Romania - Fourth Livestock Project

Document of The World Bank LE C; Y FOR OFFICIAL USE ONLY Report No. 3139a-RO STAFF APPRAISAL REPORT ROMANIA LIVESTOCK IV (CATTLE) PROJECT November 24, 1980 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 15 US$l WEIGHTS AND MEASURES 1 bectare (ha) 2.5 acres 1 hectoliter (hl) 26 gallons 1 kilogram (kg) 2.2 pounds 1 kilometer (km) 0.6 mile 1 liter (1) 0.26 gallons 1 meter (m) 1.1 yards 1 metric ton (ton) 2,200 pounds ABBREVIATIONS AND ACRONYMS AMF Anhydrous Butter Fat BAFI = Bank for Agriculture and Food Industry CAP Agricultural Production Cooperative CP Popular Council CRC = Credit Cooperative DCW = Dressed Carcass Weight EEC = European Economic Community ERR Economic Rate of Return FRR Financial Rate of Return GDP Gross Domestic Product IAS State Agricultural Enterprises ICA = Inter-Cooperative Association ICB International Competitive Bidding IMAIA Industrial Enterprise of the Ministry of Agriculture and Food Industry IRI Investment Rate of Interest LW Liveweight MAFI Ministry of Agriculture and Food Industry MFIT Ministry for Internal Trade NFDM Non Fat Dried Milk NPV Net Present Value SMA Agricultural Mechanization Station UAC Unified Agroindustrial Council USDA United States Department of Agriculture ROMANIAN FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY APPRAISAL OF LIVESTOCK IV (CATTLE) PROJECT ROMANIA Page No. I. INTRODUCTION ........................................... 1 II. THE AGRICULTURAL SECTOR IN ROMANIA .................... 1 A. Role and Land Endowment .......................... 1 B. Sector Organization .............................. 2 C. Performance in the Agricultural Sector .... ....... 3 D. Sector Issues and Development Strategy .... ....... 3 E. Bank for Agriculture and Food-Industry ........... 4 F. BAFI Lending through Credit Cooperatives .... ..... 5 G. Bank Contributions in the Agricultural Sector 5 III. THE CATTLE SUBSECTOR ............................ . 6 A. Structure ........................................ 6 B. Performance ................. 6 C. Market Outlook ................................... 8 D. Organizational Constraints ....................... 8 IV. THE PROJECT ........................................... 8 A. Concept and Objectives ............................ 8 B. Project Content .................................. 9 C. Project Costs ........... ......................... 11 D. Financing Plan .......... ......................... 13 V. DEMAND AND MARKET OUTLOOK ....... ....................... 14 VI. TECHNOLOGY, RESEARCH AND PROCESSING ..... .............. 18 A. On-Farm Production Technology ..... ............... 18 B. Technical Services ........ ....................... 19 C. Applied Research ......... ........................ 20 D. Processing and Storage Facilities ..... ........... 21 VII. PROJECT IMPLEMENTATION ........ ........................ 22 A. Organization and Management ...... ................ 22 B. Lending Policies and Procedures ..... ............. 22 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. C. On-Lending Terms ....... .......................... 23 D. Procurement ..... ..................................... 24 E. Disbursements ....... ............................. 25 F. Accounts and Audit ...... ......................... 26 G. Monitoring . . ............. 26 H. Environmental Impact ...... ....................... 27 I. Employment Effects ...... ......................... 27 J. Role of Women ....... ............................. 27 VIII. PROJECT BENEFITS AND JUSTIFICATION .................... 28 A. Benefits and Cost Recovery ......... .. ............ 28 B. Financial Analysis ............. .. .............. 30 C. Economic Evaluation .......................... . . 32 IX. RECOMMENDATIONS ....................................... 36 ANNEXES 1. Procurement Table 1: Estimated Project Procurement ........ .. .... 39 Table 2: External Training Provided through MAFI ........ 40 2. Detailed Project Description and Phasing ................... 41 Table 1: Technical Services and Research Investment Costs ....................................... 49 Table 2: Testing Equipment Kit for Machine Maintenance and Testing Technician ..................... 50 Appendix: The Pasture Enterprise Organization .... ......... 51 3. Disbursements Table 1: Phasing of Project Investments .... ............... 53 Table 2: Phasing of Project Commitments .... ............... 54 Table 3: Phasing of Project Production .................... 55 Table 4: Estimated Schedule of Bank Disbursements .... ..... 56 4. Table 1: Economic Rate of Return .......................... 57 Table 2: Economic Rates of Return Analysis Summary .... .... 58 Table 3: Present Values of Economic Streams .... ........... 59 Table 4: Prices Used for Financial and Economic Analysis .................................... 60 Table 5: Economic Prices of Different Classes of Cattle .... I 61 5. Project Implementation File Table of Contents .... .......... 62 6. Project Background File Table of Contents .... .............. 63 MAP IBRD No. 15142: Socialist Republic of Romania Location of Planned Project Investments  APPRAISAL OF LIVESTOCK IV (CATTLE) PROJECT ROMANIA I. INTRODUCTION 1.01 The Government of the Socialist Republic of Romania has requested assistance from the Bank in financing a portion of its 5-year (1981-1985) National Development Program for milk and beef production. This project was conceived on the basis of a Cattle and Sheep Subsector Survey, the field work for which took place in May-June 1979. Bank missions, including dairy engineering and animal nutrition specialists, assisted and reviewed Romanian design and preparation efforts in September and November/December 1979. The project was appraised in May 1980 by a mission consisting of Messrs. R. Hunt and F. Wright (Bank) and Messrs. P. Harrison, W. Murphy and M. Walshe (Consultants). II. THE AGRICULTURAL SECTOR IN ROMANIA A. Role and Land Endowment 2.01 Agriculture continues to be a key sector in the Romanian economy, providing almost all of the nation's food, the raw materials required for agricultural processing industries and significant foreign exchange earn- ings. In 1978 agriculture accounted for 14% of GDP, 33% of the labor force and 14% of export earnings. The proportion of the total labor force employed in agriculture declined from 74% in 1950 to 33% in 1978, thereby releasing a large number of people for employment elsewhere in the rapidly growing Romanian economy. National income increased at an average rate of about 9% from 1951 to 1978. During this period national income in agricul- ture grew at a rate of 3.5% per annum. Agriculture's share of national income declined from 28% in 1950 to 15% in 1978. 2.02 About 14.9 million ha, or 63% of Romania's land area, are used for agriculture. Of the agricultural area about 66% is cultivated, 29% is grassland and 5% under vineyards and orchards. There are three principal agro-climatic zones; the Plains (Zone I), the Foothills (Zone II) and the Mountain and Tableland (Zone III). The Plains Zone is the richest agricul- tural area, including all of the land in the Danube plains, and contains 52% of Romania's arable land and most of the irrigated land. Major crops are cereals, sunflower, sugar beet, soybeans, potatoes, vegetables, fodder crops, grapes and fruit. The Foothills zone is less productive. It con- tains about 28% of the arable and 32% of the pasture and meadow land. The Mountain and Tableland covers the mountain and northern areas and accounts  -2- for 19% of the arable land and 50% of the grasslands. In 1979 crop produc- tion accounted for 56% of total agricultural output. Livestock production accounted for 44 percent. In that year the livestock population in Romania included some 6 million cattle, 10 million pigs, 16 million sheep and 100 million poultry. B. Sector Organization 2.03 Romanian agriculture has undergone a major transformation following the collectivization measures introduced since the Second World War. Cur- rently, there are five types of production entities: (a) State units, including State agricultural enterprises (UASs); (b) Cooperative complexes (CAPs); (c) intercooperative associations (ICAs); (d) small individual plots used by CAP members; and (e) individually owned private farms. The State owns 30% of,all agricultural land, CAPs 54%, CAP members 6% and Individual Farmers 10%. Agricultural production, especially crop production, is dominated by the state agricultural enterprises (UASs) and agricultural production cooperatives (CAPs). In 1978, 87% of cereal production was in the socialist sector. Production by individual farmers and from small private plots of cooperative members is important in several areas, espe- cially fruit and livestock. Agricultural mechanization stations (SMAs) play a major role in providing machinery hire services. Recently a number of Inter-Cooperative Associations (ICAs) have been formed through combining the activities of a number of individual cooperatives. These ICAs are engaged in various large-scale agricultural operations such as cattle, pig and poultry production. 2.04 In 1978 Romania had 396 IASs with an average size of 5,100 ha and a labor force of 660 people each. They farmed 2.0 million ha, equivalent to 14% of all agricultural land. In the same year, there were 4,400 CAPs, with an average size of 2,060 ha and 550 members. The total area of land under CAPs was 9.1 million ha, equivalent to 61% of all agricultural land. Each working member of a CAP is allocated a small plot (normally 0.15 ha) which he can use for production of crops. Members are also allowed to keep limited numbers of livestock on CAP land. About 10% of the land controlled by CAPs was used for individual members' plots. Individual farmers number about 470,000. Most of their farms are in the more mountainous regions. They own only 4% of the nation's arable land, but 19% of the grasslands. 2.05 At the national level, the major State institution in the agricul- tural sector is the Ministry of Agriculture and Food Industry (MAFI). MAFI plays a major role in preparing the Five-Year Plan for the sector and is the supervisory institution for plan implementation. In each district the Ministry is represented by a general directorate, which is responsible for all agricultural activity in the district including both IASs and CAPs. Marketing is organized nationally under MAFI, with general economic direc- torates responsible for processing and marketing specified commodities. Foreign trade companies are responsible for the exports of the general economic directorates.  C. Performance in the Agricultural Sector 2.06 Although considerable progress has been made in developing agricul- ture, the sector remains relatively undeveloped. Between 19' -nd 1978 gross agricultural output increased at an average rate of 4.5%. During this period the area of arable land has remained about the same but crop yields have increased markedly. For example, the average yield of wheat increased from 1.1 tons per ha in 1951-1955 to 2.8 tons per ha in 1976-1978, while maize yields increased from 1.3 tons per ha to 3.2 tons per ha over the same period. Livestock yields have also increased and there have been signif- icant increases in the numbers of all types of livestock. Milk yields, for instance, increased from 867 liters per cow in 1950 to 1,968 liters per cow in 1978. Nevertheless, crop and livestock yields in Romania are still appreciably lower than those obtained in a number of othier European coun- tries. While agricultural production has been increasing, the labor force in agriculture has been falling. Labor productivity has thus increased much faster than agricultural output. In 1978 gross agricultural output per worker was more than six times the level of 1950. Despite this substantial improvement, the absolute level of labor productivity is still relatively low. Labor intensive methods of production, such as hand harvesting of maize and the use of animal-drawn carts, are still common, especially on cooperatives and in the individual farm sector. D. Sector Issues and Development Strategy 2.07 The growth of Romanian agriculture has been constrained by several factors, especially uncertain rainfall, lack of machinery and farm inputs and problems concerned with organization and incentives. Rainfall in Romania is both low and erratic, especially in the main cropping areas in the Plains Zone. Flooding has also been serious in many low lying areas. Fortunately the soils in the Plains Zone are good while there are excellent sources of water in the Danube and its tributaries. Romania has therefore given high priority to development of irrigation and drainage. The total area under irrigation has increased from 200,000 ha in 1960 to 2.2 million ha in 1979. Government plans to increase this to 3.4 million ha by 1985. By then about 38% of arable land would be irrigated. However, inadequate speciaiization of cropping patterns on irrigated land is likely to constrain the potential output from these areas. 2.08 Serious shortages of machinery and farm inputs, especially fertil- izers, insecticides and herbicides have been experienced. These shortages have been aggravated by Romania's foreign exchange policies, for Government has sometimes exported fertilizers or restricted imports of other inputs needed by the agricultural sector. The fertilizer deficit is expected to be substantially resolved during the 1981-85 Plan period but other deficits are likely to persist.  -4- 2.09 Hitherto, Government policy has given much greater emphasis to development of IASs rather than CAPs. IAS have been provided with the best managers and have received much higher levels of investment and supplies of tractors, machinery and fertilizers, while CAPs have been neglected. In 1978 the level of investment per ha of IASs was more than five times that of CAPs and they were therefore more productive than CAPs. This neglect of CAPs has been one of the key weaknesses of Romania agriculture, for CAPs control more than 60% of all agricultural land. In 1978 Government decided to accord equal treatment to IASs and CAPs. This new policy is to be imple- mented through the creation of Unified Agro-industrial Councils (UACs) which are responsible for providing equal levels of service and material inputs to IASs and CAPs. About 700 UACs have been established, and for each one there is an SMA. Each UAC will be responsible for coordinating all agricultural activities undertaken by the IASs and CAPs for which it is responsible. On average each UAC will be responsible for about 20,000 ha of land. 2.10 Agricultural policy is formulated within the framework of a national plan approved by Government and the Romanian Communist Party. For the 1981-85 plan, the guidelines forecast that national income will increase between 6.7 and 7.4% p.a., gross industrial production will increase in the range 8.0 to 9.0% p.a. and gross agricultural production at 4.5 to 5.0% p.a. Investment in agriculture in this period will amount to 155 billion Lei (US$8.6 billion), equivalent to 12% of total national investment for the plan period. The main thrust of agricultural development strategy will be to increase crop and livestock yields through improved organization, the use of more efficient techniques, especially greater mechanization, increased use of fertilizers and other inputs, and further large investments in irri- gation. E. Bank for Agriculture and Food Industry 2.11 The Bank for Agriculture and Food Industry (BAFI) is the Govern- ment's specialized agency for financing projects in agriculture, irrigation and food processing. As such, BAFI has been the Borrower for all Bank loans in support of agriculture and would be the Borrower for the proposed loan. BAFI was established in 1968 as a channel for, and administrator of, all investment funds provided under the State plan for the agricultural sector. It lends to both IASs and CAPs and repays the Government as it receives re- payments of subloans. BAFI is involved in all phases of project appraisal, execution and supervision, and it has a large technical and economic staff located in Bucharest, in 39 district (judet) branch offices and in 92 sub- branches throughout the country. BAFI has thorough review and approval procedures for all investment projects. In addition to BAFI's review, all agricultural investments for more than Lei 10,000,000 (US$560,000) are reviewed and approved by MAFI and those greater than Lei 70,000,000 (US$3.9 million) must be approved by the Council of Ministers. BAFI also provides short-term credit to, and maintains settlement accounts for, all cooperative and State agricultural enterprises; and acts as fiscal agent for the)  - 5 - Government for collection of State revenues from these enterprises. As the Government's channel for investment financing in agriculture, BAFI's primary source of funds is the State budget. F. BAFI Lending through Credit Cooperatives 2.12 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. The CRCs represent a considerably more important source of long- and short-term funds for the individual producers than BAFI. Total CRC lending has grown at an average of about 18% annually for the past 10 years from 641 million Lei (US$35.6 million) in 1970. Its structure remained fairly stable, about 87% being short-term loans and the balance long-term investment loans. The structure of BAFI lending remained 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 operations especially for livestock production activi- ties, 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 price during certain seasons offset this difference in terms. G. Bank Contributions in the Agricultural Sector 2.13 The Bank's lending strategy is based on the findings of various reports, including the Agricultural Sector Survey of October 1976 (No. 953a-RO), the Basic Economic Report of March 1978 (No. 1601-RO) and a number of recent appraisal reports. The main objectives of Bank lending remain to assist the Government in addressing the problems of production instability and low productivity. In addition, in appropriate cases, foreign exchange earnings or savings are an objective. Attainment of these objectives will help to raise the level and quality of domestic food consumption.  -6- 2.14 With increasing experience in the agricultural sector and a greatly improved relationship with the Romanian authorities, the Bank has been able to make other significant contributions. Technical improvements in project concept and design have been attained in a number of fields, including irri- gation, poultry and pig production and horticulture. Additionally, BAFI has decided to introduce the Bank methodology in its economic evaluation of subprojects. The Bank has made 12 loans for agriculture totalling US$741.5 million since 1975. The Giurgiu-Razmiresti Irrigation Project, the first agricultural project financed by the Bank in Romania, has been successfully completed and a completion report on this project has been sent to OED. No reports of the Bank's Operations Evaluation Department have yet been prepared on agricultural projects in Romania. III. THE CATTLE SUBSECTOR A. Structure 3.01 Romania's climate and resource base are well suited to cattle and sheep and there is a long history of animal husbandry in the country. The share of livestock to total agricultural production has gradually grown from 35% in 1960 to 44% in 1978, and is planned to approach 50% during the 1981-85 National Development Plan period. This increased emphasis is due to (a) the government's desire to improve the quality and quantity of per capita consumption of meat and (b) to increase foreign exchange earnings of beef, lamb and pork. 3.02 Pigs and poultry have traditionally been the most important live- stock commodities. However beef and milk, which currently account for about 35% of total livestock output, would have the fastest growth over the next five years. Milk production is planned to increase from 21% of total live- stock production to 28%, and beef from 12 to 18%. 3.03 There are about 6.3 million cattle in Romania. About 43% are owned by Individual Farmers and CAP Members, 43% by CAPs and 14% by the State. Both beef cattle and dairy cows are fairly evenly distributed among the three climatic zones, with no reflection of the uneven distribution of arable land, pastures and meadows. However stocking rates are highest in the foothills and mountain zones where Individual and CAP Member ownership is concentrated. Beef and milk production follows ownership patterns, although output from CAP Members and Individuals is higher (milk 53% and beef 47%) due to higher productivity. B. Performance 3.04 Past growth rates for both cattle and sheep, in numbers and produc- tion, are very acceptable for a mature industry such as Romania's. But  - 7 - productivity is low when compared to countries in Europe and North America with similar industries. Average milk yields were 1,951 liters per cow in 1977, 40% below the average level of European countries and New Zealand. Beef production is similar, with annual herd offtake rates and carcass yields 40% and 20% respectively below the same standard by a Ti margin. The core problem lies in the quality of inputs and implementation. Animal health is virtually the sole satisfactory aspect of production. Compared to other technical services, veterinarians are well trained. But this has caused undue concentration on health and resulted in control of the industry by veterinarians rather than production specialists. Other technical specialities and research staff suffer from poor training, international isolation and inadequate incentives. Forage quality, all important to economically efficient ruminant animal production, is very poor and there is a gross deficiency of protein feed. This quality factor is a serious direct loss to the economy as too much expensive concentrate energy feed is used instead of forages while the concentrates, mainly maize grain, could other- wise be exported. It is also a serious indirect loss as inadequate animal nutrution depresses productivity, thus losing potential production. The animal gene pool is satisfactory with a potential for far better per- formance. The Romanians are aware of the need for improved technology, particularly in the area of cow housing and milking. The input deficiencies can be remedied, although it will take time to turn the industry around. In view of these considerations future livestock production is likely to continue to grow at much the same rate as in the recent past at least through 1985. 3.05 At present the feed base, particularly in the Social Sector, depends heavily on crop production. Crop yields are comparatively poor, particularly in view of the high quality of the resource base. This is largely the result of inadequate inputs, notably fertilizer and machinery. The fertilizer deficiency may be overcome by 1985 but machinery inputs will remain a problem. 3.06 The grassland base, divided into pasture which is too steep to harvest (68%) and meadows which can be cut for hay (32%) totalling 4.4 million ha, is a major factor in the future of Romania's cattle and sheep industry. Future plans call for a very large expansion in production by the private sector most of whose animals are located in the grassland areas of Zones II and III. At present only 40% of the area receives any fertilizer but this is planned to increase to 80% in 1985. MAFI, through the activi- ties of its Pasture Enterprises, is now actively engaged in pasture improve- ment schemes involving clearing, reseeding, fencing and access road construction. Such improvement will expand the carrying capacity of the pasture, which has a potential for a 50% increase. To realize this poten- tial, pasture management and utilization will have to improve greatly. As there is little indigenous modern pasture management, exposure to systems in other countries is essential.  C. Market Outlook 3.07 Due to presently constrained supplies, there is considerable poten- tial for increased domestic consumption of beef, sheep meat and milk. Ex- port market prospects for beef and sheep meat are also good, while milk product exports are expected to continue to decline in view of the need to satisfy domestic demand. If 1985 beef production targets were achieved, there might be occasional difficulty in disposal due to cyclical fluctua- tions in the export market. Similarly, if milk targets were attained exports might need to be expanded again. However, since the Plan targets are considered unrealistically ambitious no market constraints are foreseen. D. Organizational Constraints 3.08 The Romanian agricultural development objectives and strategies as they apply to the cattle and sheep industry are ambitious but appropriate. However, the detailed economic planning and implementation strategies need revision. Planning is too centralized and too often based on unrealistic technical coefficients and standardized designs which are. incorporated in the detailed plans. As a result managers frequently have little or no lati- tude within which to manage. The "cost plus" pricing system, which is also centrally managed, compounds these problems by its frequent, although un- intended, inconsistency with the implementation of physical plans and leading to inefficient use of inputs. The New Economic Policies introduced in 1978 are designed to provide some greater latitude to individual enter- prises, but will not substantially affect the planning system. IV. THE PROJECT A. Concept and Objectives 4.01 The proposed project is designed to contribute to expanding produc- tion of beef and milk, in both the Social and Individual Sectors, to increase domestic consumption and generate additional foreign exchange earn- ings. It would introduce modern commercial production technology to the cattle sector. In view of shortfall in domestic supply of beef and milk, the foreign exchange earning potential and the generally low productivity in Romanian milk and beef production, these objectives are afforded high priority by the Government. They will be achieved through increased invest- ments incorporating the new technology and through the creation of new institutions to serve the sector. The principal innovations would include improved design of cow housing, introduction of herringbone milking parlors into all dairy subprojects, improve forage quality and the augmentation and strengthening of four major support services: (a) animal production and  -9- grassland research, (b) milking machine testing and maintenance services, (c) forage and concentrate feed analysis laboraitfries, and (d) animal nutri- tion advisory service. Investment in grassland improvement will serve to expand an important source of low cost feed. The project would also encour- age specialization of beef and dairy production in the zones less well suited to ''ivation and would concentrate investment in the CAPs which have considerable potential for increased productivity. B. Project Content 4.02 The project will consist of selected investments over a 3-year period (mid-1981 to mid-1984) of the Romanian 1981-85 National Development Program for milk and beef production. The investments comprise milk and beef processing and storage, grassland improvement and technical services and research. The project will comprise about 60% of the total planned investment over the three-year period. Specific investments are as-follows: (i) 92 new dairy farms, each of 922 cows and followers with an annual average output at full development of 36.9 thousand hl of milk, 222 heifers for breeding or fattening, 407 calves for fattening and 184 cull cows for slaughter; (ii) 32 modernized dairy farms, expanding from 520 cows and followers to 680 cows and followers, each with an incremental annual average output at full development of 14.2 thousand hl of milk, 8 heifers for breeding or fattening, 71 calves for fattening and 63 cull cows for slaughter; (iii) 17 new specialized breeding heifer production farms, each with an annual average output at full development of 1,236 pregnant heifers and 336 cull heifers for slaughter; (iv) 19 new beef fattening units, with 7,700 head capacity each with an annual average gross output at full development of 2.3 thousand tons of beef l.w.; (v) 109 improved pasture units, each averaging 1,000 ha, with an in- cremental annual average output of 300 tons of beef l.w.; (vi) support to Individual Producers and CAP Members for on-farm production of cattle and sheep milk, meat, cheese and breeding stock; (vii) milk and beef processing and storage facilities; including dairies, slaughter houses and cold stores; and (viii) technical services and research for feed analysis, animal nutri- tion, milk machine testing and maintenance, animal husbandry and pasture improvement.  - 1o - 4.03 Large-scale on-farm milk production investments would be undertaken by both IASs and CAPs and .ocated both in hills and plains areas to make use of available forage. The major innovation of the project will be to provide a high quality, low cost feed mix as a substitute for the expensive concentrate-based system currently in use. In the hills area this would be mainly grass fed as green chop, hay or silage while in the plains area this would be maize, alfalfa and rye grass fed as green chop, bay (alfalfa only) or silage (maize only). In both areas grain and sugar beet crop by-products would be used as well as some concentrate feed (maize grain and soybean and sunflower seed meal) and root crops (mainly fodder beet). A minimum cost feed base is assured through the maximum use of by-products and technical crops, required in the rotation by good farming practice, thus having no economic opportunity cost. This, together with improved forage quality, ensures minimum use of high cost concentrate feeds and those having a high opportunity cost (maize green chop or silage). Exclusive use of loose stall housing and herringbone milking parlours, laid out to avoid bottlenecks in the flow of operations, will minimize labor needed for both milking and feeding, improve control of the animals and reduce the incidence of mastitis. Provision is made under the project for 4 forage and feed analysis laboratories linked to the farms by a specialized nutrition advisory service. These units will help ensure full knowledge and correct usage of the available feeds and forages. A milking machine maintenance and testing service to be established under the project would assist in ensuring mechanical performance of both the project machines and others. Applied research is designed to develop country-specific data on the nutritional aspects of Romanian produced feeds as well as on milking systems performance and pasture utilization. Only on-farm subprojects incorporating the modern technology and utilizing the supporting technical services would be included in the project. Assurances to this end were obtained during negotiations. 4.04 Beef fattening and breeding heifer production to be undertaken in the project by IASs and CAPs would be mainly in the hills area to maximize use of the lower cost grass forage. To encourage specialization of produc- tion in areas of least alternative use, grassland improvement in the project would be confined exclusively to the hills area, defined as between 400 and 800 meters in elevation. This ensures that there will be no opportunity cost to utilizing these areas as grassland. Also no irrigation of grassland would be financed from Bank funds. Assurances of these were obtained during negotiations. Improved grassland would be utilized as grass and hay, partly by IASs and CAPs but mainly by CAP Members and Individual Producers. For the latter, it would be administered by Popular Councils (local district general administrative bodies) and would be mainly for beef production although some manufacturing milk may also be produced. 4.05 A line of credit would be extended by BAFI, or its agent the Credit Cooperative, to Individual Producers and CAP Members to support expanded production of cattle and sheep meat, milk, cheese and breeding stock. Funds would be used for the purchase of animals, feed, building materials and equipment such as storage tanks, coolers and small milking machines.  - 11 - 4.06 Agroindustries investment would be in the form of a line of credit to finance necessary expansion, through construction of new, and moderni- zation of existing, milk and meat processing and storage facilities. 4.07 About 80% of the proposed dairy investment would be directed to CAPs, with 20% for IASs, primarily in the Plains zone. In E -1 fattening CAPs would receive 44% of project investment, IASs about 56%. About 90% of the grassland improvement program would be for the benefit of CAP Members and Individual Farmers. 4.08 Subloans would be made by BAFI to IASs and CAPs for on-farm invest- ment in milk, heifers and beef production and pasture improvement and to Milk and Meat Enterprises for processing and storage facilities. Subloans would be made by BAFI to MAFI for grant financing by MAFI of investment in Popular Council administered pasture improvement schemes. Similarly funds would be made available by BAFI to MAFI for financing of technical services and research all of which would be under MAFI control. C. Project Costs 4.09 Total project cost is estimated at Lei 6.6 billion (about US$367 million) including an estimated foreign exchange cost of Lei 2.5 billion (US$138 million) or 38%. These estimates, detailed by component below, include taxes and duties on items expected to be directly imported under the project. Incremental working capital comprises the operating costs not covered by revenues in the initial years of the project. These are detailed in the individual model cost tables in Annex 1 of the Project Implementation File. 4.10 Cost estimates are based on prices prevailing in 1980. They include a physical contingency averaging about 4%. Price contingency allow- ances are as set out below in the total project cost table and total about 14% of the base cost. This includes price contingencies on both physical contingencies and incremental working capital. The exchange rate used to estimate the costs is the Romanian officially determined trading rate of Lei 15 per US$1, which is scheduled to come into force on January 1, 1981.  - 12 - TOTAL PROJECT COST Foreign Foreign Local Exchange Total Local Exchange Total FE (%) ----------Lei '000 ---------- --------IJV$ 'p000--- Capital Investments Dairy Farms - 922 Cow (Hill-CAP) 701,210 289,120 990,330 46,747 19,275 66,022 29 It "1 "1 (Hill-IAS) 105,182 43,368 148,549 7,012 2,891 9,903 29 " 1 " " (Plain-CAP) 525,908 216,840 742,747 35,061 14,456 49,516 29 It " " (Plain-IAS) 280,484 115,648 396,132 18,699 7,710 26,409 29 Heifer Rearing Farms (CAP) 121,666 68,562 190,228 8,111 4,571 12,682 36 "1 II "I (IAS) 16,222 9,142 25,364 1,081 609 1,691 36 Dairy Farm Modernization (Hill-CAP) 22,596 13,955 36,551 1,506 930 2,437 38 "1 "t "1 (Hill-IAS) 27,115 16,746 43,861 1,808 1,116 2,924 38 (Plain-CAP) 40,673 25,120 65,792 2,712 1,675 4,386 38 (Plain-IAS) 54,230 33,493 87,723 3,615 2,233 5,848 38 Beef Fattening Farms (CAP) 128,541 47,769 176,310 8,569 3,185 11,754 27 It "1 it (IAS) 176,744 65,683 242,426 11,783 4,379 16,162 27 Meat Processing and Storage Facilities 162,540 69,660 232,200 10,836 4,644 15,480 30 Milk Processing and Storage Facilities 107,625 46,515 154,140 7,175 30101 10,276 30 Pasture Improvement 415,861 134,770 550,631 27,724 8,985 36,709 24 Credit to Individual Producers 270,900 116,100 387,000 18,060 7,740 25,800 30 Technical Services and Research 48,410 45,492 93,902 3,227 3,033 6,260 48 Incremental Working Capital 668,537 219,500 888,037 44,569 14,633 59,202 25 Subtotal: Base Investment Costs 3,874,444 1?577,483 5,451,927 258?295 105,166 363,461 29 Physical /1 Contingency (3%) 115,553 49,438 164,991 7,704 3,296 10,999 30 Price /2 Contingency (10%) 119,472 446,590 566,062 7,965 29,773 37,737 79 Subtotal: Contingencies 235,025 496,028 731,053 15,668 33,069 48,737 68 TOTAL PROJECT COST 4,109,469 2,073,511 6,182,980 273,963 138,235 412,198 34 /1 Physical contingencies do not cover Processing and Storage Facilities, Incremental Working Capital requirements, livestock investment costs, or the line of credit for Individual Producers. /2 The following inflation estimate (in % per annum) was used in determining price contingencies, based on guidelines issued 1/7/80. Foreign Local 1980 10.5 1.0 1981 9.0 1.0 1982 8.0 1.0 1983-85 7.0 1.0 1986 6.0 1.0  - 13 - D. Financing Plan 4.11 The financing plan for the project is summarized below. In line with. Bank policy, the Bank loan would not cover the full foreign exchange and co-fi- cing would be encouraged. MAFI/BAFI Subborrowers IBRD and Cofinanciers Total ----------------