Romania - Moldova Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3650-RO STAFF APPRAISAL REPORT ROMANIA MOLDOVA AGRICULTURAL CREDIT PROJECT December 4, 1981 Regional Projects Department Europe, Middle East and North Agrica 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 EQUIVALENT Currency Unit; Leu (plural Lei) 1. Tourist Rate (Effective February 15, 1981) Lei 11.00 = US$1.00 Leu 1.00 = US$0.083 2. Conversion Rate for Traded Goods (Effective January 1, 1981) Lei 15.00 = US$1.00 Leu 1.00 = US$0.091 WEIGHTS AND MEASURES 1_millimeter (mm) = 0.0394 inch (in) lcentimeter (cm) = 0.3937 inch (in) 1 meter (m) = 3.2808 feet (ft) 1 kilometer (km) = 0.6214 mile (mi) 1 square kilometer (km2) = 0.3861 square mile (mi2) 1 liter (1) = 0.2642 gallon (gal) 1 hectoliter = 100 liters I liter per second (1/sec) = 0.0353 cubic foot per second (ft3/sec) 1 cubic meter per second (m3/sec) = 35.3147 cubic feet per second (ft3/sec) 1 atmosphere (at) = 14.2239 pounds per square inch (psi) 1 kilowatt (kw) = 1.3410 horsepower (hp) 1 kilogram (kg) = 2.2046 pounds (lb) 1 metric ton (ton) = 2,204.6225 pounds (lb) ABBREVIATIONS AND ACRONYMS BAFI - Bank for Agriculture and Food Industry CAP - Agricultural Production Cooperative DELIF - Directorate for Exploitation of Land Reclamation Works DGEIFCA - Economic General Directorate for Land Reclamation and Agricultural Construction, also called DIFCA DRIAM - Design and Research Institute for Agricultural Mechanization IAS - State Agricultural Enterprise ICA - Intercooperative Economic Association ICB - International Competitive Bidding ISPIF - Institute for Land Reclamation Studies and Design IUTIFPEC - Enterprise for Earthworks, Equipment, Land Reclamation Design, Execution and Construction MAFI - Ministry of Agriculture and Food Industry SMA - Station for Agricultural Machinery UAC - Unified Agroindustrial Council ROMANIAN FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT MOLDOVA AGRICULTURAL CREDIT PROJECT ROMANIA Table of Contents Page No. I. THE AGRICULTURAL SECTOR ..................................... 1 A. Project Background ...................................... I B. Agriculture in Romania .................................. I C. Bank Contributions for the Agricultural Sector .......... 4 II. THE PROJECT AREA ............................................ 5 A. Sectoral Context ........................................ 5 B. Description of Project Area ............................. 6 C. Agriculture and its Development Potential ............... 7 III. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY (THE BORROWER)... 11 A. Structure of Investment Planning and Banking in Romania. 11 B. Role and Structure of BAFI .............................. 13 C. Lending Policies and Procedures ......................... 14 D. Lending Terms and Operations ............................ 15 E. Financial Situation and Performance ..................... 16 IV. THE PROJECT ................................................. 17 A. Project Objectives ...................................... 17 B. Project Description ..................................... 17 C. Cost Estimates .......................................... 21 D. Financing ............................................... 22 E. Disbursements ........................................... 23 F. Procurement ............................................. 23 G. Environmental Effects ................................... 24 H. Role of Women ........................................... 24 V. PROJECT IMPLEMENTATION .. 25 A. Institutional Arrangements .............................. 25 B. On-lending Policies and Procedures .26 C. Accounts and Audits .28 D. Reporting, Monitoring and Evaluation Procedures .28 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.  Page No. VI. PRODUCTION, PRICES, MARKETS AND FINANCIAL ANALYSIS . . 29 A. Production .............................................. 29 B. Market Prospects and Arrangements ....................... 30 C. Prices .................................................. 32 D. Financial Analysis ...................................... 32 VII. PROJECT JUSTIFICATION .. 33 A. Benefits ................................................ 33 B. Economic Analysis ....................................... 34 C. Sensitivity Analysis .36 D. Risks .36 VIII. RECOMMENDATIONS............................................. 37 ANNEXES ANNEX 1: Detailed Project Cost and Phasing . . 38 A. Project Cost Estimates .38 B. Location and Phasing of Investments ................ 39 Table 1: Total, Foreign and Local Costs . .41 Table 2: Annual Phasing of Project Expenditures.. 42 Table 3: Number and Type of Agricultural Machinery to be Financed .43 Table 4: Soil Erosion Protection Worksr. 44 Table 5: Project Procurement Estimates . .46 Table 6: Project Disbursement Profile . . 48 ANNEX 2: Table T-1: List of Bank Loans Channelled Through BAFI 49 Table T-2: Gross Production of Crops and Livestock Products (1979-85) .50 Table T-3: Actual and Planned Investments in Project Area and Romania (1976-85) .51 Table T-4: BAFI - Sources and Applications of Funds (1977-85) .52 Table T-5; BAFI - Historical and Projected Balance Sheets ......... 53 Table T-6: BAFI - Historical and Projected Income Statements .54 Table T-7: BAFI - Selected Financial Ratios .55 Table T-8: Key Technical Assumptions Underlying Primary Production Models .56 Table T-9: Key Technical Assumptions for Soil Erosion Protection Component .58 Table T-10: Key Technical Assumptions for Farm Mechanization Component .59  Page No. Table T-ll; Key Technical Assumptions for Agroindustry Component ................................ 63 ANNEX 3: Supporting Tables for Market and Economic Analysis ..... 65 ANNEX 4: Selected Documents and Working Papers Available in the Project File .80 CHART Chart No. IBRD 23113 Project Implementation Schedule .81 MAP Map No. IBRD 15867   Staff Appraisal Report Moldova Agricultural Credit Project Romania I. The Agricultural Sector A. Project Background 1.1 The proposed project area covers the greatest part of the Moldova region, located in the northeastern part of Romania (IBRD Map No. 15867). This area consists of the following six out of a total of forty-one judets in Romania - Neamt, Bacau, Vrancea, Botosani, Iasi and Vaslui. The project area represents about one-seventh of Romania's total land and population and is one of the country's lesser developed areas. The project is patterned after the Sadova Corabia Agricultural Credit Project (Loan 1083-RO) which has been successfully completed recently. The Sadova Corabia project was also located in a less developed region of Romania and provided credit for orchards, vine- yards, dairy and beef fattening farms, a fruit handling and storage complex, a feed mill, a pre-mix feed mill, refrigerated trucks and farm machinery for state and cooperative enterprises. 1.2 The proposed project was first discussed with a Bank mission in September 1979. Bank missions of April 1980 and June 1980 helped develop the criteria for selecting the project area and outlined the content of the Preparation Report. The Project Preparation Report was received in the Bank in February 1981. A preparation mission visited Romania from March 26 to April 1, 1981, and the project was subsequently appraised from May 21 to June 11, 1981. The appraisal mission consisted of Messrs. V. Bhargava (mission leader), E. Hunting, H. Ochs, E. Schertz, J. N. Srivastava (Bank staff) and B. Bilbo (consultant). B. Agriculture in Romania 1.3 Agriculture continues to be a key sector in the Romanian economy as a provider of food, labor, foreign exchange earnings and investable funds. Between 1950 and 1979 the social product from agriculture more than tripled. At the same time about 3 m /a people moved out of agriculture so that the proportion of total labor force employed in agriculture declined from 74% in 1950 to 29% in L980. In view of the rapid industrialization of the Romanian economy, the reLative contribution of agriculture to national income declined from 28% in 1950 to 12% in 1980. /a m = million  1.4 About 14.9 m ha or 63% of Romania's land area is used for agri- culture. Of this area, 66% is arable, 29% is grassland and 5% is under orchards and vineyards. About 64% of all arable land is devoted to the production of grain; mostly wheat and maize. Other important crops are sun- flower, sugarbeet, soyabeans, potatoes, vegetables, fodder crops, grapes and fruits. In 1979, crop production accounted for 56% of the total agricultural social product while livestock accounted for 44%. 1.5 Romanian agriculture comprises four types of production entities:(a) state units, including state agricultural enterprises (IASs); (b) agriculturaL production cooperatives (CAPs); (c) small individual plots (0.15 ha on average) cultivated by 2.3 m CAP members; and (d) 0.62 m privately owned individual farms. In 1979, there were 396 IASs in Romania with an average size of 5,100 ha and an average labor force of 550 persons, and 4,400 CAPs with an average size of 2,080 ha and 530 members. The IASs account for about one-fourth of agricultural resources and outputs while CAPs produced about two-thirds of total grains, almost 100% of sugarbeets and one-third of all other major agricultural commodities with 75%/ of arable land and 40% of live- stock. The CAP plot holders and individuals, collectively referred to as individual sector in this report, produce roughly half the country's livestock products, potatoes, vegetables and fruits. Their contribution is more than their proportionate share in resources as they own only about 16% of agri- cultural land, 46% of cattle and poultry and 24% of pigs. 1.6 The performance of Romanian agriculture over the last 3 decades has been impressive. Between 1951 and 1979, gross agricultural output increased at an average annual rate of 4.5%. This was achieved as a result of increased livestock yields, substantial increases in the number of all types of live- stock, and increases in crop yields per unit area. The impressive growth in agricultural production, besides meeting domestic food consumption require- ments for a population growing at 1% per annum, made it possible for Romania to achieve rapid industrialization. In addition to providing the necessary raw materials for industry, the agriculture sector released labor for employ- ment elsewhere in the economy and contributed to total exports and convertible currency earnings, thus paying for a part of imported inputs needed for industries. However, in recent years, performance of agriculture has not been as good: (a) the agriculture share in total exports declined from 24% in 1977 to 17% in 1980; (b) during the 1976-80 Plan period agricultural production grew by 6% against a plan target of 9.0%; (c) there were reports of scattered food shortages; (d) the crop and livestock yields continued to be much below thieir potential -- about one half that of developed countries; and (e) agri- cultural trade surplus in 1980 was only about half of the surplus realized in 1975. The Government is concerned about the poor performance of agriculture and declared it a priority sector for the 1981-85 Plan period. The performance of Romanian agriculture continues to be well below its potential, leaving significant room for improvement.  1.7 Several factors are responsible for performance below potential. The resource constraints of Romanian agriculture relate to shortages of fertilizer, pesticides, herbicides and farm machinery, and inadequate rainfall during critical periods. Shortages of farm machinery and farm inputs have been aggravated by Romania's foreign exchange needs and the Government has sometimes exported fertilizers or restricted imports of farm inputs needed by the agricultural sector. The shortages of seasonal labor, particularly during the harvest period, combined with shortage of harvesting machinery and storage facilities have caused serious harvest losses. The policy constraints relate to; (a) inflexibility of application of sometimes unrealistic technical coefficients and standard designs; (b) organizational and incentive problems; and (c) GovernTnent's policy to accord much greater emphasis to the development of IASs in spite of their relatively small share in agriculture resources and production (para 1.5) rather than to CAPs and the individual sector. The last constraint appears to be changing and the Government is according equal treat- ment to IAS and CAP sectors through the system of Agroindustrial Councils. Finally, although the Government's stated objective is to accord top priority to agricultural development, this commitment is not matched by increased investment allocations to agriculture. Thus, the proportionate share of agriculture during the 1981-85 Plan period will be at about the same level as in 1976-80 Plan. Total investment in agriculture and food industry in the period 1981-85 is expected to amount to about Lei 180 billion, which is equal to 15% of the total plan outlay. 1.8 The basic goals of agricultural development during the Plan period 1981-85 will be similar to those of the previous plans and consist of: (a) raising land and labor productivity by intensification and modernization of agriculture; (b) improving the diet of the population by intensifying the production of high value crops, meat and dairy products; and (c) producing surplus for export. The gross agricultural production is expected to grow at 4.5-5% per annum over the Plan period. By end 1985, output of milk, meat, vegetables, sugar, and fruits are expected to increase by more than 60% above 1980 levels. 1.9 Plan objectives will be achieved by: (a) more rational use of land, particularly irrigated land; (b) land reclamation works adding irrigation of 600,000 ha, drainage of 940,000 ha, and soil erosion control works on 950,000 ha; (c) rationalizing fertilizer application by basing it on soil analysis and increasing fertilizer availability per arable ha to 280 kg by 1985 compared to 113 kg in 1980; (d) providing 290,000 tons of pesticides; (e) mechanization of all farm operations by supplying 86,000 tractors, 15,800 self-propelled combine-harvesters and other farm equipment; (f) increasing fodder production; and (g) improving animal breeding and husbandry practices. Among the policy initiatives, the Government plans to enhance the role played by Agroindustrial Councils which are the centers for the management of the entire agricultural activity as well as for the economic and social development of the communes within their respective territories, for solving their main political, economic and social problems. For the first time, the Government has directed  -4- MAFI and the judet Peoples Council to support the individual farmers by making available improved seeds and seedlings, improved sires, technical assistance and guidance so that they can maximize vegetable and animal outputs. Total plan outlay would be split approximately as follows: crops (orchards and vine- yards) 8%; livestock 30%, mechanization 29%, land reclamation 14%; agro- industries 17% and others 2%. Compared to the previous plan, the proportion allocated to farm mechanization has been substantially increased while allocations for crop, livestock and agroindustry production have remained virtually unchanged, allocation for land reclamation has been reduced by about 13%, and no new schemes for irrigation are proposed. 1.10 The average annual agricultural growth rate of 4.5-5% for the 1981-85 Plan, which is roughly half the rate planned under the previous Plan, appears to be realistic given that the actual growth rate achieved under the previous Plan was 6% per annum. However, production targets for major crops and live- stock products, when viewed against actual achievements in 1978-80, imply large production gains in many cases over 50%. These targets would be difficult to achieve unless all Plan years turn out to be exceptionally good years. The Plan foresees a two and a half times increase in fertilizer availability per hectare, which, if realized, would successfully overcome the present fertilizer constraint. The new Plan's emphasis on farm mechanization and storage facilities is appropriate in view of production losses, but not enough; additional investments are feasible and desirable. The Plan also does not contain policy initiatives which would address incentive packages for on-farm labor and management in order to improve output quality and encourage higher productivity. The Government's initiative in extending help to the individual sector is welcome, given its importance in agricultural output (para 1.5). It remains to be seen how far the Government will go in supporting and preferably in expanding the role of the CAP members as well as individual household producers and farmers. The attainment of plan targets will depend on whether the Government can deliver its promised inputs and support to this sector. C. Bank Contributions for the Agricultural Sector Bank Lending Strategy 1.11 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. A cattle and sheep subsector survey was carried out during 1979 and its report is being finalized. Beyond the provision of foreign exchange, 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. 1.12 Up to now, Bank's total lending to Romania amounts to US$1,987.6 million for 31 projects. Of the 31 loans already approved, 15 totalling US$976.5 million have been in agriculture (List at Table T-1). The  - 5 - agricultural projects are progressing satisfactorily with no major problems. The first irrigation project, Giurgiu-Razmiresti (Loan 1082-RO) has been satisfactorily completed with cost under-run and yields higher than the appraisal estimate. The Project Audit Report by the Operation Evaluation Department was circulated to the Executive Directors in February 1981. The Report commended the efficient implementation of the project and noted that full Government commitment was a decisive factor in timely completion. It also suggested that the cost underruns were attributable to the system of controlled prices and a cost equalization scheme which compensates for inflated costs of imports. The Sadova Corabia project (Loan 1083-RO) has also been completed; a Project Completion Report is under preparation by the Borrower. 1.13 With increasing experience in the agricultural sector and a greatly improved relationship with the Romanian authorities, the Bank has made efforts to introduce technological improvements in Romanian agriculture. Thus, technical improvements in project concept and design have been attained in a number of fields, including irrigation, livestock production and horti- culture. Additionally, BAFI has adopted the Bank methodology in its economic evaluation of subprojects. Suggestions given by Bank staff have also led to important changes in project design, for example, inclusion of private plots of members of cooperatives as well as individual producers in irrigation projects, and subloans to the individual sector, namely for livestock production. The Bank's emphasis on individual sector development and the important role it could play in achieving Romania's food production objectives may have influenced the Government's decision to actively support this sector (para 1.10). II. The Project Area A. Sectoral Context 2.1 The Moldova project area makes an important contribution to Romanian agriculture. In 1979, the project area accounted for 14.2% of Romania's arable land, 9.2% of orchards, 27% of vineyards, 13.7% of pastures, 16% of cattle, 9.6% of pigs and 17% of sheep, and contributed 12.4% of Romania's grains, 16% of sugarbeets, 16% of potatoes, 15% of vegetables, 15.7% of fruits, 29% of grapes, 14% of meat , 16.6% of milk and 14% of processed food products. In view of its significant potential for increased agricultural production, the 1981-85 Plan expects from the project area one of the highest planned increases in agricultural output per agricultural worker in Romania as well as substantial increase in agricultural production per hectare. As a result, the gross agricultural production in the project area is expected to grow faster than the increase planned for Romania as a whole, and the project area's contribution to gross agricultural production in Romania would increase from 13.6% in 1980 to 14.8% in 1985. The proposed project, which is part of Romania's Five Year Plan for 1981-85, would cover about 17% of total Plan investments in agriculture and agroindustries in the project area.  - 6 - B. Description of Project Area 2.2 The project area covers about 33,000 km2 or 14% of the total area of Romania. Mean air temperatures are around 80C but vary from -7