian consumers' preference for it compared to other meats. This secular emphasis on pigmeat production has also stimulated the development of a level of tech- nical efficiency which enables Romania to export competitively. The National Herd Structure 1.15 The 1977 national pig herd was about 10.2 million head including about 960,000 sows (Table 1.1). Herd size increased rapidly from about 2.2 million in 1950 to about 5.4 million in 1965, to about 8.6 million in 1974,  Table 1.1: PIG POPULATION PRODUCTION AND DISPOSITION Growth Rate p.a. Actual Planned 1970-75 1975-80 1980-85 1970 1975 1976 1977 1980 1985 --%------------ No. pigs - thousand head 5972 8566 8813 10193 13000 15500 7.5 8.7 3.6 of which: - I.A.S. 2424 3117 3380 3469 3745 4350 5.2 3.75 3.05 - C.A.P. 1613 2620 2795 3013 4565 6000 10.2 11.75 5.65 - C.A.P. members )2323 1580 2403 3371 4345 4805 - 7.5 22.5 2.05 - private sector ) Production - Total thousand tons liveweight 604 955 1018 1026 1462 1770 9.6 8.9 3.9 Consumption - Total tnousana tons carcass weight 275 453 478 492 624 850 10.5 6.6 6.4 - Per captta kg carcass weight 13.6 21.3 22.3 22.8 28.0 36.0 9.4 5.6 5.2 X Export - Thousand tons liveweight /1 166 244 265 257 443 442 8.8 10.8 0 Population '000 20253 21245 21446 21559 22311 23542 0.95 1.0 1.1 /1 Difference between production and conslmption assuming a 73% carcass yield. Source: Ministry of Agriculture, Bucharest July 1978  - 9 - and 9.6 million in 1976. Over this period, emphasis was placed on increasing production in the socialist sector. In 1950, 1.8 million pigs (about 80% of the total) were recorded in the private sector compared with about 0.7 million (about 6.3%) in 1977. In 1977 about 3.5 million pigs (about 34%) of the total were recorded in large-scale commercial production units either on mixed State enterprises or on specialized State enterprises for pig production. About 3.0 million pigs (30.6%) were recorded in large-scale units on cooperative (CAP) farms or intercooperative (ICA) pig complexes (specialized pig production units owned by two or more cooperatives). Another 2.7 million pigs (30%) were produced by members of cooperatives in small individually operated plots, and the remaining 0.7 million (6.3%) on individually owned smallholdings. State, CAP and ICA farms produce 65% of total pork all of which is sold through the Government operated slaughtering processing and marketing systems. Pigs produced by individuals or CAP members on their own plots, amounting to 35% of total output, may be sold under contract through the Government operated system or in the private market. Planned Development 1.16 Actual and planned production and exports of pigmeat and consumption of pigmeat and all meat from 1970 to 1985 are set out in Table 1.1 together with population data and annual growth rates. Total production in 1977 was 1.0 million tons liveweight. This is planned to increase to 1.5 millions tons in 1980 and 1.8 million tons in 1985. In line with this, growth con- sumption and exports are also planned to increase. Of particular interest is the pattern of growth rates for the three 5-year periods from 1970 to 1985. These show that, despite the substantial absolute increase in volumes of pro- duction, consumption and exports, the growth rates of these show significant declines. This growth path appears reasonable based on the future demand facing the industry. The steepest decline is in planned exports which fall from a growth rate of almost 11% per annum in the 1975-80 period to zero between 1980 and 1985. Domestic per capita consumption growth is seen to taper off to 5.2% annually during the 1980-85 period, having grown at the very high rate of 9.4% annually during the 1970-75 period. 1.17 Thus the past 5-Year Plan emphasized consumption although not neglecting exports. This was needed in order to give a needed boost to lag- ging domestic consumption. The current 5-Year Plan gives priority to exports with the general aim of firmly establishing Romania's share in export markets which are generally viewed to grow more slowly in the future. The annual rate of growth in domestic consumption in the period is planned to decline by 4 percentage points from 10.6%, but still remains acceptable at 6.6% annually given actual levels of consumption. Finally the 1981-85 Plan aims at maintain- ing growth in consumption at the level of the 1975-80 period but drastically reducing the growth rate of exports, possibly in preparation for a more uncertain export market future. Constraints 1.18 Before discussing constraints it must be emphasized from the outset that pig production and processing technology in Romania is very  - 10 - modern and gives very satisfactory results. The appraisal mission's economic analysis amply substantiates this conclusion. It is necessary to keep this in mind when discussing the industry's constraints to higher output and efficiency in order to keep the criticisms made in perspective. The rapid development of Romanian pig production from its smallholder base in 1950 to its present large scale industry base bears tribute to the efforts of Romania to ensure adequate meat supplies. Thus the removal of the constraints dis- cussed here, while likely to have greater than a marginal effect on output and efficiency, is not critical to the survival and economic well-being of the industry. 1.19 Given the well established technology, if the necessary investments are made, and the technology efficiently applied, there is no reason why the Plan targets cannot be achieved. Nonetheless the industry is not without room for improvement. By comparison with other large pig production units in Western Europe and North America, feed conversion efficiency, sow fertility and labor productivity in Romania are all poor. Present levels of feed con- version efficiency in the better-run units range from 5 to 5.2 kg feed per kg of liveweight gain. This would range from 4.5 to 4.8 in Western Europe or North America. Based on generous Romanian pig nutrient specifications a figure of 4.5 is used in Romanian planning data. If these nutrient specifica- tions were generally provided in pig feeds, the planned feed conversion figure (4.5) would result in a 20% decline in feed use for a given output. But, due to poor quality domestically-produced maize and barley and inadequate use of soybean meal and fishmeal for protein, plus the scarcity of feed additives (vitamins and minerals), the specifications are not achieved. Apart from the factors mentioned, conversion efficiency is found to be reduced by feed wastage due to inefficient feeding systems, overfeeding, and general lack of control. 1.20 The number of marketed pigs produced per breeding sow per year is an important coefficient in determining overall profitability. This is relatively low in Romania, averaging 10 or 11 per sow. It is a function of average litter size and mortality and number of litters per sow per year. This latter is the main source of the problem. The number of litters is about 1.5 per sow/year. Allowing for 5-week weaning which is the practice in Romania the number of litters produced per sow should be about 2.0 and could be 2.2. The main reasons advanced for the small number of litters/sow are (a) group housing of pregnant sows; (b) poor quality maize particularly in bad harvest years; (c) operational shortages of feed or shortage of protein rich feed ingredients; and (d) heat stress during summer months. It is extremely difficult to quantify the relative contribution of these factors to the overall problem. High summer temperatures are considered an important cause in Romania because fertility is relatively low during the hot summer months. However, this does not explain the broad range of results encountered across farms since production systems, nutrition, and housing environments are much more standardized in Romania than elsewhere. The one important factor that is not standard is the level of management which probably accounts for the broad range encountered. A significant example of such management problems is the difficulty of detecting oestrus in sows, especially when dealing with batch mating of large numbers.  - 11 - 1.21 The number of pigs produced per year per person employed ranges from about 200 to 450 on the farms visited. This is about 1/3 to 1/2 the number produced per worker on some well run farms in Western Europe. Managerial and technical personnel account for about 13% of total staff on pig units in Romania; and auxiliary workers, including those that work on the manure dis- posal systems and in the waste water treatment plants, account for another 45%. Only about 42% of the total employees work directly with pigs. There is considerable scope for improvement in labor productivity in Romania through reductions in the number of managerial and auxiliary workers. The present practice of expressing output in terms of pigs produced per worker directly employed on pigs tends to be misleading; it is recommended that output per employee would be a better criterion of efficiency as this would reflect the number of auxiliary workers present. The first index is generally employed when measuring improved productivity from the introduction of new technologies such as mechanized feeding systems. Similar overemployment in clerical posi- tions and among auxiliary workers is of the order of 20-25%. 1.22 While indicating the amount of room for improvement, of themselves these deficiencies are not constraints provided they are incorporated in the planning process. However, utilizing unrealistic coefficients in the planning process, such as 4.5 for aggregate feed conversion efficiency and 16 pigs sold per sow per annum, could have a serious effect on achieving Plan targets through a shortfall in inputs required, with the exception of labor. As presently seen, the result would be a 20% shortfall in feed inputs, to be made up either by reduced production consumption and exports or a decrease in energy grain exports and an increase in protein feed imports. The low fertility problem can be counteracted in practice by increasing the number of sows to ensure that the planned number of pigs are produced. Under Romanian conditions the principal incremental costs associated with the larger sow herd would be for feed and veterinary services (because accommodation allowances for dry sows are usually adequate for the increased number required); these additional costs are small relative to the benefits realized by operating closer to full capacity. During appraisal a number of pig production com- plexes were observed operating below capacity; therefore, the strategy of increasing the number of sows should improve profitability considerably. Planned animal feed production is such as to permit Romania to remain a net exporter of maize and become a net exporter of soybean meal by 1979. This latter is considered doubtful but is not of significance since adequate supplies are available in the world. The aggregate feed grain surplus situation is likely to continue but at present problems with poor quality grain are also seen to contribute making it difficult to achieve improvement in feed related production coefficients. Feeds Sources, Quality and Compounding 1.23 Pigs are fed domestically-produced maize, sorghum, and barley. About 50% of the soybean meal (the predominant protein food), and 100% of the fish meal included in pig rations are presently imported. Meat, bone, and blood meals included in rations are produced domestically. Other ingredients  - 12 - for food concentrates include wheat offals, sunflower meal, fats, sugar, whey, minerals and vitamins. Energy feeds (maize, sorghum, barley) account for about 80% of the total pig feed, and high protein feeds (soybean meal, fish meal and meat meal) account for the remainder. Romania is generally well supplied with feed grains of satisfactory quality needed in formulating good pig rations. This does not ensure that good quality pig rations are always provided at producer level. Pig farms usually buy mixed feeds from large feed mills at controlled prices. Feed mills procure energy feeds (maize, barley, sorghum, etc.) from the Cereal Marketing enterprises and buy sunflower meal and soybean meal from sunflower and soybean processing plants. Fish meal and imported soybean meal are procured through Romagrimex, a State enterprise in charge of importing agricultural inputs. Rations are formulated by computer on a monthly basis, at the Nutrition Institute, based on a national inventory of available feeds. The Nutrition Institute provides feed mills with direc- tives for vitamin-mineral premixes appropriate for different ration formula- tions. About one percent vitamin-mineral premix is incorporated in the five standard rations formulated for pigs and designated 01 to 05. 1.24 The overall strategy for providing livestock feeds is centered on locating large feed mills throughout the country to supply formulated feeds to livestock producers within a radius of about 50 km. Government plans to construct four or five plants throughout the country to provide sufficient vitamin-mineral-protein premixes to the feedmills in the future. One such plant, with a capacity for about 100,000 tons of premix per year, is being financed under the Sadova-Corabia Agricultural Credit Project. Although the feed base in Romania is satisfactory, low feed quality is the most important single factor reducing production efficiency at farm level. There are three main reasons for this: (a) Low quality maize. The maize crop is frequently of low quality because of bad harvest conditions. A proportion of the crop is affected every year and in bad harvest years (such as 1975 and 1976) a high proportion of the crop was affected. Wet weather at harvest causes damage associated with fungal growth and also with too high drying tempera- tures. Furthermore storage facilities are frequently inade- quate, particularly in the cooperative sector. It is not possible to quantify the proportion of the crop affected and the degree of damage incurred, but it is reasonable to assume that on average 20 to 30% of the crop is affected and is unsuitable for pigs or is of low feeding value. This portion should be diverted to ruminants. Sufficient efforts in this direction are not being made. (b) Protein. Problems arise from time to time in the quantity and quality of protein feeds available. When in short supply, the protein content of feeds is reduced across the board resulting in reduced animal performance. Also priority is sometimes given to the production of poultry rations (particularly layers) because reduced performance is much  - 13 - more quickly detected in this category. The protein quality of soybean meal of US origin is considered better than that of the domestic product because considerable denaturing of protein is caused by extraction techniques used in Romanian plants. The problem is fully appreciated and progress is being made in upgrading the quality of Romanian soybean meal. (c) Absence of Independent Quality Control. In Romania practically all feed mills are owned and operated by a Central State enter- prise for feed mills. It has the obligation to provide pre- determined volumes of five standard feed formulations to pig producers. In practice considerable deviations from these standards occur because of low quality maize and scarcity of protein feeds. The feed mills rather than an independent body are responsible for feed quality control and the pig producers have little or no control over feed quality as delivered to the pig unit. The State enterprise for feed mills operates the quality control program from three regional laboratories. Although these laboratories carry out some analysis on mixed feeds their main function is to conduct analysis on the ingredients used in feed mills and to help individual feed mill laboratories standardize their own quality control tests. Market Prospects 1.25 Based on MFIT estimates of "unrestricted" consumption and current Bucharest city consumption, demand projections were made assuming that domestic fresh meat consumption would be 50% higher if supplies were not regulated by Government. Canned and prepared meat demand and supply are assumed in equilibrium as these are in plentiful supply locally. This gives an overall difference of 14% between "unrestricted" consumption and the actual supply of pigmeat. At constant 1978 prices, with an income elasticity of demand of 0.8 and a real income growth rate of 5.75% annually the projected "unrestricted" domestic market demand for pigmeat in 1980 is 681 thousand tons and in 1985 is 949 thousand tons. These compare with planned consumption figures in Table 1.1 of 624 and 850 thousand tons respectively. Thus, despite increased per capita consumption, the difference between "unrestricted" con- sumption and available domestic supply is 9% in 1980 and almost 12% in 1985. Over the long run the gap is seen to close only slightly and the constraint is clearly available supply rather than consumer demand. 1.26 Export markets have altered in recent years. Exports to the EEC have declined due to enlargement of the Community, with completed phasing-in of the UK, a major importing country, and Denmark and Ireland, two sizeable exporters. The composition of sales to the EEC has also changed veering from live pigs, frozen pork and offals to processed products. Declines in sales to the EEC have largely been offset by sales to other Western European countries and the USSR, mainly of frozen pork. Exports of canned pork and ham to the US have grown steadily by about 15% annually.  - 14 - 1.27 Assuming continuation of existing marketing practices, very little growth in exports to the EEC is foreseen. The volume of exports in any given year will depend on the position of the EEC pig production cycle. On average, in one year out of three, exports will be substantial, and in one year out of three they will be extremely low. Greater emphasis on high quality brand-name products in consumer packs would help offset declines in export earnings in adverse years. Prospects for increasing Romanian canned ham exports to the US are good. The traditional suppliers, Denmark and the Netherlands, have reduced export sales in favor of the enlarged EEC domestic market. Sweden, Spain, Portugal, and Greece are the other major export markets, although recently the USSR is seen of importance. While trade has been erratic, it has shown growth in the past and can be expected to continue to grow. However, it will probably remain erratic due to domestic pig production cycles in these countries and the lack of long-term trade agreements. The entry of Greece, Spain and Portugal to the EEC could make export sales to these countries more difficult because of the EEC's Common Agricultural Policy. Other small export markets are now being investigated by Romania, e.g. Gibraltar, Hong Kong and Malta. While these would never be large export outlets, they could be very useful as supplemental markets and assist in the process of market management. The general conclusion is that, between both the domestic and export markets, there will be adequate demand to meet planned output. On the export market there may be occasional cyclic constraints but the under-satisfied domestic market and increased efforts in new markets should be adequate to avoid over-production problems. 1.28 Due to the extreme domestic price stability coupled with centrally planned production and the absence of any major disease outbreaks, pig pro- duction in Romania shows no cyclical pattern. This results in a monotonically increasing export supply of pigmeat. Due to cyclical production in export markets the demand for Romanian pigmeat exports exhibits a cyclical pattern. This pattern is expected to strengthen in the future. The net result of this is to create variations in domestic supply of pigmeat. Such variations are generally accepted in Romania and can be expected to increase in absolute value in the medium term. Endeavors are made to offset individual variations so that a decrease in domestic pigmeat supply may be compensated for by an increase in poultry. With beef, in the recent past, increased exports of chilled beef have been offset by imports of frozen beef. H. Price Formation and Marketing Margins Price Formation 1.29 Prices of all products in Romania, at both farmgate/ex-factory and retail levels, are established and controlled by the State. A major tenet of Romanian economic policy is to maintain stable price levels. Retail prices in the aggregate increased by less than 3% over the 1971-75 period and are expected to increase by approximately 5% between 1975 and 1980. The prices of  - 15 - essential goods, including food products, are kept relatively low, and retail prices of some goods, e.g. bread, have remained unchanged since the early 1950s. Producer (supply) prices are also kept stable over at least one planning period: between 1974-76, producer prices were revised for the first time since 1963 to reflect changes in technology and costs, both internal and international. 1.30 The basis for establishing official prices is cost of production plus a reasonable margin for the industry. Within agriculture and agro- industries, the "reasonable margin" for production costs is considered to be around 8-10% on turnover. 1.31 The producer prices for pigs and indeed all farmgate prices are officially set by the State Committee for Prices, an agency established at the level of the Council of Ministers which has a professional staff at central government and judet levels. However, the initial calculations and proposals for such prices are made by the pricing department within the Ministry of Agriculture, taking technical advice from the relevant production departments. Retail prices for main pigmeat products are also fixed by the State Committee for Prices, in a similar fashion. Prices for new pigmeat products are pro- posed by MIC after consultation with MFIT. Following approval by the State Committee for Prices, MFIT issues a price order which is ratified upon publication in the Official Bulletin. Price Levels and Marketing Margins 1.32 State-controlled producer prices apply to all pigs passing through the official channels. The official prices for cooperatives and individuals are higher than those for State farms, however, so too are the prices of inputs, mainly feeding stuffs. The rationale for this is not entirely clear, but at comparable performance levels cooperatives generally show slightly lower margins than State enterprises. It appears, therefore, that the State has chosen to tax cooperatives on the basis of inputs utilized but to collect funds from State enterprises on the basis of net income transfers. 1.33 In addition to the "contract prices", which apply to pre-agreed quantities of produce, "acquisition prices" are also established to cover produce in excess of contracted quantities sold to State marketing agencies by CAP members, individual farmers and CAPs. In the case of pigs, "acquisition prices" are the same as "contract prices". 1.34 Pigs sold liveweight in the private markets have generally averaged 55% higher prices than the official producer prices. The reason why large volumes of pigs are not produced and sold on the private market is that feed supplies are only obtainable from the socialist sector for contracted pigs. Pigs for private sale have to be Eed on the produce of individuals plots. The supply of such produce is limited because of the small amount of land available for such production.  - 16 - 1.35 The marketing margins for retailers and for the wholesale agency ICRA are shown in Table 2 below: Table 2: WHOLESALE AND RETAIL MARKETING MARGINS (REBATE PERCENTAGES) FOR PIGMEAT PRODUCTS ICRA Retailer Total Carcass meat 0.8% 3.2% 4.0% Prepacked meat 0.8% 2.7% 3.5% Offals and abattoir by-products 1.0% 5.0% 6.0% Canned and prepared meats 1.25% 4.25% 5.5% Raw and salted fat 1.0% 5.0% 6.0% Lard 1.0% 4.0% 5.0% Note: Percentages are based on retail prices. The levels of retail margins in Romania are low compared with other countries. This is a reflection of the low level of inputs into retailing - lack of visual display materials, shortage of availability of cold storage space, virtually no product advertising, and utilitarian labeling and packaging. Furthermore, the policy of self sufficiency at the judet level keeps trans- port costs low. 1.36 Generally, ex-MIC prices are calculated by reducing the retail price by the rebate percentage figure. However, for fresh meat purchased in carcass form there is also a tax of about 1 lei per kg levied on for meat sold directly to shops, while carcass meat for further processing is untaxed. This tax has the effect of keeping the price of fresh pork, ex-butchers shop, relatively high compared with processed products. Results of the Pricing System 1.37 Virtually no account is taken of consumer preference in setting prices. Rather, through the use of MFIT consumer surveys the planned physical allocation of goods takes account of consumer preference. Consequently, no extra financial incentives are given to influence producing trusts, e.g. MITs, to manufacture goods which are more popular. This system appears quite satisfactory with major commodities, e.g. bread, meat, milk, but it does lead to overproduction of some processed products, and insufficient availability of fresh meat. 1.38 In the case of joint pigmeat products, when there is no basis for allocating the cost of production, the policy in Romania is to keep the differentials low. The intention is that everyone should be able to afford fillet, chops, hams, etc. and that the allocation of high quality meat should not be solely on the basis of who can afford it. This consumer equity orienta- tion is the strength of the Romanian pricing system and is to be highly com- mended. However, it does give rise to other interesting allocational issues.  - 17 - At the consumer level, allocation in the presence of a finite supply is on a first-come-first-served basis while at the producer level actual production decisions are a function of bureaucratic strength between the consumption and production-oriented ministries. 1.39 Also, the low differentials do actually permit poor allocation of resources. For example, the relatively high retail price of fat, compared with the price for whole carcasses, in Romania is out of line with world price relationships. Domestically, lard sells for 11 lei/kg and the wholesale price of carcasses is 16.5 lei/kg, a ratio of 1:1.5. Export prices on the other hand, over the last seven years, have averaged 1/ US$500 and US$1,448 per ton respectively, a ratio of 1:2.9 (long run estimates for 1990 are US$319 and US$1,670 - 1:5). The high retail price of fat makes it possible for the producer price of a heavy pig - say 130 kg liveweight - to be higher than a lighter one. Consequently, at domestic prices it is more profitable to pro- duce fat pigs than at 'economic' prices and, as a result, Romania is almost certainly producing uneconomical overfat pigs. The current net annual eco- nomic cost to Romania of slaughtering at 105 kg average weight, instead of about 95 kg, would appear to be about US$10-12 million. I. Government Supporting Services 1.40 Training. Agricultural education in Romania is organized into a national system, coordinated by the Ministries of Agriculture and Education, to provide training for specialists and skilled workers for the agricultural sector. Formal education consists basically of providing instruction for new personnel and staff in-service training. Instruction starts with agricultural gymnasiums (high schools) where students are exposed to a wide range of agri- cultural activities, as well as provided the opportunity to specialize. Some of the graduates from these high schools proceed directly to production com- plexes as skilled workers while the remainder continue on to agricultural universities. A varied in-service training program is conducted for all levels of workers in the agricultural sector. MAFI organizes 8-week review courses which are compulsory for all expert staff every 5 years. Similarly, short courses are given annually for experts and skilled workers. Included in the investment and operating costs of each new production complex is a train- ing component for the unit's staff members. The director of the new complex is appointed from the beginning of construction works and follows through their completion. To gain familiarity with the operation of the unit, the director and other key staff work on existing units for at least 6 months in all operational activities. Once a new unit is in operation, skilled workers from existing complexes are brought in for about 6 months to provide on-the- job training for new lower-level staff. The system is satisfactory. 1/ Average price expressed in 1978 constant dollar terms.  - 18 - 1.41 Animal Health. MAFI's Central Veterinary Diagnostic Laboratory in Bucharest provides a specialized diagnostic service to the district veterinary services, covering 39 districts and Bucharest. The District Veterinary Inspectorates are responsible for implementing the Sanitary Veterinary Law (1964), and their main functions include: (a) operation of veterinary diagnostic laboratories for the districts; (b) provision of services to private farmers and cooperative members who maintain livestock. (Services are free and include the provision of medicines, drugs, advice, and on-farm treatment of animals); (c) administration of all inoculations required by law; (d) provision of specialized services to large industrialized animal production complexes, including back-up laboratory services; and (e) sanitary inspection and control of slaughterhouses and meat shops. All large livestock production complexes (including those to be financed under the project) have full-time veterinary surgeons on their staff who are techni- cally and functionally responsible to the District Veterinary Inspectorates but are paid directly by the production units. The Inspectorate maintains a total staff of about 305 out of which about 200 are employed on these large animal complexes. Veterinarians are likewise posted throughout each district to provide field service for small producers. A horse and buggy are provided to enable on-farm visits at the village level within a radius of about 15-20 km. Veterinary Research 1.42 The Pasteur Institute in Bucharest is the main center for veterinary research as well as principal coordinating agency for all veterinary research carried out in Romania. It is responsible to MAFI through the Agriculture Academy of Science. The Institute has extensive, well equipped laboratories in Bucharest and owns three farms on which experimental animals are maintained. In addition, it operates three smaller field stations at Iasi, Cluj, and Arad. University veterinary faculties are also located in these towns. The Institute has two main functions: (a) production of all the biological materials (e.g. vaccines) required for veterinary use throughout the country; and (b) conduct of research on infectious and nutritional diseases of animals, including pigs.  - 19 - 1.43 The Institute has about 120 research staff members and employs about 1,500 persons in total. Most of the general staff time is spent in producing biological materials (e.g., about 25 million doses of Swine Fever vaccine are produced each year). About 40% of the professional staff spend about 80% of its time on the production of biological materials and about 20% on research. Sixty percent of the staff spend about 80% of its time on research and about 20% in providing technical assistance to the veterinary services on specialized veterinary problems. The Pasteur Institute is a research organization of high caliber providing useful services in an efficient manner. Pig Research 1.44 Pig research is mainly concentrated in the Peris National Pig Research Station near Bucharest and in the Nutrition Institute in Bucharest. The Peris research station has about 80 technical staff members including 25 researchers with university-level training (about ten with doctoral training). It owns and operates a large pig production unit with about 1,500 sows that produces about 22,000 fattened pigs per year. The main areas of investigation at Peris include: (a) nutrition and feeding; (b) environmental research; (c) production technology (e.g., different types of pig cages); (d) reproduction and fertility; and (e) breeding research with Landrace, Largewhite, Duroc, Hampshire, and Yorkshire breeds. Peris is applied research-oriented with the objective of developing production systems that could stimulate production throughout the pig industry. Reflecting emphasis placed on inter-disciplinary research, multi-disciplinary teams are organized at Peris to carry out ongoing research projects. There appears to be scope for improvement in the quality of research carried out at Peris. The production facilities including pig houses, feeding arrangements, etc. are designed to meet the needs of a large commercial pig farm rather than the needs of a pig research station. In particular, nutrition research seemed to be poorly organized and serviced. For example, Peris apparently maintains neither individual feeding facilities for growing pigs nor facilities for conducting digestibility studies on pig feeds. Part of the problem seems to stem from the division of responsibility between Peris and the Nutrition Institute for Nutrition Research. 1.45 The Nutrition Institute is part of the National Academy of Agricul- ture. It has responsibility for conducting nutrition research for pigs, poultry, cattle, and sheep. It is a specialized institute engaged in more basic research having the following functions: (a) analysis of mineral- vitamin-protein premixes for all animal feeds utilized in the country; (b) monthly computer formulation of all rations to be fed to livestock in Romania on the basis of the inventories of available feeds; (c) improvement of feed preparation technology for such products as soybean meal, and investigation of feed quality problems associated with processing; and (d) analysis of the nutritive value of feeds and formulation of rations and feeding systems based on animal experimentation. 1.46 The Nutrition Institute employs a high caliber professional staff and maintains good laboratory facilities. Pig feeding work is carried out  - 20 - in cooperation with the research station at Peris. This arrangement is not satisfactory because (a) Peris is located about 15 km from the Institute and (b) shared responsibility has not proven a good mechanism for conducting research. Design and Survey Institute for Construction 1.47 Within the Food Industry Department of the Ministry of Agriculture and Food Industry (MAFI) the Design and Survey Institute for Construction in Agriculture and the Food Industry has national responsibility for the design of facilities required for the production and processing of a wide range of food items. There are other organizations which also carry out project design such as the enterprise initiating the project, the Judet Design Institute and the specialist Centrals, such as the MIC which have design staff within the organization. The decision on where the project will be designed depends upon the size of the project and its complexity. 1.48 The Design Institute is organized into several sections - livestock, food industry, feed mills, accounting and administrative services. Each sec- tion is further subdivided into specialist sections. In the food industry section for instance specialist sections each under the control of a chief engineer cover such items as sugar factories, oil factories, meat and dairy processing plants. The specialist sections in turn have particular respon- sibilities. Within the meat and dairy specialist section for instance, separ- ate specialist subsections cover slaughterhouses and meat processing plants, cold storage, milk processing plants and cheese processing plants. In its work and particularly for new projects the technology and economic aspects are subject to review by the technical and economic section of MAFI. A similar review is carried out by BAFI when it wholly or partially finances such projects. 1.49 The work program for the Design Institute is planned ahead on a yearly basis. The enterprise initiating a project must ensure that prelim- inary planning is completed in sufficient time to get the project included in the Institute's program for the following year. It must also negotiate with the Institute to determine the cost of the design work and the program for completing the design phase of the project. In turn the Institute negotiates a design cost and time deadlines with the Project Team. Overruns on time by the design team can result in deductions from the negotiated design cost paid to the team. Design costs are in the range 2-3% of investment costs. 1.50 This approach to financing of detailed project design is a signifi- cant source of the Bank's difficulties with agricultural project preparation in Romania. The detail of project preparation reports including technical specifications and financial models is given to this institute on an ad hoc basis and without allowance in its budget. This results in a hastily-produced and very incomplete and unsatisfactory project preparation report. No market demand or economic analysis is included in these preparation reports as the Design Institute has no capability in these areas. This significantly adds to the deficiency of project preparation reports.  - 21 - 1.51 Romania has agencies which are technically competent to develop the various topics requiring coverage in project preparation but no well deter- mined point of responsibility for producing project preparation reports exists. It is recommended that MAFI establish a small unit especially for this task and fund it adequately so that it can contract out the work as required to the various specialist agencies as is the practice in Romania but retain the responsibility for assembling the final report. Research Institute for Food Chemistry and the Food Industry 1.52 Also within the Food Industry Department of the MAFI the Research Institute for Food Chemistry and the Food Industry carries out research in all branches of the food industry, except in the areas of fruit and vegetables, wine, tobacco and fish which are covered by other institutes. Organized as a central, the activities of the Institute are based essentially on contracts with particular enterprises, other centrals and MAFI. The Institute is orga- nized into two basic sectors, a technology section with responsibilities in such fields as chemistry, cold storage, mechanization and a products section with laboratories covering food items such as meat, sugar, beer, etc. The work of the Institute is subject to approval of MAFI although some projects may require Government approval before they are included in the annual or five yearly research plan. 1.53 The Institute carries out its work in the enterprises' production units as well as in the Bucharest laboratories. Pilot plants for processes are built in the Institute's workshop attached to the laboratories. The Institute works closely with the Design Institute who have the responsibility for developing the technology and pilot plants for application in full scale plants. Meat Inspection Service 1.54 A well organized, internationally accepted Meat Inspection Service is operated by MAFI. Its main responsibilities include: (a) enforcing meat inspection regulations; (b) providing inspection services at all approved slaughterhouses and processing facilities to ensure that only wholesome and hygienic meat products are made available to consumers; (c) ensuring that facilities are constructed to meet sanitary standards; and (d) collecting information on such topics as the number of animals slaughtered by type and weight range, number of animals condemned including cause, tonnage of meat products produced, and tonnage of freslh and processed meats leaving the plant. The Meat Inspection Service is controlled by the Director of Veterinary Ser- vices within the Animal Production Directorate of MAFI. The service is orga- nized on a Judet basis for most meat packing plants, but in the case of plants approved for export to the U.S., the Meat Inspection Service for that partic- ular plant is directly responsible to the Director of Veterinary Services. The Meat Inspection Service staff are mainly veterinarians but technicians are used for some routine inspection procedures. The Inspection Service is completely independent of the plant and is paid by the veterinary services directorate. In the event of disagreement with the plant management, the plant veterinarian can go to the Judet Director of Veterinary Services, or in the case of plants approved for export to the U.S., to the Director of Veterinary Services.  - 22 - II. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY A. Overview 1/ 2.01 The Bank for Agriculture and Food Industry (BAFI) is a State-owned credit institution established in 1968 to finance and supervise investments and operations in agriculture and agroindustries. The Administrative Council is BAFI's policy-making body. Between the sessions of the Administrative Council, the Executive Bureau acts as the decision-making body. BAFI's opera- tions are carried out by 39 branches, 92 sub-branches and about 850 credit cooperatives which serve as BAFI's agents for small-scale lending. Enter- prises of national importance are served by the three operational departments in the head office (agroindustries, cooperative sector and State sector). B. Fiscal Agency Operations 2.02 One of BAFI's most important functions is that of financial agent for State investments in agriculture and agroindustries. BAFI reviews and is empowered to require changes in proposed development plans, disburses accord- ing to approved plans, supervises implementation with particular emphasis on adherence to appraisal estimates and plan targets, and collects depreciation payments 2/ and net incomes for the State budget account. BAFI is paid a commission for this service at the rate of 0.5% of the investments channelled through it. Over the past several years, State equity contributions for investments disbursed by BAFI were as follows: FY Million Lei 1970=100 1970 27,077 100 1973 39,471 146 1976 70,598 261 1977 93,445 345 In terms of their relative importance, net investments financed with State equity channelled through BAFI were equivalent to about 34% of BAFI's total assets at the end of 1977. 3/ 1/ Additional details and BAFI's organization chart are given in Annex 3. 2/ Depreciation charges are assessed on capital inputs on the basis of cost and the legal life of each item, to provide for full cost recovery and accumulate savings for future investments. 3/ See Annex 3.  - 23 - C. Financing Policies and Procedures 2.03 BAFI makes short--, medium- and long-term loans to the cooperative sector and to a limited degree to individual borrowers (coop-members and private farmers). Short-term capital requirements of State enterprises are financed mainly by equity contribution (State budget allocations channelled through BAFI) and partly by BAFI production credits. Long-term investments in State enterprises are likewise generally financed with equity from the State budget channelled through BAFI (para. 2.04). 2.04 Loans are primarily secured by "credit engagements" of borrowers, who commit all present and future income to debt service and are obliged to maintain all their financial assets in BAFI settlement (deposit) accounts. Under BAFI policy, short-term credit extended to cooperatives cannot exceed 60% of the contracted value of the commodity whose costs are being financed, and interest and principal repayments are deducted from the borrowers' accounts when sales proceeds are realized. Though no bad debt has been recorded by BAFI to date, the law provides that in the event a liquidity problem should arise, BAFI's claims have priority vis-a-vis other debts. D. BAFI Lending through the Credit Cooperatives 1/ 2.05 BAFI and the Central Commission of Credit Cooperatives maintain a protocol by which BAFI lending to individual producers is channelled through the CRC system. BAFI pays to the CRC a commission of 0.41% of the total value of loans processed on its behalf. BAFI provides both short-term and long-term investment loans to individuals through the CRCs. In order to receive loans from BAFI, the individual must contract with a socialist enterprise (or indirectly through a Consumer Cooperative acquisition Center) for 100% of the value of the BAFI loan. BAFI short-term loans are provided for up to 45% of the value of the finished goods contracted at an interest rate of 2.5% p.a. For BAFI long-term loans the individual submits the contract and an applica- tion to the CRC for evaluation. The CRC evaluation reports are then sent to the BAFI sub-branch for approval. 2.06 The CRCs represent a considerably more important source of long- and short-term funds for the individual producers than BAFI. Total CRC lending over 1970-77 grew by an average of about 18% annually from 641 million lei (US$35.6 million) in 1970 to 2,094 million lei (US$116.3 million) in 1977. Its struc- ture remained fairly stable, about 87% being short-term loans and the balance long-term investment loans. Total BAFI individual producer lending over the same period declined from 417 million lei (US$23.2 million) in 1970 to 385 million lei (US$21.4 million) in 1977. The structure of BAFI lending remained 1! For details see Project Implementation File Annex 3 - Institutional for Financing and Marketing of Pigs in the Private Sector.  - 24 - relatively constant with about 97% being short-term loans and the balance long- term loans. The decline in BAFI lending is attributed to the fact that in recent years the CRCs have made special efforts to expand their lending opera- tions especially for livestock production activities, and that the CRCs put much less restrictive contracting conditions on their lending. In order to receive BAFI loans the individual must contract to market through a socialist enterprise all of the products obtained as a result of use of the loans, while the contract marketing conditions on CRC lending are limited to products representing 20% of the value of the loan granted for loans up to 10,000 lei and 25% for loans exceeding 10,000 lei. Although the CRC loan terms are more stringent than those of BAFI (3 years at 7% versus 5 years at 3%) the less restrictive marketing conditions together with the significantly higher free market prices during certain seasons offset this difference in terms. E. Sources of Funds 2.07 In descending order of importance, the various sources of the funds channelled through BAFI as of the end of 1977 were the State budget (51%), 1/ short-term loans from the National Bank of Romania (NB, 37%), deposits of State enterprises and cooperatives (6%), miscellaneous accounts payable (2%), BAFI's statutory capital and reserves (2%), and IBRD borrowings (2%) (Annex Tables 3 and 4). BAFI has no other foreign debt. No major shifts in relative importance among these financing sources is expected during the period up to the end of 1985. F. Financial Conditions 2.08 BAFI's financial condition is strong and is expected to remain so through 1985. The balance sheet reveals a prudent matching of assets lives with financing sources. Net worth is about 2% of total assets, a ratio that is similar to those of Western commercial banks and adequate in relation to the low proportion of BAFI's repayable long-term debt, 2/ the low volatility of BAFI's revenues and deposits, and the quality of its asset portfolio rela- tive to loan default risk. 1/ Balance sheet items included under this category are the "Fund for short- term credits", the "Fund for medium- and long-term credits", accounts payable to the State budget, and the State budget investment account administered by BAFI. 2/ Consists entirely of six IBRD loans. It is expected that the ratio of repayable long-term debt to net worth will peak at 4:1 in 1981 and there- after decline (Annex 3 Table 7).  - 25 - III. THE PROJECT Concept 3.01 The project represents the final two-year time slice for the pig production and processing portion of the Romanian 1976-80 National Develop- ment Program. The previous two-year tranche, 1977-78, was partially financed by the Bank's Pig Production and Processing Project. As such this project would be a major input in realizing the planned pig meat production necessary towards meeting domestic demand and generating further export earnings. Specific project objectives are: (a) continued expansion of large-scale pig production units to avail of managerial and technical scale economies; (b) additional production of hybrid gilts for breeding so as to expand use of animals of high genetic quality; (c) provide new and modernized slaughtering and processing facilities capable of providing access to export markets; (d) assist in expanding individual producers small-scale activities in agriculture and horticulture, including pig production, so as to use underutilized resources in private households; (e) improve nutrition-related pig production coefficients through applied research. Composition 3.02 Investments planned are (i) 27 new fattening farms each averaging 45,500 fat pigs and 2,000 weaners annually; (ii) 25 new crossbred gilt pro- duction farms, 12 averaging 17,000 gilts annually and 13 averaging 3,885 gilts annually; (iii) modernization of 37 pig breeding and fattening units to increase capacity, each averaging an incremental 17,333 fat pigs and 783 weaners annually; (iv) a line of credit to individual CAP members and individual producers for development of various smallholder agricultural and horticultural activities such as fattening of surplus weaners produced in the previous 3 investment categories; (v) provision of facilities to augment existing pig nutrition research; and (vi) construction of slaughterhouses for 3.5 million pigs annually at full development, cold storage totalling 70,000 cubic meters for producing and packaging unsalted pork and beef cuts from carcasses and processing facilities for 4,500 tons of salami annually. This would include modernization of existing facilities, to meet both the domestic and export market hygiene standards, as well as provision of new facilities. 3.03 Subloans would be made by BAFI to State Enterprises and Coopera- tives for buildings, utilities, slaughtering and processing equipment, farm  - 26 - machinery, vehicles, feed storage units, and quality breeding stock, and by BAFI or its agent the Credit Cooperative to individuals for construction materials, weaners and feed. Funds would be made available on a grant basis through BAFI and MAFI to (i) the National Pig Research Station at Peris for laboratory facilities and equipment and a small feed manufacturing plant and (ii) the Animal Nutrition Institute at Balotesti for a 400-sow unit and attendant housing and facilities for feeding experiments. IV. PROJECT COSTS AND FINANCING A. Project Cost 4.01 Total Project cost is estimated at Lei 7.8 billion (about US$436 million) of which the foreign exchange component is Lei 1.7 billion (US$95.5 million) or about 21.4%. These estimates, summarized below, include taxes and import duties on items expected to be directly imported under the project. 4.02 The cost estimates are based on prices prevailing in 1978. An allowance of 5% is included for physical contingencies. Price contingency allowances are 1% per annum for 1979 through 1982 on all domestic components and on foreign exchange components 6.5% for 1979 and 6.0% annually for 1980 through 1982. The exchange rate used in estimating costs is the Romanian officially determined trading rate of Lei 18-US$1. This rate is expected to remain stable.  - 27 - TOTAL PROJECT COST Foreign Foreign % Local Exchange Total Local Exchange Total F.E. --------(Lei '000) ---- ---------(US$ '000)--------- Fixed Capital Investments Pig breeding/fattening units State Enterprises 606,131 145,893 752,024 33,674 8,105 41,779 19.4 Cooperatives 562,836 135,472 698,308 31,269 7,526 38,795 19.4 Crossbred gilt production units State Enterprises 154,139 35,687 189,826 8,563 1,983 10,546 18.8 Cooperatives 433,185 103,599 536,784 24,066 5,756 29,822 19.3 Modernization of existing Pig breeding/fattening units State Enterprises 429,660 101,440 531,100 23,870 5,636 29,506 19.1 Cooperatives 206,237 48,691 254,928 11,458 2,705 14,163 19.1 Slaughterhouses for 246,000 pigs/year 641,976 211,716 853,692 35,665 11,762 47,427 24.8 Slaughterhouses for 500,000 pigs/year 584,048 196,296 780,344 32,447 10,905 43,352 25,1 Sausage processing facilities 237,062 77,344 314,406 13,170 4,297 17,467 24.6 Cold stores 202,353 66,020 268,373 11,242 3,668 14,910 24.6 Modernization of existing slaughterhouses 114,000 36,000 150,000 6,333 2,000 8,333 24.0 Credit to individual producers 489,600 122,400 612,000 27,200 6,800 34,000 20.0 Applied nutrition research 20,250 4,750 25,000 1,125 264 1,389 19.0 Subtotal: Base fixed capital costs 4.681,475 1,285,302 5,966,777 260,082 71,407 331,489 21.1 Contingency allowance Physical (5%) 216,072 57,780 273,852 12,004 3,210 15,214 21.1 Price/l (4%) 76,464 137,718 214,182 4,248 7,651 11,899 64.3 Subtotal: Contingencies 292,536 195,498 488,034 16,252 10,861 27,113 40.1 Subtotal: Fixed capital costs 4,974,011 1,480,800 6,454,811 276,334 82,268 358,602 22.7 Incremental working capital 1,155,762 229,176 1,384,938 64,209 12,732 76,941 16.5 TOTAL PROJECT COST 6,129,773 1,709,976 7,839,749 340,543 95,000 435,543 21.4 /1 The following expected inflation rates (in percent per annum) were used in determining price contingencies for the prgject costs: Imported Component Local Component 1979 6.5 1.0 1980-82 6.0 1.0  - 28 - B. Project Financing 4.03 The financing plan for the Project is shown below: Cofinanciers Sub- IBRD MAFI/BAFI Borrowers Total ----------- (Lei '000)---------------- Fixed Capital Investments Pig breeding/fattening units State Enterprises 170,614 376,068 269,261 815,943 Cooperatives 159,758 375,061 229,208 764,027 Crossbred gilt production units State Enterprises 42,740 94,208 67,452 204,400 Cooperatives 121,419 285,141 174,202 580,672 Modernization of existing pig breeding/fattening units State Enterprises 121,442 256,066 203,274 580,782 Cooperatives 58,269 136,797 83,600 278,666 Slaughterhouses for 246,000 pig/year 194,662 438,384 297,904 930,950 Slaughterhouses for 500,000 pig/year 177,954 400,757 272,335 851,046 Sausage processing facilities 72,573 163,436 111,063 347,072 Cold stores 61,609 138,747 94,285 294,641 Modernization of existing slaughterhouses 33,787 95,479 32,317 161,583 Credit to individual producers 129,262 488,919 - /1 618,181 Applied nutrition research 5,931 20,917 - 26,848 Sub-total: Lei '000 1,350,000 3,269,910 1,834,901 6,454,811 Sub-total: TIJS$ '000 75,000 181,663 101,941 358,604 Incremental working capital - 959,347 425,591 1,384,938 TOTAL: Lei '000 1,350,000 4,229,257 2,260,492 7,839,749 TOTAL: US$ '000 75,000 234,960 125,583 435,543 Percentage of Total Project Cost 17.2 54.0 28.8 100 '1 Contributlon in kind from family labor.  - 29 - 4.04 A Bank loan of US$75 million and a loan of an unspecified amount from as yet unidentified co-financiers would be made to BAFI. The Bank loan would cover 17.2% of the total cost or 79% of the foreign exchange cost. The subborrower's contribution amount to 28.8% of total project cost. The remain- ing 54% woul7 be financed by MAFI/BAFI representing the Government and the co-financiers. 1/ In accordance with changed regulations State-owned enter- prises would now contribute to their own investment costs whereas as in the Pig Production and Processing Project their contribution was channelled through the State investment budget, these contributions range from 20 to 35% depending on the specific investment. Cooperative Enterprises would continue to contribute 30% to their investment costs. Individual producers would make no financial contribution but would utilize existing family labor for construc- tion and operation. The remaining 42.7% of the total project cost would be met from the State budget and BAFI's own funds. 4.05 The Bank loan would be for 15 years including 3 years grace. Terms of the co-financier's loan are not yet determined but are likely to be more stringent than the Bank terms. V. DEMAND AND MARKET ASPECTS Domestic Market Demand 5.01 Romanian domestic consumption of meat, particularly pork and pig- meat products has increased substantially over the past decade (Table 1.1). The fact that the price of pigs in the free market is much higher than the official price is evidence of excess domestic demand for pigmeat. MFIT indicated that, within the meat demand shortfall, unfulfilled demand for pork is relatively higher than that for poultry or beef. 5.02 Provisional Romanian proposals for total allocation of meat to be made available to the domestic market, in 1980 and 1985, are outlined below. 1/ Preliminary efforts at identification of co-financiers by the Bank have resulted in substantial interest being generated. Institutions indicat- ing an interest in this have been put in contact with BAFI. No serious problems in arranging for co-financing are now envisaged. BAFI has indi- cated that it envisages borrowing more than the amount of the foreign exchange gap (US$20 million) from co-financiers to finance this invest- ment.  - 30 - 1977-80 1980-85 1977 1980 increase 1985 increase Pigmeat 492 624 /1 8.2 850 /I 6.4 Beef 255 312 7.0 390 4.6 Other meats 330 402 6.8 460 2.7 Total 1,077 1,338 7.5 1,700 4.9 /1 Equivalent to approximately 1,140 and 1,550 thousand tons liveweight respectively. Within the Five-Year Plans, MFIT is given levels for total meat distribution, rather than for the individual items, thus, under the conditions of shortage, MFIT has been able to switch between meats, when convenient, yet still have no problems of clearing stocks. This facility has enabled advantage to be taken of export opportunities when the relative world price of different meats has changed, and also, has allowed chicken to be substituted for beef when pro- posed consumption expansion rates have been greater than sustainable beef production expansion rates. 5.03 MFIT and retail store managers confirm that fresh pork is in scarce supply, while canned and preserved pigmeat is readily available, but at much higher prices. Queues at fresh meat (pork) counters are the rule and their absence is an indicator that the store has sold its quota. Lack of attention to final product demand is due to its inability to affect final product prices. These are determined by MAFI and the State Pricing Committee on a cost plus basis and processing plant targets are measured in value. Thus, since it is more profitable for a slaughtering plant to process pigmeat than to sell it as fresh pork, fresh meat is scarce. Although MFIT are responsible for consumer interest in this area, they have not been successful in increasing the rela- tive proportions of fresh pork to processed pigmeat products marketed. In fict in 1970 fresh pork accounted for 50% of total pigmeat products sold by MFIT whereas by 1977 the proportion had fallen to 47%. Clearly therefore the type of processing of pigs allocated to the domestic market under this project should reflect this composition of demand. Future Domestic Demand 5.04 Demand projections are made on the basis that real prices remain constant; that the present level of consumption of fresh pigmeat would have been 50% higher had supplies been available; that canned and prepared meat consumption is in equilibrium and will remain so; and that live pigs will continue to be sold in the rural areas. 5.05 Under these circumstances base "potential demand" would be:  - 31 - Assumed demand base for Actual consumption 1977 projection purposes Pigmeat Factor Pigmeat equiv. '000 tons '000 tons Fresh meat 140 1.5 210 Sausages, etc. 140 1.0 140 Canned 18 1.0 18 Other 194 1.0 194 TOTAL 492 1.14 562 If real prices in the private sector were to continue to be the same amount higher than official prices, demand projections for 1980 and 1985 would be as follows: 1980 1985 Meat Meat Fresh meat 255 355 Sausages, etc. 170 237 Canned 22 31 Other 234 326 TOTAL 681 949 With increased public supplies, the price premium for private sector pigs may fall, and so the demand for the 75% of "other" pigs, thought to represent private sector pig sales will be higher than the figures in the data above. By comparison with the 1980 and 1985 planned pigmeat consumption of 624 and 850 thousand tons respectively (Table 1.1), it is seen that the gap between desired and planned consumption will be only slightly reduced. Actual 1970 and 1975 and projected 1980 and 1985 per capita consumption of all meat and pigmeat is given in Annex 6 Table 1 for a selection of European countries as well as the USSR and Japan. Current levels of Romanian consumption are well towards the lower end of the spectrum, and growth in these levels is seen as relatively modest. Thus, the Plan targets are distinctly non-indulgent of the Romanian consumer. Export Market Demand 5.06 Romanian meat exports have grown significantly over the past 8 years from around 60,000 tons annually in the 1969-1971 period to about 160,000 tons in the 1975-1977 period, of which pigmeat is about 50%. The majority (80-90% by weight) of pigmeat exports are in form of frozen carcasses or cuts, some 10 percent are semi-conserved, i.e., hams, etc. and about 3 percent are other conserved products. In addition to the pigmeat products, some 15 to 20,000 tons of lard are exported annually. 5.07 The destination of pigmeat exports have changed substantially over the last 7 years. Exports to the United States (almost entirely semi-canned products) have been growing at about 15 percent per year since 1973, and by  - 32 - 1977 has reached 7,000 tons. Sales to the three main importing nations within the EEC, Italy, West Germany, and the United Kingdom grew very rapidly between 1971 and 1975, peaking at 48,000 tons. However, since 1975 as a result of continued tightening of import restrictions, exports to the EEC have fallen sharply, amounting to 11,000 tons in 1977 to these three main countries, and a total of 14,000 tons to the whole EEC market. Exports to other countries, principally Spain, Portugal, Greece, Russia, Sweden and other European coun- tries, have grown consistently from 1970 to 1977 largely offsetting the reduc- tion in sales to the main EEC importing countries. Exports to the US and UK are handled by a single agency, Atalanta Corporation, while exports to other European countries are through various brokers and importers. Future Export Demand 5.08 This is largely a function of demand and supply prospects in the EEC, the US, the group of traditional Southern European importing countries, Sweden and the USSR. Efforts are being made to develop new markets with Gibraltar, Hong Kong and Malta mentioned in this respect. But these are small and likely to continue so. Japan, a major pork import market, is closed to fresh and frozen pork imports from Romania for animal health reasons and Japanese demand for processed pigmeat is low. FAO's 1985 pro- jections of global supply and demand indicate a deficit of 260 to 270 thousand tons. But, since this is only one half of one percent of total global demand it is well within even the smallest margin of error. This is to be expected since, with respect to short production cycle commodities such as pigmeat, a basic assumption underlying these projections is that supply in most countries would increase in line with demand and that the base period (1972-74) self- sufficiency rate of individual countries would remain unchanged. Nonetheless under the constant relative prices assumption this allows for growth in import markets. 5.09 The European Economic Community produces about 9 million tons of pigmeat annually and imports some 2 million. Most of the imports, however, are intra-community imports. When domestic production in the EEC countries is high and the actual market price achieved is below the target prices, it is difficult for third countries to supply products to EEC countries at the minimum import price or above and still be competitive with domestic products. However, for high value processed items, the strength of brand preference can often be sufficient to allow sales to continue at prices above those of com- peting products from within EEC sources. 5.10 It is expected that pig production cycles will continue with a periodicity of about three years within the EEC, and that in those years of cyclical production troughs and price highs, substantial imports from third countries would be made. Thus, it can be expected that in some years (probably about one year in three) Romania would make substantial pig product exports to EEC countries, particularly of carcasses and cuts to Italy and Germany. However in years of low European prices, exports would probably be limited to canned hams to UK, canned processed products to Germany and offals and a few high quality cuts to Italy. Sales of large volumes of carcass meat would effectively be cut off.  - 33 - 5.11 The United States of America is one of the world's largest importers of pigmeat products. These are mainly canned hams which, over the last four years, have been running at between 80 and 85% of total pigmeat imports. About half of all canned hams consumed in the USA are imported. At present Romania is a small supplier in the US canned ham market and provides about 3% of total imports. It is a major supplier of other semi-canned imported products such as canned bacon, pork loin and luncheon meat with about 36% of the market in 1977. 5.12 The US imports of canned hams peaked in 1973 at about 140,000 tons. Since that time they have fallen each year until 1977 when they were 114,000 tons. The fact that real unit import prices have also fallen from the 1973 level seems to indicate that this reduction in imports has resulted from a downward shift in demand rather than a shortage of canned hams available on the world market. Preliminary figures for the first five months of 1978 indicate that they may be higher this year. A recent study predicted canned ham imports would increase by about 5% annually between 1975 and 1980. 1/ So far the 1976 and 1977 figures have negated this forecast as import growth has been negligible. 5.13 Prospects for Romania increasing its penetration of the US canned ham market appear good. Shares of the main traditional suppliers of imported canned ham, Denmark and the Netherlands which between them supplied 70% of the US market, have fallen to 48% while the shares of the Eastern European coun- tries replacing them have increased. Taking the semi-conserved products together it might be expected that Romania could increase its sales from about 5% of the imported supplies as at present to maybe 15% by 1985, i.e, Romanian exports to the USA by 1985 might be of the order of 15 to 20,000 tons of semi- conserved products annually. 5.14 Historically, other countries which have imported pigmeat and pig- meat products from Romania include Sweden, a group of Southern European countries--Spain, Portugal, Greece, and Eastern European countries including Russia. The Swedish market has almost been entirely for semi-conserved hams and has grown at more than 15% annually. As Romania appears to provide a large production of the Swedish imports of this product it can be expected that its market share is unlikely to increase much further. Consequently, the potential growth of the Swedish market is likely to be in line with the growth in demand for this product--about 2-3 percent per year. 5.15 Imports are on average a small part of total pigmeat supply, 2-3% in aggregate, for European countries outside the EEC which import pigmeat. Con- sequently a small change in either supply or demand can alter the status of a country from being a net importer to being self-sufficient or a net exporter. The FAO commodity forecasts project production and consumption of pigmeat products will grow by about 17% in other Western European countries and 13% in 1/ Profiles and Prospects in Canned Meat - 1980. Business Research Opera- tions Control Department, American Can Company, Greenwich Connecticut Spring 1976.  - 34 - Eastern Europe between 1975/77 and 1985. Furthermore they project that the imports of the "Other Western European" countries will grow from an average of 64,000 tons in 1972-74 to 80,000 tons in 1985 and that the import requirements of the Eastern European countries are likely to grow from 93,000 tons in 1972-74 to 120,000 tons in 1985. But, as noted, the possibility of error in these predictions is fairly high. Processing Capacity 5.16 Romanian proposals for processing sub-projects being funded under the Pig Production and Processing Project, which are being constructed in 1977 and 1978, would provide the following capacities: Tons product weight Output capacity Canned meat 13,600 Sausages and prepared meats 42,400 Semi-canned 28,200 Although further capacity would be required under this project (Livestock II) for slaughtering and for making sausages and prepared meats, there is clearly no need to further increase canned or semi-canned capacity. Even if sales to USA were 35,000 tons, rather than 15,000 to 20,000 projected here, there would be adequate semi-canned production capacity. Thus, construction or equipping of any additional canning or semi-canning plants for pigmeat are excluded from the project. 5.17 At full production of the project, canning capacity, particularly for the export market, may not, at present, be suitably located with respect to new slaughterhouse construction under the project. This may require moving existing canning plants to new slaughterhouse locations in order to provide the most suitable processing mix. In the absence of any detailed study and in view of the relatively high cost particularly in foreign exchange of canning plants this is, a priori, considered to be a lower cost solution than adding to the existing overcapacity. It is possible that any canning plants financed under the Pig Production and Processing Project, but not yet constructed, could be located to facilitate any canning activities proposed in association with output from slaughterhouses financed under this project. Conclusions 5.18 It is clear that the exports from Romania to other countries (in- cluding the USSR) have continued to increase over the past 7 years. In view of this and in the light of the FAO trade projections it can be expected that on average Romanian exports to "other countries" will continue to expand should supplies be made available for this purpose. In the absence of long- term agreements however trade with individual countries is likely to vary considerably from year to year.  - 35 - 5.19 Incremental demand for pigmeat products by 1985 is projected approxi- mately as 894,000 tons composed as follows: 1977 1985 Potential Actual Potential Increase --- ('000 tons) --- Export market Semi-canned 10 23 13 Sibiu salami 1 4 3 Canned 1 5 4 Carcass/cuts 63 80 17 Domestic market Canned (incl. semi-canned) 18 31 13 Sausages, etc. 140 237 97 Carcass/cuts 140 355 215 Others /1 Meat equiv. 194 326 132 Total meat 567 1,061 494 Liveweight equivalent 1,026 1,920 /2 894 /2 /1 Meat in rural area, mainly home killed. /2 Approximate figures based on 1977 ratios. 5.20 The availability of incremental pig production from "1976 commit- ments", Pigs I and this project (Livestock II) would be about 580,000 tons liveweight from 1983 onwards, that is about 65% of the estimated incremental demand. Assuming that this production is used first to fulfill the whole of the export demand and that the remaining products are channelled to the domestic market, pro rata with estimated demand, incremental pigmeat (mea- sured in terms of products consumed) would be required in different forms approximately as follows: Total ('000 tons) Semi-canned 15 Sibiu salami 4 Canned 10 Sausages, etc. 59 Carcass/cuts 150 Non industrial slaughter 82 Total meat 320 LW equivalent 580  - 36 - VI. TECHNOLOGY, RESEARCH AND PLANT LOCATION Production Technology 6.01 The basic production technology associated with large-scale pig pro- duction is well understood in Romania. The scale of operation has grown sub- stantially. As managerial capacity has grown with this has come changes in feeding systems, housing, and ration formulation all with the aim of improving efficiency and meeting the continuously expanding demand of a developing econ- omy and a buoyant export market. Of all these investments housing is the most expensive and long lasting, consequently prudence is counselled towards new housing designs which should be rigorously tested in a practical fashion prior to being accepted. 6.02 At present two pig housing innovations are undergoing preliminary testing. There are two levels of cages in growing houses to double the capac- ity of these houses and two-storey fattening houses are being constructed in a few newer complexes. Despite their use in some commercial enterprises these have not yet been fully tested and are considered by the mission as of dubious merit. The disadvantages of the two-storey system are the substantially higher construction costs and operating costs involved in return for the rather small amount of site space saved. This is also the case for the two-level cage system in growing houses together with reduced physical input- output coefficient due to the discomfort of the pigs on the lower level. The two-storey fattening houses would not be included in the project. A number of variants of the two-cage growing houses are now being evaluated in Romania. But, this innovation would not be financed under the project unless otherwise agreed to by the Bank, subsequent to its review of the evaluation. This evaluation would include both technical and economic analyses. Applied Nutrition Research 6.03 Under the project about 20 million lei (US$1.1 million) would be provided to strengthen applied pig nutrition and husbandry research. The items financed and their specific objectives are: (i) pig nutrition research would be strengthened at the Peris National Pig Research Station and Peris would be charged with responsibility for input/output studies for all cate- gories of pigs. Peris should be provided with a feed manufacturing plant (10 thousand ton capacity annually); laboratory facilities (about 300 m2) and laboratory equip- ment to support digestible energy, protein, amino acid, mineral and vitamin studies. In addition at least three pig nutritionists and supporting staff would be based at Peris. Sow breeding/management studies should be expanded to document more clearly the relatively low fertility of the national breeding herd;  - 37 - (ii) the Animal Nutrition Institute at Balotesti should be pro- vided with a new sow unit for about 400 sows and ancillary housing and facilities to enable medium- to large-scale feeding experiments to be undertaken; and (iii) Peris and/or Balotesti should provide an independent analytical service to pig pr-duction units cc monitor feed quality. The three existing national feed quality control laboratories should be regarded mainly as a monitoring service for raw material used by the feed mills. This approach is suggested to ensure that adequate checks and balances, at present absent, are introduced. The proposed investments in the research component, together with the asso- ciated program of work to be undertaken by Peris and Balotesti, would be submitted to the Bank for approval prior to disbursing for these. Slaughtering and Processing Plant Location 6.04 A comparative survey, on a judet basis, of pig slaughtering capacity and pig production for 1982 reveals wide variations in loading figures. 1/ 2/ The overall national picture is quite satisfactory with a simple average loading factor of 0.75. However, the range is over judets extremely wide running from 0.05 in the Bucharest Municipality to 1.9 in three judets. There is probably substantial transfer of pigs between judets to bring actual plant figures much closer to the average after allowance for the age and condition of the individual plants. However, data on this was not available. It is quite probable that plants in judets with extremely low loading factors are old and being phased out, but, information of this nature was not available. 6.05 A critical issue is the determination of the exact siting of the four very large slaughtering plants of 500,000 head capacity to be con- structed in the judets of Ialomita and Timisoara (2 in each) in connection with the development of COMIAL and COMTIM. 3/ In the preparation report models it was apparent from the costs that the power houses constructed for these plants would also supply electrical power and steam heat to nearby residen- tial complexes thereby predetermining the specific siting of these plants. 4/ 1/ This survey is tabulated in the Project Implementation File Annex 5, Appendix 3. 2/ Loading Factor - Actual Utilization/Design Capacity. 3/ See Project Information File Annex 11 for details of COMIAL and COMTIM. 4/ These costs were eliminated in the appraisal models which reflect the costs of electricity and power required exclusively for the slaughtering and processing plant.  - 38 - Indicative sites for some of these, when inspected by the mission, were seen to be poorly located with respect to such critical factors as waste disposal (especially waste liquid), the surrounding road network, and minimization of transport costs. Transport time is of particular importance when transporting live pigs to the slaughterhouse because of the severe weight loss incurred by pigs due to travel stress. Thus detailed professional site location studies and recommendations considering these factors would be submitted to and examined and approved by the Bank as a condition of disbursement for each of this type of plant with a capacity of 350,000 head per year or greater. Feed Quality and Compounding 6.06 The interest of the feed mill is adequately catered for, but the interests of the pig producer are not. Despite this the pig producers are responsible for any shortfall in output. The tacit Romanian assumption up to now that the interests of these two parties are synonymous is being reexamined. It is now generally recognized that an independent quality control service should be available to the pig producers to ensure that the necessary checks and balances are in operation. To ensure this an applied Nutrition Research component has been included under the project which inter alia would provide an independent analytical and specialized advisory service to pig producers on pig feeds and feeding. 6.07 An alternative strategy for supplying feeds to large pig complexes would be worth considering in the interest of the economy. If pig units were to buy ingredients and grind and mix their own feeds, considerable cost savings could be achieved, and in addition, the pig unit manager would have greater control over feed quality. The advantages associated with on-farm mixing include: (a) economies resulting from the elimination of double handling since grains would be moved directly to the pig farms with- out going to a feed mill; and (b) economies in the cost of producing feed which presently runs about 110 lei/ton at the feed mill (10% to 12% of the average cost of pig feed/ton). Disadvantages include the costs of storage, grinding and mixing on the farm. Furthermore, unless this approach were given official approval and encourage- ment, the supply of ingredients to the pig farms might not be assured. How- ever, since vitamin-mineral-protein premixes could in time be purchased from the specialized plants, supply of these ingredients at the local level should not constitute a problem. 6.08 Some pig complex managers favor home-compounding in order to provide cheaper and better feeds. At present, some piggeries formulate rations, par- ticularly in ICAs where the energy feeds are grown by and provided to the piggeries by participating CAPs. Although the present system at first seems rigid, it appears that the directors and managers of large pig complexes enjoy  - 39 - considerable freedom of action, enabling the industry to evolve sensibly with- in the context of fairly rigid overall planning. This flexibility should be encouraged. 6.09 The establishment of two large 'Combinats', COMIAL and COMTIM, in Ialomita and Timis, together with the internalization of their own feed compounding on a large scale is a good example of the industry's ability to evolve in a reasonably flexible manner in order to overcome major constraints such as poor quality pig feeds which currently poses a serious problem for these two State enterprises and for all pig production units. VII. PROJECT IMPLEMENTATION A. Organization and Management 7.01 BAFI would be the Borrower under guarantee of the Socialist Republic of Romania, and individual subprojects would be implemented by State Enter- prises and Cooperatives after thorough appraisal by MAFI and BAFI. As with previous Bank projects in agriculture in Romania this project would be admin- istered by BAFI through its 39 district branches. BAFI would be responsible for overall project management and monitoring. This is a repeater project and the third Bank-assisted agricultural credit project in BAFI together with 4 irrigation projects thus the institution is very experienced in management of Bank projects. The Pig Production and Processing Project is being imple- mented smoothly and so general management of this project should be quite satisfactory. 7.02 BAFI branches would be responsible for directly supervising the financial and administrative execution of the subprojects, with technical assistance from MAFI, particularly the Directorate General of agriculture, research stations, and meat inspection service. BAFI would meet project expenditures from a special project account which would receive funds from the State budget and from disbursements under the proposed Bank loan. B. Lending Policies and Procedures 7.03 BAFI would examine all proposals for subprojects to be financed under the project with a view towards determining their technical feasibility and financial viability. Detailed subproject investment proposals would be submitted to the branches or to BAFI's head office, depending upon their cost- scale, in accordance with normal BAFI procedure and subloan approval authority delegation. 1/ All subproject investment proposals would have to be cleared 1/ Details provided in Project Implementation File Annex 4.  - 40 - by the responsible MAFI agency before review by BAFI. BAFI would prepare an individual summary analysis for each investment subproject, including key operating and investment indicators. For subprojects involving total fixed investment costs of 60 million lei (US$3.1 million) or more, BAFI would submit the individual summaries to the Bank for approval prior to any disbursement for these. For subprojects involving total fixed investment costs below 60 million lei, BAFI would submit individual summaries to the Bank for approval prior to any disbursement of the following representative investment subproj- ects: (a) one slaughterhouse - modernization; (b) two new pig breeding/ fattening units (1 State Enterprise and I Cooperative); (c) two crossbred gilt production units (1 State Enterprise and 1 Cooperative); (d) two pig breeding/ fattening units - modernization (1 State Enterprise and 1 Cooperative); and (e) sample subprojects of three types of activities undertaken by individual producers. Assurances were obtained during negotiations that analysis of these subprojects would be undertaken according to a format agreed between BAFI and the Bank during negotiations. This level of prior Bank review would cover 19% of the already identified subprojects financed under the project and 23% of the total fixed investment costs. C. On-Lending Terms 7.04 In accordance with its current lending regulations BAFI would on- lend to (i) State Enterprises for a period of up to 10 years including a maximum grace period of 3 years; (ii) Cooperative Enterprises for up to 18 years including a maximum grace period of 3 years; and (iii) Individual Producers for up to 5 years with no grace period. BAFI would also provide medium-term loans of up to 6 years to cover interest costs during construc- tion. Funds for investment in pig nutrition research and training which is the responsibility of MAFI would be transferred to MAFI and later repaid directly to BAFI from the State budget on terms and conditions acceptable to the Bank and contained in a memorandum, describing this process, to be obtained during negotiations. 7.05 Interest rates would be the same as those charged by BAFI for similar investments. Medium-term loans extended to IASs and CAPs would be at 4% and 3% p.a. respectively. Interest on investment subloans to IASs would be 2% p.a. during construction and 4% p.a. after start of operations; subloans to CAPs would be at a uniform 3% p.a. The weighted average interest rate on total (medium- and long-term) BAFI loans made under the project would be about 3.6% p.a. and BAFI's financial and administrative costs of providing these loans would be at a rate of about 2.6% p.a., so that BAFI would realize a positive spread on its medium- and long-term loans. As a result of central controls over domestic prices, 'Romania maintains a domestic inflation rate on retail prices of less than 1% per year and it is expected to continue through the end of the 1976-80 Five-Year Plan. This 1% annual rate of increase takes into account the 20% increase in building and equipment costs since 1963. Be- cause of the step-function nature of such increases in the past, no significant  - 41 - further increase is anticipated during project implementation. 1/ Insulation of the domestic economy from world inflation is expected to continue in the future. In view of the above, BAFI lending operations under the project would be performed at interest rates that are real and positive and expected to remain so d,iring repayment of subloans. More generally, interest rates play no role in the allocation of resources or in influencing individual investment decisions in Romania's socialist sector. Lastly, the level of interest rates does not influence the level of capital intensity employed in investments, since project design and technology choices are standardized by the Ministry of Agriculture's Design Institute and applied in all investment projects nation- wide (para 1.04). Assurances would be obtained during negotiations that BAFI would implement the project lending policies, procedures and terms described in paras 7.01-7.06. D. Procurement 7.06 In Romania, all civil works are constructed by Romanian State-owned construction enterprises who are experienced and familiar with local condi- tions, methods, and regulation. Installations similar to those proposed under the project have in the past proved well designed and constructed. Construc- tion of project facilities would be carried out under contract by the Romanian construction enterprises. The foreign exchange component of equipment and material required for the project is estimated to cost about US$82.3 million (including contingencies), the remainder being indirect foreign exchange associated with incremental working capital required during the construction period. An agreed list of items costing US$75.0 million would be procured by Romagrimex under ICB in accordance with Bank procurement guidelines. These items include construction materials, concrete reinforcing steel, US$12.7 million; structural steel, US$9.5 million; steel piping, US$2.2 million; electrical cables, US$14.8 million; asbestos cement sheets, US$4.5 million; and slaughterhouses and meat processing equipment, US$31.3 million and are detailed in Annex 1. Romanian manufacturers would be allowed a 15% preference margin or the applicable customs duty, whichever is lower. Romanian manufac- turers are highly competitive and it is anticipated that foreign suppliers would be awarded contracts for only about US$7.8 million for slaughterhouse and meat processing equipment which are not manufactured in Romania. Assur- ances were obtained during negotiations that procurement of items specified above would be obtained through ICB in accordance with Bank guidelines. 1/ The total project cost estimate includes a price contingency on local costs calculated at 1% p.a. on the expectation that Government will pursue a policy of passing through cost increases on a more frequent basis.  - 42 - E. Disbursements 7.07 Bank disbursements would extend over an estimated 5-year period although the entire loan is expected to be committed by the end of the second year. The annual phasing of commitments and investments and the forecast of quarterly disbursements are shown in Annex 2, Tables 1 and 2 respectively. Disbursement of the proposed Bank loan of US$75 million would be as follows: Category % of Expenditures to be Financed (1) Disbursement under BAFI loans: (a) for construction of pig breeding/ fattening complexes and crossbred gilt production complexes 31 (b) for construction or moderniza- tion of livestock slaughterhouses, cold storage facilities and sausage processing facilities 31 (c) for development of various agricul- tural and horticultural activities by individual CAP members and individual producers 21 (2) Goods and services for pig nutrition research 21 Disbursement will be made against certificates of expenditure, the documenta- tion for which is not submitted for review but is retained by the Borrower and made available for inspection during the course of Bank and co-financier supervision missions. F. Accounts and Audit 7.08 The existing accounting and auditing procedures in Romania are quite strict and satisfactory. BAFI's accounts are subject to audit by internal inspectors and an annual audit by inspectors from the Ministry of Finance and the Court of Superior Control. The Court, which reports directly to the President of the country, conducts an independent audit of BAFI's accounts and of results of audits by inspectors from the Ministry of Finance. During negotiations, assurances were obtained that BAFI would submit to the Bank an annual audit report satisfactory to the Bank within 6 months of the close of the fiscal year. 7.09 BAFI would keep separate accounts for all project expenditures, including those related to goods and services financed out of the proceeds of  - 43 - the proposed Bank loan. These accounts would be audited according to exist- ing procedures. Assurances were obtained during negotiations that such project expenditure account satisfactory to the Bank and available to Bank supervision missions would be kept by BAFI and that a report on the project accounts, audited by the Ministry of Finance, would be submitted to the Bank annually within 6 months of the close of the fiscal year. G. Monitoring 7.10 BAFI maintains detailed records by borrowers of financial and pro- duction results relative to subproject appraisal expectations which it uses in its subproject supervision. In order to measure overall progress of proj- ect implementation in relation to objectives, goals, and schedules established for each component, BAFI would submit quarterly reports to the Bank within 45 days of the close of each quarter. These reports would include data on pro- gress of construction of all physical facilities, progress in the procurement of equipment and materials, and data on project expenditures and livestock production. Information would be collected on each component and consolidated into an annual report whose coverage would include data on the number of enterprises and farm financed; the type, size and ownership of each; incre- mental pig and pork production; efficiency of production; annual consumption and exports of pork and pork products. Since its own procedures require BAFI to assemble such material and data the incremental cost of monitoring the project would be negligible. BAFI would also furnish to the Bank a project completion report promptly after completion of the project but in any event not later than 6 months after the project closing date. BAFI would prepare its report in accordance with Bank guidelines and format to be agreed during negotiations. Assurances regarding these matters were obtained during nego- tiations. H. Environmental Impact 7.11 Romania now maintains a comprehensive system of standards and con- trols to ensure satisfactory waste disposal, and a strict system of penalties is maintained to ensure compliance. Facilities financed under the project would be constructed and operated in conformity with this environmental protection code. During construction, each pig production complex would be required by law to install suitable waste water treatment works as well as separate well and water pumping facilities. In the manure and waste disposal system, combined solid and liquid manure would be pumped to concrete holding tanks for sedimentation and separation of liquid and semi-solid materials. Liquid material is drawn off and pumped through existing irrigation facilities onto field crops. After about 20-30 days of drying, the remaining solid material would be loaded and transported to farms for use as fertilizer. Similarly, the slaughterhouses, cold stores and sausage processing facilities would be required to construct primary effluent treatment plants to separate  - 44 - fats and solid materials, prior to discharge into the municipal sewerage system. Provision would also be made for a separate drainage system for rainwater. Slaughterhouse and meat processing plants must pay to discharge pre-treated waste water into municipal systems for final processing; this charge is either calculated on a fixed fee or a gauged basis. If a slaughter- house complex is constructed in a community where it represents the dominant industry, it would build a sewerage treatment unit for the entire town and thereafter forego periodic charges for its use. A strict system of penalties is maintained to ensure compliance with water purity requirements. I. Risk 7.12 The risks associated with project investments would be minimal. Design of the project components has been prepared in detail, and the Govern- ment has well organized and coordinated plans to supply necessary manpower, materials, and technical expertise to complete project works on schedule. The project is part of the final two-year investment program from the 1976-80 National Development Plan whose directives are obligatory and carry legal authority. However, because of the existing large capacity for processing pork into canned hams and sausages relative to the market demand for these products and the more favorable demand prospects for chilled and frozen car- cass pork and cuts, the planned investment in these facilities was scaled down considerably during appraisal. Analysis shows that with the investments financed here adequate capacity would exist for the slaughter and processing of planned production through 1982. The Government in addition (a) has allocated sufficient grain to support the project; (b) stands ready to forego grain exports, if necessary, to support livestock activities; (c) is actively pursuing programs to expand domestic production of high grade proteins for feed manufacture; and (d) supports the importation of protein materials to supplement domestic supplies. Demand estimates indicate that total from this project and prior planned investments would fail to satisfy domestic consumption in a free market situation and export demand is expected to grow significantly in traditional markets. Consequently no risk is seen in dis- posal of project output. The basic technology to be employed in project facilities is well established in Romania, and levels of efficiency observed are acceptable, but amenable to improvement through activities built into the project. Project construction is usually completed within the time schedule specified by Government, and costs overruns are rare. VIII. PROJECT BENEFITS AND JUSTIFICATION A. Production, Markets and Prices Production 8.01 At full production (year 5) the project would produce 2.6 million pigs or about 200,000 tons of pork in carcass equivalent. While some of this  - 45 - would be processed into semi-canned and canned meats, sausages and salamis in existing facilities most would be sold as fresh or frozen pork. The project would finance additional slaughtering capacity for 3.7 million pigs, sausage making facilities for 4,500 tons of salami type sausage and a total of 70,000 cubic meters of cold stores principally for processing carcass pork to cuts and packaging these. Finally modernization of existing plants would be carried out under the project to upgrade the health and hygiene standards of these. Markets 8.02 From the analysis and conclusions in Chapter V (particularly paras 5.19 and 5.20) it is seen that no marketing problem is foreseen in the aggre- gate. The domestic market will probably remain undersupplied. However, it may be necessary for Romania to reduce its export targets in occasional years due to cyclical production peaks in importing countries. Prices 8.03 The domestic pricing system is an administered one. Without the necessary Government directive prices may not be changed. Thus, incremental demand for inputs and supply of pigmeat will have no endogenous effect on these prices. At present no consideration is being given to any such price change. Actual financial prices used are given in the Projected Income and Investment Cost Tables for each model. 8.04 Since Romania is a net exporter of maize and is expected to continue to be so in the foreseeable future 1/ in the absence of the project, the maize and barley to be utilized as feed would be exported. Thus the export parity price is used as the economic value of these. These prices are derived by adjusting the international prices for quality, and then transportation and handling charges. By similar reasoning the import parity price is used for soyabean meal and an economic price of feed is determined based on the ratios of these in the feed mix. It is generally agreed among forecasters that on the world market, in the long run, the supply of pigmeat expands to meet expansion in demand. Unlike cattle and sheep meat production technology, pigmeat production technology is very much the same world-wide, having rela- tively high variable costs and low fixed costs. Measured cross price elas- ticities of demand between pigmeat and other meats are very low (probably zero in the long run); consequently there is little interaction between them, leaving the price of pigmeat as a function of its cost of production, mainly variable costs. Feed is the major portion (63%) of this variable cost, thus, the international price of pigmeat in the long run is a function of world feed grain prices and is related to these by well established ratios. These ratios do fluctuate due to cyclical fluctuations in pig and grain production but remain fairly constant in the long run. The annual average ratio between the Romanian pigmeat export price and the economic price of feed has averaged 8.6 1/ See Project Implementation File Annex 9.  - 46 - from 1970 to 1977. 1/ These long run average prices in 1978 terms are used as the economic values of pigmeat and feed. Based on the Bank's Commodities Division's feed grain and soybean price projections the price of concentrate feed in constant terms is expected to increase by 22% in 1990 over the 1977 level. But pigmeat prices can be expected to similarly rise, thus the given price projections are not incorporated into the primary analysis. Actual economic prices used, excluding construction, equipment and labor are detailed in Annex 4, Table 1. Construction and labor were priced at domestic rates, no shadow pricing being used. Equipment was costed at prevailing international prices. The price of labor was adjusted for taxes and includes actual and planned real wage increases over the current Five-Year Plan (1976-80) period. B. Financial Analysis 8.05 The financial rates of return to the various components, summarized in tabular form below, range from 5% for CAP pig breeding/fattening units to 40% for the slaughterhouses of 500,000 pigs/year capacity. 2/ Given the administered price system and the general independence of investment decisions from financial rates of return these rates of return have little meaning with- in Romania as they provide little or no indication of relative profitability of investments. 8.06 Differences in the rates of return among similar components range from minor to marked. For pig breeding/fattening units, and modernization of these, differences are minor and are the result of higher pension contribu- tions required by CAP workers. This also is true for Crossbred Gilt Produc- tion Units but is offset by the scale economies achieved by CAP units which have almost 4.5 times as many pigs as the State Units. Similarly, scale eco- nomies explain why the rate of return to larger slaughterhouses is over twice that of the smaller ones. 1/ For details of this analysis, see Project Implementation File Annex 1. 2/ Cash flow and details of associated investment and operating costs and revenues are contained in the Project Implementation File, Annex 7.  - 47 - Financial Rates of Return Analysis Summary Sensitivity Analysis Capital Operating Component Basic Costs Costs Revenue +10% -10% +10% -10% +10% -10% ------------------- percent ------------------ Pig breeding/fattening units State enterprises 8.5 7.4 9.8 1.8 14.2 15.1 0.3 Cooperatives 5.1 4.1 6.2 -4.0 12.2 12.9 -5.3 Crossbred gilt production units State enterprises 19.4 17.7 21.4 15.9 22.8 24.4 13.9 Cooperatives 19.0 17.3 21.0 13.0 24.5 26.1 10.9 Modernization of existing pig breeding/fattening units State enterprises 11.6 10.5 12.9 4.8 18.3 19.2 3.4 Cooperatives 15.1 13.8 16.6 9.4 20.9 22.1 7.8 Slaughterhouses for 246,000 pigs/year 20.3 18.4 22.5 -* 35.5 37.2 -* Slaughterhouses for 500,000 pigs/year 46.1 42.5 50.3 27.0 62.8 66.2 22.2 Sausage processing facilities 18.2 16.5 20.2 10.7 24.5 26.0 8.3 Cold stores 17.9 16.0 20.0 -* 62.6 64.1 -* Individual producer pig fattening 22.0 20.0 24.4 12.4 32.1 34.2 9.9 Individual producer pig housing 34.4 31.2 38.3 n.a. n.a. 37.9 30.8 * Below zero. C. Economic Evaluation Economic Rate of Return 8.07 The overall project economic rate of return based on all quanti- fiable benefits and costs is 30%. 1/ Benefits included are final goods from slaughtering and processing facilities, including meat and bone meal and other 1/ The project economic cash flow is given in Annex 4, Table 2.  - 48 - byproducts; incremental revenue from private sector pig house renovation, the value of manure in N, P and K equivalents the residual value of the herd, and sales of pigs outside of the project. Benefits from modernization of existing slaughterhouses to achieve sanitary standards and those from research were considered non quantifiable. Project Economic Rate of Return 30.0 Sensitivity Analysis Revenues + 10% 38.6 - 10% 20.8 Capital Costs + 10% 27.7 - 10% 32.8 Operating Costs + 10% 23.7 - 10% 36.2 10% Improvement in Feed Efficiency 32.2 1 Additional Pig Sold/Sow/Year 32.3 10% Improvement in Feed Efficiency plus 1 Additional Pig Sold/Sow/Year 35.2 8.08 The overall project return is not very sensitive to capital cost variations but is much more so to operating costs and benefits. Under the very strict, but unlikely, test of applying the projected real increases in grain prices with no corresponding pigmeat price increase the return would be 24%. But, if projected grain price increases occur and along with them the corresponding pigmeat price increases, because investment costs are fixed the actual margin over feed costs per pig would increase thereby raising the rate of return to 36% compared with the base estimate of 30%. 8.09 Of more significance in sensitivity analysis of the project than variations in costs or revenue are variations in two major technical coeffi- cients, feed conversion efficiency and number of pigs marketed per sow/year. A 10% improvement in feed conversion efficiency would raise the overall rate of return to 32.3%, while an increase of one in pigs marketed/sow/year would also raise the overall rate of return to 32.3%; finally, a combination of both of these would give a 35.2% overall rate of return. Since the aim of the research program is to effect changes in these two coefficients of the magnitudes indicated here, the sensitivity analysis gives an estimate of the effect that this might have on the entire project. The inability to real- istically assign a time span for the targeted improvement of the coefficients through research or to identify the possible changes in operating costs, particularly feed costs, which might arise out of research work recommenda- tions are the factors preventing any reasonable estimate of the rate of return to the research component. Excluding the investment costs of research and slaughterhouse modernization increases the economic rate of return to 30.9%.  - 49 - Employment and Benefit Distribution 8.10 Additional employment in slaughtering and processing plants financed under the project would create about 4,800 new jobs while project pig produc- tion would employ about 5,000 persons. As is customary with new ventures, a detailed education component during the investment period would provide the necessary upgrading of skills. Almost 50,000 CAP members and other individual producers would benefit through credits enabling them to invest on their own holdings. Final goods from project would be sold through the Government's fixed price marketing system or exported. In either case surplus funds accruing to producing, processing or exporting enterprises would be trans- ferred to the State for redistribution in accordance with State planned expenditures. Cost Recovery 8.11 With the exception of research costs all costs would be recovered through subborrower repayments. Since input and output prices, and incomes and consumer prices are determined independently of the individual enterprise or project, these need not enter into cost recovery considerations in Romania. Cost recovery is legislated in accordance with the characteristics of the type of investment so that the State investment funds may be replenished. Since BAFI default rates are virtually negligible this is additional evidence that the legislated time schedule for such recovery is reasonable. IX. RECOMMENDATIONS 9.01 During negotiations assurances were obtained that: (i) the project would be implemented in accordance with the project description in paras 3.02 and 3.03 (para 3.03); (ii) BAFI would analyze subprojects as specified in para 7.03 in accordance with a format agreed upon by BAFI and the Bank during negotiations (para 7.03); (iii) BAFI would implement the lending policies procedures and terms described in paras 7.03-7.05 (para 7.05); (iv) BAFI would submit to the Bank an annual audit report satis- factory to the Bank within 6 months of the close of the fiscal year (para 7.08); (v) BAFI would keep a project account as outlined in para 7.09 and satisfactory to the Bank and available to Bank supervision missions and would submit an annual report on this account, audited by the Ministry of Finance, to the Bank within 6 months of the close of the fiscal year (para 7.09);  - 50 - (vi) BAFI would submit to the Bank quarterly reports, as outlined in para 7.11, within 45 days of the close of each quarter and would be responsible for monitoring and evaluating the costs of and benefits realized under the project (para 7.10); (vii) BAFI would be responsible for the preparation of a project completion report in accordance with Bank guidelines and format agreed upon during negotiations. The report would be submitted to the Bank not later than 6 months after the project Closing Date (para 7.10). 9.02 The following four disbursement restrictions would apply: (i) BAFI would submit to the Bank, for its agreement, the tech- nical and economic assessments of any investment to which new technologies or major modifications to existing tech- nologies, including double level cages, are applied, before BAFI requests reimbursement for such investments (para 6.02); (ii) prior approval by the Bank of details of proposed invest- ments in research facilities at Peris and Balotesti, together with the associated work program, would be required as a condi- tion of disbursement for these (para 6.03); (iii) with respect to slaughterhouses of 350,000 pigs/year or greater capacity, detailed professional site location studies as outlined in para 6.05 would be submitted to and approved by the Bank prior to disbursement for these types of plants (para 6.05); (iv) prior approval, by the Bank, would be required for subprojects of over lei 60 million total investment cost and representative subprojects of categories of subprojects agreed to during negotiations, based on subproject analysis agreed to during negotiations, before disbursements could be made with regard to these individual subprojects and subproject categories (para 7.03). 9.03 With the above assurances and conditions the project constitutes a suitable basis for a Bank loan of US$75 million, equivalent, to BAFI for a term of 15 years including 3 years grace.  -51- ANNEX 1 Table 1 APPRAISAL OF LIVESTOCK II PROJECT ROMANIA Estimated Project Procurement 1. List of construction materials to be procured under International Competitive Bidding procedures. Romanian bidders are expected to win these contracts. Value Unit Quantity US$ Million Concrete reinforcing steel ton 36,000 12.7 Structural steel ton 19,000 9.5 Steel piping ton 14,500 2.2 Electric cables km 3,000 14.8 Asbestos sheets m2 5.6 mill. 4.5 Total 43.7 2. Slaughterhouse and meat processing equipment to be procured under International Competitive Bidding. US$ Million (a) Equipment not Produced in Romania: Control systems, specialized boning, chopping and filling equipment, slicing and packaging lines, continuous lard rendering equipment and electrical fork lifts 7.8 (b) Equipment Produced in Romania: Heat exchangers, refrigeration system components, scales, killing lines, boning and processing tables, conveyor systems, pumps, valves, pickling tanks, mixers, grinders, choppers, smokehouse and curing equipment, electrical motors, gear boxes, saws, transformers and electrical switch gear 23.5 Total 31.3 GRAND TOTAL 75.0  - 52 - ANNEX 2 Table 1 APPRAISAL OF LIVESTOCK II PROJECT ROMANIA Phasing of Project Investments /1 YEAR Fixed Capital Investments -1979 1980 1981 1982 TOTAL Pig Breeding/Fattening Units --------