Romania - Orchards Project

Document of The World Bank FLE c FOR OFFICIAL USE ONLY Report No. 2907a-RO STAFF APPRAISAL REPORT ROMANIA ORCHADS PROJECT May 28, 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 18 = US$1 WEIGHTS AND MEASURES 1 hectare (ha) = 2.5 acres 1 kilogram (kg) = 2.2 pounds 1 kilometer (km) = 0.6 mile 3 1 cubic meter (m ) = 1.3 cubic yards 2 1 sq meter (m ) = 1.2 square yards 1 ton (t) = 2,200 pounds ABBREVIATIONS BAFI = Bank for Agriculture and Food Industry CAP = Agricultural Production Cooperative GEDH = General Economic Directorate of Horticulture IAS = State Agricultural Enterprise ICA = Intercooperative Association ICB = International Competitive Bidding MAFI = Ministry of Agriculture and Food Industry p.a. = per annum p.c. = per capita SMA - Agricultural Mechanization Stations UAC = Unified Agroindustrial Council ROMANIAN FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY APPRAISAL OF AN ORCHARDS PROJECT ROMANIA Table of Contents Page No. * I. INTRODUCTION .................................... I II. THE AGRICULTURAL SECTOR ......................... l A. Role of Agriculture in the Romanian Economy ..................................... I B. Development Constraints and Issues .......... 3 C. Sector Planning, Strategy and Investment Program .......................... 3 D. Bank Assistance in Agriculture .... .......... 5 III. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY ...... 5 IV. THE ORCHARD SUBSECTOR ........................... 7 A. Role in Agriculture ......................... 7 B. Production and Production Organization ...... 8 C. Domestic Consumption and Export .... ......... 10 D. Handling, Storage and Processing .... ........ 11 E. Subsector Institutions ...................... 11 F. Subsector Strategy and Plan .... ............. 12 V. THE PROJECT ..................................... 15 A. Concept and Objectives .15 B. Project Content ............................. 15 C. Project Costs ............................... 17 D. Financing Plan .............................. 18 VI. MARKETS AND MARKETING ........................... 19 VII. TECHNOLOGY AND RESEARCH ......................... 25 A. Production Technology and Research .... ...... 25 B. Storage Technology .......................... 26 C. Fruit Marketing Technology .... .............. 26 This document has a restricted distribution and may be used by recipients only in the performnce of their official duties. Its contents may not otherwise be disclosed without World Dank authorization.  Table of Contents (Continued) Page No. VIII. PROJECT IMPLEMENTATION ............................ 27 A. Organization and Management .... ............... 27 B. Lending Policies and Procedures .... ........... 28 C. On-lending Terms .............................. 28 D. Procurement ................................... 29 E. Disbursements ................................. 30 F. Accounts and Audit ............................ 30 G. Monitoring .................................... 31 H. Environmental Impact .......................... 31 I. Role of Women ................................. 32 IX. PROJECT BENEFITS AND JUSTIFICATION .... ............ 32 A. Production and Prices ......................... 32 B. Financial Analysis ............................ 34 C. Economic Analysis .............................. 35 D. Project Risks and Sensitivity Analysis ........ 36 X. RECOMMENDATIONS ................................... 37 ANNEXES 1. Detailed Project Description and Phasing 39 2. Tables and Charts 45 Table 1 - Allocations of Fruit Production:1976-78 Table 2 - Fruit Production Forecasts Table 3 - Allocations of Fruit Production with the Project: 1988 Table 4 - Project Procurement Estimates Table 5 - Estimated Schedule of Disbursements Table 6 - Incremental Fruit Production Table 7 - Summary of Economic Costs and Benefits Chart 1 - Organization of the General Economic Directorate for Horticulture 3. Selected Documents and Data Available in the Project Implementation File 53 MAP 1. Fruit Producing Areas and Cold Storage System (IBRD 14850)  APPRAISAL OF AN ORCHARDS 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 investment program for orchards and fruit storage. An identification mission reviewed possible project components in Romania in September/October 1978. Romanian preparation reports were presented to the Bank in June 1979, and proposed project compo- nents were reviewed by a preappraisal mission in September/October 1979. The project was appraised by a mission consisting of Messrs. Noon, Clough, Schertz (Bank) and Moulton (Consultant) in November/December 1979. A special mission consisting of Messrs. Noon, Clough (Bank),. and Lynn (Consultant) visited The Netherlands and Italy in January 1980 to review proposed project technology. The findings of the following report are also based on work undertaken by Messrs. Lazar (Bank) and Lynn as part of the preappraisal mission, and by Messrs. M. Pekonnen and F. Wright (Bank) for computer applications used in project analysis. II. THE AGRICULTURAL SECTOR A. The Role of Agriculture in the Romanian Economy 2.01 Agriculture plays an important role in the Romanian economy. In 1978, agriculture accounted for 15.3% of national income and provided 32.5% of all employment. Agriculture provided almost all of the country's food and the raw materials required for a number of processing industries. In addition agriculture supplied 14% of exports in 1978. The agriculture sector has also acted as a reserve pool of labor which has been used to meet growing employment needs of other sectors, especially industry. 2.02 The rate of growth of the Romanian economy has been impressive over the past two or three decades. From 1951 to 1978 national income grew at an average rate of about 9% per annum. During this period national income in agriculture grew at an average rate of 3.5% per annum. As the rate of growth in agriculture was less rapid than in other sectors of the economy, agricul- ture's share of national income declined from 27.8% in 1950 to 15.3% in 1978. 2.03 Between 1948 and 1978 the population of Romania increased from 15.9 to 21.0 million. During the same period the rural population declined from 12.2 million to 11.2 million. The proportion of people living in the rural  - 2 - areas therefore declined from 77% in 1948 to 51% in 1978. The decline in the agricultural labor force has been even more marked, from 74% in 1950 to 33% in 1978. Despite these significant changes, more than half of the population still lives in the rural areas and one third of all employment is provided by agriculture. 2.04 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 used for various types of agricultural production. Of the agricultural total, arable land accounts for 65.8% (9.8 million ha), pasture 20.1% (3.0 million ha), meadowland 9.4% (1.4 million ha), and vineyards and orchards 4.7% (0.7 million ha). Romania can be divided into three agroclimatic zones based on climatic factors, topography, soils, and other natural conditions influencing land use and agricultural performance. The Plains Zone, located in the western, southern, and eastern 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 pastures and meadows. Crop yields tend to be highest in this region. The Foothills Zone, situated mainly to the north of the Plains Zone, is characterized by shallow, less productive soils. About 28% of the total arable land and 32% of total pasture and meadowlands are situated in the Foothills. The Mountain and Tableland Zone, including dis- tricts in the northern and central parts of the country, accounts for 19% of total arable area, but 50% of pasture and meadowlands. 2.05 Romanian agriculture has undergone a major transformation following the collectivisation measures introduced since the Second World War. Today agricultural production, especially crop production, is dominated by state agricultural enterprises (UASs) and agricultural production cooperatives (CAPs). Production by individual farmers and from small private plots of cooperatives members is relatively unimportant except for certain products including fruit and livestock. Agricultural Mechanization Stations (SMAs) play a major role in providing machinery hire services to all producers. Recently a number of Intercooperative 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 pig and poultry production. ICAs are expected to undertake about 30% of investment in new orchards from 1980 to 1985 and will play an increasingly important role in fruit production. 2.06 In 1978, crop production accounted for 56% of total agricultural output. About two thirds of all arable land is planted with cereals, espe- cially wheat and maize. Other important crops include soyabeans, sunflower, sugar beet, potatoes and vegetables, fodder crops, grapes and fruit. Livestock accounted for 44% of agricultural output in 1978. In that year the livestock population in Romania included 6.5 million cattle, 10.3 million pigs, 15.6 million sheep and 100 million poultry.  B. Development Constraints and Issues 2.07 Although considerable progress has been made in increasing agricul- tural production in Romania in recent years, the sector remains relatively underdeveloped. One of the main constraints preventing rapid agricultural development has been the low and erratic rainfall in the principal agricul- tural areas of the country, especially in the Danube plains. Many areas have also suffered from flooding at certain times while soil erosion has also been a problem. Fortunately the soils in most of the crop producing areas are good, and there is an excellent source of water in the Danube and its tribu- taries. Romania has therefore given high priority to development of irriga- tion, flood control and drainage. The total area under irrigation has been increased from 200,000 ha in 1960 to 2.2 million ha in 1979. The latter is equivalent to 23% of all arable land. Government plans to increase the area irrigated to 3.7 million ha by 1985. Development of irrigation would there- fore continue to play a central role in agricultural development strategy. 2.08 State farms and producer cooperatives are the most important forms of production unit in Romanian agriculture. These farms have at times suffered from a shortage of material inputs such as machinery, fertilizers and other agricultural chemicals. Due to a shortage of foreign exchange, Government has sometimes exported fertilizers or reduced importation of pesticides and insecticides which were needed by Romanian agriculture. In the past IASs have received a higher share of investment relative to their share of cultivated land while CAPs have been relatively neglected and have consequently been less productive. IASs have also been better endowed than CAPs with good land, skilled management and farm inputs such as fertilizers. Recently Government decided that it would discontinue its previous policy of giving favored treatment to IASs and would instead accord equal treatment to IASs and CAPs. This new policy is to be implemented through newly created Unified Agroindus- trial Councils (UACs) which are responsible for providing equal levels of services and inputs to cooperative and State sector farms. There will be about 700 UACs, one for each SMA, which will operate under an annual plan from the Judet General Department for Agriculture of the Ministry of Agriculture and Food Industry (MAFI). Each UAC will in turn be responsible for coordina- tion of all agricultural activities, and the production and other operating results of the State and cooperative units in its area. One of the major features of the reorganization is the centralization of all farm mechanization services for both State and cooperative farms under the direct control of the UAC. C. Sector Planning, Strategy and Investment Program 2.09 Agricultural policy is formulated within the framework of a national plan approved by Government and the Romanian Communist Party. The plan is comprehensive and determines the physical and financial framework for all important areas of the economy. The next development plan will cover the 1981-1985 period. The guidelines for this plan were approved by the Party Congress in November 1979, and the detailed plan will be released later this  - 4 - year. Each year, annual development plans are prepared and these provide the basis for implementation of the overall targets set out in the five year plans. Approved Government plans are enacted as laws and it is mandatory for all actual investment decisions to be made within the framework of the plan. 2.10 For the 1981-85 plan, the guidelines forecast that national income will increase at a rate of between 6.7 and 7.4% p.a., gross industrial produc- tion is to 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 about 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 the use of more efficient techniques, especially improved mechanization, increased use of fertilizers and other inputs, and further large investments in irriga- tion. The plan also aims to improve the efficiency of management and organi- zation within agriculture especially through the creation of the new UACs and through a reorganization of the Ministry for Agriculture and Food Industry (MAFI) in August 1979. 2.11 Specific investments planned for the agricultural sector during the 1981-85 plan include: (a) investments of Lei 133 billion (US$7.4 billion) on State and cooperative farms; (b) an increase of arable area by about 154,000 ha, by 1985, through reclamation of land in the Danube delta and in other zones, bringing the total to about 10 million ha; (c) an increase of irrigated areas from 2.2 million ha in 1979 to about 3.7 million ha by 1985; (d) provision of drainage facilities for an additional 0.8 million ha and soil erosion control works to protect an additional 1.0 million ha; (e) an increase in the use of high power tractors, to reach 140,000 units, and self-propelled harvesters to 40,000 units, including a wide range of other multipurpose farm machinery and equipment; (f) an increase in fertilizer applications to about 3.8 million tons p.a. by 1985; (g) provision of increased quantities of pesticides and high yield seeds and seedlings; and (h) improvement of the present breeds of livestock and devel- opment of new ones.  - 5 - 2.12 Developments planned for the orchard sector in the 1981-85 period would be consistent with the overall plan strategy of increasing yields through the introduction of improved production methods. New orchards to be developed during the plan period would produce fruit yields much greater than present average yields, through the introduction of improved tree varieties, more intensive planting, the increased use of fertilizers and crop protection chemicals, and improved management. Most of the new orchards -to be developed in the new plan period would be irrigated. D. Bank Assistance in Agriculture l 2.13 The Bank has made 25 loans to Romania since it became a member in December 1972, for a total volume of lending amounting to US$1,537.8 million. Eleven of these loans, totalling US$691.5 million, were for agriculture. These included six irrigation projects, one agricultural credit project, a flood recovery project and three livestock projects. The first irrigation project (Guirgiu-Razmiresti, Loan 1082-RO) has been completed satisfactorily, and a completion report for the project is being prepared. No OED reports have yet been prepared for agricultural projects in Romania. Progress with all agricultural projects has been satisfactory. These projects have been supervised regularly by Bank staff. III. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY 3.01 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 operations are carried out by 39 branches, 57 sub-branches, 35 agency branches in offices of the National Bank and about 850 credit cooperatives which serve as BAFI'S agents for small-scale lending. Enterprises of national importance are served by the three operational departments in the head office (agro- industries, cooperative sector and state sector). 3.02 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 channeled 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. 3.03 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  - 6 - payments 1/ and net incomes for the State budget account. BAFI is paid a commission for this service at the rate of 0.5% of the investment channelled through it. Over the past several years, State equity contributions for investments disbursed by BAFI were as follows: Index FY Million Lei 1970 = 100 1970 27,077 100 1973 39,471 146 1976 70,598 261 1977 93,445 345 1978 110,100 406 In terms of their relative importance, net investments financed with State equity channelled through BAFI were equivalent to about (31%) of BAFI's total assets at the end of 1978. 3.04 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' account when sales proceeds are realized. 3.05 The various sources of the funds channelled through BAFI as of the end of 1978 were the State budget (35%), 2/ short term loans from the National Bank of Romania (53%), deposits of State enterprises and cooperatives (6%), BAFI's statutory capital and reserves (2%), and IBRD borrowings (4%). BAFI has also undertaken US$300 million in other foreign borrowings in the past ten months under cofinancing arrangements for three Bank-financed agricultural projects, US$100 million in 1979 for the Second Livestock Project (Loan 1669- RO) and US$200 million in April 1980 for the Mostistea Irrigation (Loan 1670-RO) and Third Livestock (Loan 1764-RO) projects. BAFI's on-lending interest rates for investments under the proposed project will vary from 3 to 4% depending on the type of borrowing entity. Although these rates are lower than the interest rate which BAFI will pay on the Bank's loan, the overall average spread on BAFI's total loan is positive about 1.7% due to other sources of funds which have lower effective costs. 1/ 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. 2/ 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.  3.06 BAFI's financial condition is strong and is expected to remain so. 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 propor- tion of BAFI's repayable long-term debt, the low volatility of BAFI's revenue and deposits, and the quality of its asset portfolio relative to loan default risk. IV. THE ORCHARD SUBSECTOR A. Role in Agriculture 4.01 Much of the arable land in Romania has suitable soils and is in areas where the climate is favorable for fruit production. While fruit are grown throughout the country, most species are grown in particular areas where production conditions are most favorable (see Map). Apples, plums, pears, sweet cherries and sour cherries are produced mostly in the Foothills Zone of the Carpathians and in the rolling plateaus in the northern Mountain and Tableland Zone where soils and terrain are suitable for orchards but less desirable for field and row crops. Peaches and apricots are generally grown in the Plains Zone in the south since they do better in the deeper and lighter soils. Also, the warmer and drier climate in the plains is more suitable for soft fruits. 4.02 The Statistical Yearbook indicates that the total area under fruit in Romania was 418,000 ha in 1978. This was equivalent to 2.8% of all agricul- tural land. The total area shown in the official statistics included 282,000 ha in the socialist sector (199,000 ha on CAPs and 83,000 ha on state enter- prises). Data in the statistical yearbook, however, are misleading in that they include areas under very old orchards which are no longer productive and exclude significant portions of the individual producer sector for which many trees around households were not recorded. A more recent fruit census con- ducted by MAFI in mid-1979 indicated that the total area of fruit in the socialist sector was about 253,000 ha, 29,000 ha less than the figure in the Statistical Yearbook. This census also estimated that individual producers have about 65 million fruit trees, over half of which are plums. The recent census is considered more reliable as it has excluded from the area under fruit a large amount of old orchards which had degenerated into pasture and ceased to be productive, and sought to record trees of individual producers. 4.03 Although apples and plums are the most important species of fruit grown in Romania a wide variety of other fruits are also produced. This provides consumers with a choice of different fruits while it also helps to extend the harvest season over a wider period. During 1976-78 local consump- tion of fruit accounted for 93% of total production (excluding table grapes). Only 7% of production was exported. The volume of exports has been erratic and has not shown any increasing trend for the last 20 years. In addition to fresh fruit which is sold through the marketing system for consumption within  - 8 - Romania, a significant amount of fruit is consumed directly by producers, in- cluding individual small farmers, plotholders on CAPs and private householders. Some fruit is also processed in various forms including canned fruit, fruit juices, and distilled alcoholic beverages, especially plum brandy (Tuica). B. Production and Production Organization - 4.04 Fruit production in Romania has been relatively neglected and has shown only a slightly increasing trend in the last few years as shown in the table below. Total fruit production amounted to 1.2 million tons in 1965 Fruit Production by Species, 1965-1978 'OOOs Tons 1965 1970 1975 1976 1977 1978 Apples 217 176 315 470 593 359 Plums 695 697 414 567 510 602 Pears 55 54 81 66 97 80 Peaches 13 29 65 65 53 73 Cherries 36 61 59 53 47 67 Apricots 21 47 63 35 57 34 Nuts 41 33 26 30 31 30 Strawberries 22 32 23 29 30 28 Other Fruit 59 47 55 36 37 42 Total 1,158 1,174 1,101 1,350 1,455 1,316 and in 1970. This had increased to between 1.3 and 1.5 million tons during 1976-1978. However production has tended to increase more noticeably for certain species of fruit. The data in the table indicate no significant trend in the growth of production for plums, cherries and apricots, although increases have been apparent for apples, pears and peaches. Romania has not until recently been replanting sufficient old orchards to maintain the national orchard in a healthy condition. In the period 1971-1975, orchard replantings in the socialist sector averaged about 5,000 ha p.a., or about 2% of the area under Socialist sector orchards. During 1971-75 there were no radical changes in the type of technology adopted and the yields obtained, and given an average tree life of about 25 years it is necessary to replant about 4% of the orchards each year if production is to be maintained. Thus in the period 1971 to 1975 if Romania had replaced 4% of its socialist sector orchards, replantings would have averaged about 10,000 ha each year compared with the 5,000 ha actually achieved. During 1976 to 1978 the rate of replanting in the socialist sector increased to about 7,000 ha per annum while major changes were also made in production methods. Most of the new plantings made since 1976 have been based on more intensive planting systems while many have been provided with irriga- tion. Yields from these new orchards are expected to be much higher than those from the older established orchards. In addition to replanting, a major  orchard modernization and improvement program has also been started in the socialist sector since 1976. Thus, fruit production from existing orchards in the socialist sector is expected to increase in the next few years as recently planted and modernized orchards come into full production. While data on replantings are available only for the socialist sector, very little planting material has been provided to fruit producers in the private sector during the last decade and these producers must therefore have had difficulty maintaining their fruit trees in a healthy condition. 4.05 The current very poor levels of production from Romania's orchards, together with the concomitant low level of fruit consumption, provide the main rationale for the orchard project described here. There is an enormous gulf between the level of yields which would be obtained under the project using modern orchard production practices and the actual level of yields currently obtained in Romania. This is illustrated by the data below: Existing Average of Classical All Romanian Project Orchards Orchards Orchards ---------------