Romania - Technical Assistance - Critical Imports Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Z-Aa Ro Report No. 9652-RO STAFF APPRAISAL REPORT ROMANIA TECHNICAL ASSISTANCE/CRITICAL IMPORTS LOAN JUNE 11, 1991 Country Department IV Country Operations Division Europe, Middle East and North Africa Regional Office 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 EOUIVALENTS Currency Unit = Leu (plural Lei) US$1 60 Lei Leu 1 = US$0.0167 Lei per US Dollar Official Rate' Interbank Rate2 1990 November 25 n.a 1991 April 60 200 approx. FISCAL YEAR January 1 - December 31 Abbreviations and Acronyms CMEA Council of Mutual Economic Assistance CONTRANSIMEX Trading Company for Road Transport CONVEX Company for Terminal at Port of Constanza DC Direct Contracting EC-PHARE European Economic Commission/Economic Assistance for the Restructuring of Poland and Hungary EIB European Investment Bank ERR Economic Rate of Reform GATT General Agreement on Tariffs and Trade GOR Government of Romania ICB International Competitive Bidding IMF International Monetary Fund IS International Shopping MEF Ministry of Economy and Finance MOLSP Ministry of Labour and Social Protection MOT Ministry of Transport NAP National Agency of Privatization NBR National Bank of Romania NCS National Commission of Statistics PETROM Regia Autonoma a Petrolului (Petroleum) PIU Project Implementation Unit RAL Regia Autonoma de Lignitului (Lignite) RENEL Regia Autonoma de Electricitate (Electricity) ROMAGRIMEX Trading Company for Agricultural Machinery ROMGAZ Regia Autonoma a Gazelor Naturale (Natural Gas) ROMPOST TELECOM Romanian Post and Telecommunications Administration SAL Structural Adjustment Loan SMA Agricultural Machinery Station SOCEP Company fcr Terminal at Port of Constanza TA Technical Assistance TOR Terms of Reference y The official exchange rate applies to the puachase of foreign exchange that is not retained by exporters (one-half of their foreign exchange receipts a.e subject to retention), the sale of foreign exchange for the iwportation of a limited nimber of goods, and certain governrnt transactions. v The Interbai* rate applies to other foreign exchange transactions. The Interba* arket for foreign exchr=ge has been established in April 1991.  FOR OMCALM USE ONLY ROMAN!A TECHNICAL aSSISTANCE AND CRITICAL IMPORTS PROJECT STAEF aPPRAISAL REPO9RT3 Table of Contents Page No.~ LOAN AND QpMRECT SUMMARY . . . . . . . . . . . . . . . . . . . . i-vi I. JACKGROUBNP A. The Economy . . . . . . . . . . . . . . . . . . . . . .1 B. Bank Strategy . . . . . . . . . . . . . . . . . . . . 5 I. THE- PROJECT A. Project Objectives . . . . . . . . . . . . . . . . . . 6 B. Project Des:ription and Justification . . . . . . . . . 6 C. Rationale For Bank Involvement . . . . . . . . . . . . . a D. Detailed Project Description . . . . . . . . . . . . . 8 The Technical Assistance Component . . . . . . . . . . 8 - National Economic Management . . . . . . . . . . . 9 - Accounting and Atlditing . . . . . . . . . . . . . 10 - Privatization ak.d Industrial Restructuring . . . . 11 - Commercial Banks . . . . . . . . . . . . . . . . . 12 - Energy Sector Development . . . . . . . . . . . . 12 - Irrigation Sector Development . . . . . . . . . . 13 - Employment Services and Social Security . . . . . 14 - Mining Sector Development . . . . . . . . . . . . 15 - National Commission of Statistics . . . . . . . . 16 - Project Implementation Unit . . . . . . . . . . . 16 The Imports Component . . . . . . . . . . . . . . . . . 16 - Imports for the Petroleum anid Gas Sector . . . . . 18 - Imports for the Power Sector . . . . . . . . . . . 18 - Imports for the Lignite Mining Sector . . . . . . 20 - Imports for the Transportation Sector . . . . . . 21 - Imports for the Telecommunications Sector . . . . 23 - Imports for the Irrigation Sector . . . . . . . . 24 - Imports for Agricultural Machinery . . . . . . . . 25 - Environmental Aspects . . . . . . . . . . . . . . 26 III. PROJECT COST. FINANCING AND IMPLEMENTATIN . . . . . . . . . 27 A. Project Cost and Financing . . . . . . . . . . . . . . 27 B. Onlending Arrangements . . . . . . . . . . . . . . . . 30 C. Project Implementation . . . . . I . . . . . . . . . . 31 D. Procurement . . . . . . . . . . . . . . . . . . . . . . 34 E. Disbursements . . . . . . . . . . . . . . . . . . . . . 35 F. Accounts and Audits . . . . . . . . . . . . . . . . . . 35 IV. BENEFITS AND RISKS . . . . . . . . . . . . . . . . . . . . . 35 V. AGREEMENTS REACHED AND RECOMMENDATION . . I . . . . . . . . 37 t This ort fs bmse on the findife of pre-aprisetl w appraiord missaim whidc vsited Remnim in Fxbri'r Aprf1 1991. Th* oi"sarm eomssted of arff artmm (task nfr), Anbem Tmntle (ntifnol economic _Agement), Uwe Richter. Uyon Anerf Chris Chrlstof id T.T. Shetty (enw). Kidhwe 1adkamf, HRar Fuchs (irdustry). larbra Lee (privatization) David Cotin (C coservatfon) Franco Lucca. Peter Vindiotd Nahmad Tirwezi (agriculture) Cv lye Sinclter, Dxlse Saers (etalyment services), Heinz Iendri& (mining), likote Holcer mnd goslo Chavic (ettlecsnications). The project Ms red urder the srvision of Philipwe NIlytl, Division Chief, ENV.W, md Euenio Larf, Dlrectoe,E4. 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.  Li Table of Contents (continued) Rg MNUNZJ ANNEX 1: Institutional and Pricing Issuems Energy Sector 39 ANNEX 2: EconomLc BenefLts, Costs, and Risks of the Energy Components . . . . . . . . . 47 ANNEX 3: Petroleum and Gas Component 52 ANNEX 4: Power Component . 54 ANNEX 5: LignLt Mining Component 59 ANNEX 6: Imports for Transport Component . . . . . 66 ANNEX 7s Imports for Telacommunications Component 68 ANNEX 8: Irrigation Component . . . . . . . . . 71 ANNEX 9: Imports for Agricultural Machinery . e81 ANNEX 10: Schedule of Disbursements . . . ..82 ANNEX 11: Documents available in Project File . * . 83 IABLES TABLE II s1: PROJECT COST SUHMARY BY COMPONENT . . . 28 TABLE III2: PROJECT COST SUMMARY BY CATEGORY OF EXPENDITURES 29 TABLE III.3: FINANCING PLAN . . . . ..29 TABLE III.4: PROCUREMNT ARRANGEMENTS . . . . . . . . 34 CHARTS CHART 11.1: IMPORTS COMPONENTS, OUTPUT EFFECTS AND ECONOMIC JUSTIFICATION... 17 CHART 111.1: PROJECT IMPLEMENTATION RESPONSIBILITIES . 32 MEZ IBRD No. 22907  iii TRCNIALASSXSTACIAN2 CRITICAL IMPORS PROJUCT STAFF APPRAISAL RUPORT Loan and PtroimS&AL uaVj igliflZR s Romania' FUIA MZUIs For technical assistance components Ministry of Economy and Finance, Ministry of Industries, National Agency of Privatisation, Ministry of Labor and social Protection, Ministry of Agriculture, Cooperative Bank, Savings Bank, Development Bank, Comercial Bank, Agricultural Bank, Reg a Autonoma A Petrolului (PUTROM), Regia Autonoma de Lignitulut (RAL). For import components Regia Autonoma de Zlectricitate (RENEL), Regia Autonoma a P-trolului (PETROM), Regia Autonoma a Gazelor Naturale (RONGAZ), Regia Autonoma de Lignituliu (RAL), Romanian Post and Telecommunications Company (ROMPOST TeLECOM), Bucharest Metro, Port of Constanza for terminals operated by CONVEX and SOCeP, CONTRANSINEX (for buses arId trucking companies), ROMAGRINEX (for agricultural machtnery), and Ministry of Agriculture. IQUEts US$180 million equivalent TOM$St Fifteen years, including five years of grace, at the Bank's standard variable interest rate. esumllJnfnt Part of the proceeds of the loan would be onlent to Bucharest Metro, CONTRANSINEX, CONVEX, PETROM, RAL, RENEL, ROMGAZ, ROMAGRINEX, ROMPOST TELECOM, and SOCEP for the import component. Funds for the tochnical assistance components would be onlent to agencies not fully financed by budgetary transfers, including PETROM, RAL, Commoercil Bank, Savings Bank, Cooperative Bank, Agricultural Bank, and the Development Bank. Maximum maturity periods under the onlending arrangements are 10 years with 3 years of grace. Funds onlont are denominated in US$ terms or in Deutsche Mark and carry an interest rate of LZBOR or VISOR plus a minimum of 1.5 percent for the US dol).ar or DM loans, respectively. ki TMe prwl i_ of 3t., the sociltst Rq"tlc of bInsf a no tqeW _intuntd. A nw m wlt be dicd ed the nw cnnstltutlmn, pre_tty .ulh prqamtfon.  iv 9ZjC M5gtZiyis The project would provides 5i) technical a*olstance to support the ongoing economic reform process in the formulatLon and LmpleaentatLon of macroeconomlc and sectoral policy programs; and (ii) forelgn exchange for the import of ossential spare parts and equlpment to the irrigation, t-lecommunioations, power, lignite, petroleum, gas and transportatlon sectors and for agricultural machinery to *ustaln output performanco, which is threatened due to serlous foreign exchange constraints and dLilocations caused by the transition from a planned to a market economy. PROJECT DESCRIPTION: The project includes a technlcal assistance and an import component. The technLcal assistance (TAI component would support: (i) national macro conomie mAnacement to prepare fiscal, pricing, budgetlng, investment plannlng, and legal reforms; (ii) strategy formulation and pricing reforms in the enerav soctor, the definition of sectoral restructuring programs in the industrial sector and support for the Drivatization of industrial enterprises, services and housing; (iii) the establishment of an efficient service to administer unemployment bonefits, improve labor market information, provide emsloyment advioory serviceo and retraLiang activities, and support reforms of the social security system; (iv) support to the National Commiision of StatLnieta to improve proessiLng and evaluation of statistics; (v) strategic studies, training plans, and assessments for computer requirements, for commerciaI bankss and (vi) sector studies in the irrLaatLon and eneroy sectors, and advisory services to establish an internationally recognized accountlna and auditLnU profession. The imoorts comoonent would provide spare parts and equipment financing for: (i) the transoortatLon sector, including the Port of Constanza, the Bucharest NMero, and for road transportation; (ii) spare parts and equipment financing for: two major oowMr plants, Turceni and Rovinari, and to the lignite mines supplying lignite to these power plants; (iii) 2etroleum and cas wells; (lv) the telecommunications system; (v) LrL$atLon system; and (vi) aoricultural machinery. yE FITS AND RISKgs The project, through its technical assistance program, is expected to support the ongoing economic reform program in Romania, which is proceeding boldly, but where policy decisions often are taken without full knowledge of pollcy optlons, due to unfamlilarity with market economLes and lack of knowledge of policies pursued ln other countries. The imports component is deslgned to maintain productlon in selected key sectors,  v DUNEPITS AND RISKS: targeted for import financlng under the proposod (contLnued) program. Aggregate output effects of the proposed project are estimated to be subutantlal. Value wr annual production of the energy components alone is estlmated to amount to US$ 421 million. Possible political instability leading to changes of key personnel is a risk to successful implementatlon of this program. Lignite production may not be sufficient to feed the Turconi and Rovinari power plants equipped under the import component. The mining component included under this project is designed to minimize this risk. Through careful specification of goods to be imported and targeting of imports to selected economic activities, output effects are expected to be assured in the short - term. Maintaining production in the longer term, would depend on continuing economic reforms, particular in the areas of price liberalization and the establishment of efficient foreign exchange markets to assure access to imported spare parts and equipment in the future. Longer - term project success thus depends on continuing economic reforms. Future Bank adjustment and investment lending is expected to play an important role in helping to suctain this reform process.  vl USS Million NSTIUN=O PROJ3CT COSTS osi LQghl 29ASl Technical Asistance 23.0 13.0 36.0 Imports Component 174.4 526.4 197.4 65A. UsS Million PINANCING PLAN: FQr*in Local Total erc-nta^a IBRD :180.0 - 180.0 68 EIBS 17.4 - 17.4 7 Government/BeneficLarLes - 665.0 2 lA197.4 IA 0 Ill USS MLllion ESTIMATED DISBURSEMENNT 1922 1994 1995 (IBRD Fiscal Year) Annual 120 35 20 5 Cumulative 120 155 175 180 SCONOMIC RATE Or RETURNt Not appllcable a ElI WI1 prwvtde 1U017.4 silt1io for cofflnwicr of tX pumw cspornrnt.  TUCUNICAL ASSX STANCE AND CRITICAL IMtP RT PROJECT A. Trhe Rcongm= 1.1 Romania is one of the largest of the former centrally-planned economies in the Central and East European Region with a land area of 237,000 sruare kilometers, and a population of 23 million. The country has a wide range of natural resources, including a fertile agricultural base, large depouitu of coal and lignite, oil and natural gas, and scattered mineral doposits. Long a major food producer, Romania was a large not exporter of agricultural products until the early eighties. 1.2 The Communist Party came into power in 1948 and quickly installed central planning and nationalized most privately-held property. In the early fifties, it instituted a strategy of vigorous, self-sufficient industrialization. Building on the large domestic hydrocarbon resources, the country invested heavily in refining and upstream chemical plants, and established a large machine-building industry. Despite a lack of attention to consumer goods industries and the service sector and a highly energy intensive development pattern, the strategy wai reasonably successful for a time, rates of growth averaged between 6-8 percent per annum until the late seventies. 1.3 In the aftermath of the second oil shock (1979), Romania experienced a sudden withdrawal if short-term foreign credits. The action had wrenching political and economic effects resulting, by 1981, in a cessation of foraign borrowing and ultimately culminating in a decision to repay all foreign debt. These decisions had very negative economic and social consequences for the nation. Import of modern machinery and equipment was almost halted, leaving a legacy of obsolete and depreciated capital. Growth slowed substartially and, at the end of the decade, production and per capita Lncomes were probably no higher than at the beginning. While investment remained high during the eighties, most of it was channelled towards existing, inefficient industries. Moreover, in the latter half of the decade, investment was progressively diverted to huge and unproductive "showcase" projects at the behest of an increasingly autocratic ruler. 1.4 In December 1989, the Ceaucescu regime, which had ruled Romania for more than two decades, came to a sudden and violent end. In May 1990, a coalition of parties, the National Salvation Front, won large majorities in the country's first post-revolution elections. After the revolution, the Government restored civic freedom, shortened the workweek from six to five days, released the restrlctions against imports of consumer goods and reJLrectod some energy supplies from industry to households. The Government took important steps to initiate economic reforms: (i) framework legislation for privatization was enacted, and the transformation of State enterprisesinto joint stock companies was begun; (Li) land reform was initLated; (ill)  2 restrictions on private enterprise were largely removed; (iv) the monopoly cf the State over foreign trade was eliminated, and the official exchange was dovalued by a cumulative 60 percent; (v) prices in rural markets were freed, followed by a first ,.age price reform (in November 1990) in which about half of the previously regulated prices were also freed, and administered prices for some important industrial inputs, including crude oil, were raised approximately to international levels. 1.5 During the first quarter of 1991, Parliament legislated a new law on unemployment benefits, a banking law establishing an independent central bank and commercial banks, and a law on foreign investment. To replace the previous ad hoc exchange controls, the Government introduced a dual exchange rate system, involving partial foreign exchange retention rights and an interbank market, as an explicitly temporary mechanism during the transition towards establishment of full currency convertibility. A transitional tariff structure was put in place, with a permanent scheme under preparation consistent with GATT. A strict stabilization program for 1991 was adopted with support from an IMF standby and a compensatory fund facility, both approved in April. This program entails firm budgetary discipline (with a maximum budgetary deficit of 1.5 percent of GDP) and tight monetary and credit ceilings. A second phase price reform took place on April 1, 1991, coupled with a 71 percent devaluation of the domestic currency, and full liberalization of interest rates. An incomes policy was imposed in January 1991 to prevent a wage-price spiral in reaction to the administered price increases. A system of monthly compensation to workers and pensioners for these price increases was introduced to soften the impact on household incomes. 1.6 Further legislation to implement privatization of commercial enterprises is nearly finalized. The privatization of land is progressing rapidly--almost 70 percent of agricultural land is now estimated to be privately owned as a result of the new Land Law, compared to only 10 percent in 1989. New la.es on competition and liquidation are expected to be enacted during the present year. Work is proceeding to prepare a major reform of taxation (a value added tax and an income tax are planned to be introduced in 1993) and of the tariff regime. A broad scale decentralization of Government functions, including expenditure and revenue authority to new local governments is also underway. The Government has indicated its intention to undertake ambitious reforms of social policy, including the reforms of pensions, and the health and education policy, which are essential to improve productivity, while developing an adequate safety net and ensuring sound public finances. 1.7 The rapid breakdown of previous structures of command and control in the economy during this first year of the new era resulted, predictably, in severe disruptions of domestic supply and trade patterns. Two major external shocks--a 40 percent increase in oil prices and the accelerating breakdown of the CMEA--contributed to sharp reductions in exporhs and in supplies of *nergy and raw materials. During 1990, industrial output iaclined by 20 percent and overall GDP by 10 percent. The current account shifted from the artificially high surplus maintainid under the Ceaucescu regime to a deficit of 7 percent of GDP, financed entirt-Y by a drawdown of reserves. Initial wage increases  3 following the revolution permitted a surge in private cornumptLon. With a decllne in budgetary revenues accompanying theme developments, the previous budgetary surplus war elimlnated during the year but the budget remained in balance, mainly due to a sharp cut in investment expenditures. 1.8 Eccnomic growth deteriorated further in the first quarter of 1991, with industrial output declining 17 percent compared to the same period of 1993. The decline in industrial p,roduction in the first quarter war mainly concentrated in heavy and energy-intensive industries (coal mining and metallurgy, machine-building, transport equipment, chemicals), while electrical equipment, household appliance, food and beverages, showed declines below 10 percent. While exports are more sluggish tthan expected, fiscal developments have been encouraging so far and monetary indicators have been kept within the limits of the Standby program. Continued output declines are attributed to uncertainty in the enterprise sector concerning the actual authority of managers, inefficiencies of State enterprises, bottlenecks in the supply of inputs, both imported and domestic; workei. indiscipline ("the psychology of revolution"); the incomplete status of price liberalization, which has squeezed certain subsectors and inefficient State enterprises generally; and, the collapse of markets in the former CMEA member countries, particularly the Soviet Union, and in the Gulf region. 1.9 In the first quarter of 1991, trade in convertible currencies was well below expected levels for both imports and exports. The convertible currency trade deficit for the quarter was US$611 million, to be measured against a total deficit of US$1590 million for the year as anticipated by the IMP program. External financing remains insufficient. The IMF program had estimated a financing gap of about US$1.0 billion in 1991, based on the anticipated level of production and exports, and after taking into account the likely resources available from the IMF and the Bank. 1.10 Romania is embarking on the reform path with two distinct advantages not shared by the other formerly socialist countries in the regions it meets a substantial share (70 percent) of its energy consumption requirement through domestic production, and it entered the transition period with virtually no external debt--an advantage won at bitter cost to the economy and the population. Like its neighbors, Romania also has a relatively well-educated work force and low labor costs, which should facilitate its economic recovery and its ability to attract foreign investment once economic reform and stabilization programs are firmly established. But, Romania also has several strikes against it. Because the, previous regime was centralized and autarkic to the extreme and practiced the most distorted allocation of resources in the region, Romania will have a greater task than the other countries of the area to develop its institutiond, upgrade its capital stock, and adjust to the behavior and attitudes needed to create a modern market economy. Considering its political and economic heritage, Romania has made remarkable progress in introducing economic reform measures. The present Government seems to have a clear vision of the required policy reforms and appeArs prepared to implement them decisively. To achieve this objective, Romania requiree coneiderable external assistance, both technical and financial.  4 D. hank S%rU t-av 1.11 Romani. initlated discussionm with the Bank and the IMF early in 1990 after Bank lending had been discontinued in 1982. The firat mission visited Bucharest in March 1990. Romania clearly indicated its intention to dav*lip a new relationship with the Bank and has requested economic advice on a wlde range of matters, including among others the design of a social safety not, the protection of the environment, and the assessment of public investment pro,rams. It has further requested assistance for import financing, adjustment lending, and technical assistance programsc 1.12 Due to repayment of all foroign debt under the Ceaucescu regime, Romania has very favourable creditworthiness indicators. But creditworthiness will depend on the restoratton of sustainable economic growth. Bank interventions through adjustment and investment lending will need to help the creation of a conducive economic environment, which fosters efficient economic growth. 1.13 The Bank's lending program for Romania will reflect the country's size and '-Is strength of its economic reform efforts. The Bank'si strategy in Romania has several mutually reinforcing themes: (a) The proposed operation, the first in Romania since 1982, is designed to encourage an almost instantaneous supply response by putting back on line productive facilities crippled by lack of imported spare parts. This would help halt the economic slide that started in 1989. (b) An adequate social safety net is a prerequisite to the changes needed for the transition from autocratic central planning to a pluralistic market-based economy. The Bank's efforts in the human resource area will be designed to build a social security system and to strengthen human capital. A health services project has been appraised, and future ope, -'ions in employment and training and in education are being co.. 'Jered. (c) Romania has little external debt, but its physical iafrastructure was so greatly neglected during Ceausescu's draconian import compression that it now constrains economic growth. An important part of future Bank strategy will be to improve the existing infrastructure. A technica& assistance project for the infrastructure sectors, recently appraised, will prepare lending interventions in these sectors. (d) Assuming that Romania's present receptivity to Bank advice continues, policy-based lending will be an important part of the Bank lending program. A sustained, robust supply response will depend on Romania's ability to create a climate beneficial to rapid private sector development. The explicit goal of the structural adjustment loan will be designed to help create such a climate. Future policy-based loans will concentrate on particular areas important to a sustained supply response,  5 especially enterprise privatization, financial modernization, energy pricing, and the environment. (s) Investment operations in productive sectors will reinforce the private sector development effort. The first operatic. in the agricultural sector will be a Private Fanmers' Support Project, the target beneficiaries of which will be the private farmers. (f) Efficient growth will depend to a large extent on efforts to restructure and privatize large and inefficient industrial enterprises, and policy reform and institutLoan building is needed to lay the basis for efficient financial intermediation. Interventions in the financial and industrial sector are likely to figure prominently in our lending program. II. - R A. Proleot Obiectlves 2.1 The project's objective is to provide urgent assistance to the Government of Romania for two essential activitiess - To provide technical assistance to Government for the formulation of strategies and policies to promote and accelerate the transition to a market economy. * To help avoid further decreases in production while Government designs and starts implementing its program of economic reforms. Continued decline in production is likely to make the reform process unsustainable due to social dislocations leading to increasing pressures for a slowdown of reforms. It is thus necessary to help maintain or restore output performance in key sectors of the economy. B. Plect Denacriotin and Jultification 2.2 The project comprises first, a technical assistance component which would: Help define restructuring policies for Lndustrial ent rriaes and support Privatization and private sector development in industry, services and housing. Support national economic managemnnt through advisory services for reform in the fiscal, pricing, budget, and investment planning systems and for legal reforms which are underway. Help establish an internationally recognized accounting and auditing system.  6 * Help define strategic plans, training plan. and computer hardware requirements for commercial banks. * Provide assistance in nenrao pricing and energy strategy formulation; undertake audits for gas and oil exploration and assessments of the hydrocarbon potential, and provide management support to the lignite mining sector. * Undertake a comprehensive irrigation sector study. * Help create efficient employment services through financing computer equipment, training staff who administer unemployment benefits, and assessing the social security system. * Provide the National Commission of Statistics with adequate computer equipment. 2.3 Second, the project includes an imoorts component for the financing of critical imports of spare parts and equipment for key production units in essential productive sectors of the economy. Specifically, the project would provide spare parts and equipment for the power, petroleum, gas, mining, irrigation, telecommunications and transportation sectors, and provide spare parts for the agricultural machinery. In addition, management support would be provided to the lignite mining sector, to ensure that the spare parts firanced under the project would lead to the restoration production of previous years. 2.4 Justification for the Imports Comonent. Output performance has continuously declined in Romania over the last 18 months, due to inadequate foreign exchange allocation for the purchase of spare parts. This has led to a drastic decline in capacity utilization and rapid falls in production. Declining domestic production of spare parts has exacerbated the situation, particularly for the transportation network, and the power, petroleum, and agricultural sectors. 2.5 The proposed imports component is justified by the fact that Romania has undertaken very substantial economic reforms, which the Bank is preparing to support through a SAL in the near future. Since the GOR faces an acute shortage of foreign exchange, the proposed operation is an immediate response to avoid further deterioration in the economic fabric of the country. The investment program rests on the assumption that the Bank will became involved in Romania with adjustment and sector investment lending operations. These will need to address outstanding sectoral pricing reforms and support the establishment of an efficient foreign exchange market, to ensure Later sJl" that beneficiaries included in the operation will contin.e to have access to foreign exchange beyond the life of the project. Without such a follow up, the benefits of the project would be short-lived. 2.6 Care has been exercised to ensure that the imports component does not interfere with the economic reform by artificially strengthening units which should not survive after the reform. Thus, the program would provide foreign exchange financing only to those productive units which are considered  7 a priori economically viable in the competitive environment of a market economy, or which will retain for some time a character of public utility. Sector and economic activities included in the imports component were selected after an assessment of existing competitiveness or projected competitiveness after only minor restructuring or management improvements. Sectors which require major restructuring, and where comparative advantage remains uncertain, such as the industrial sector and most of the agricultural sector, have been excluded from the project, since they will need detailed sectoral analyses before any investment in them can be economically justified. C. Rationale for Bank Involvamnt 2.7 The Bank's economic mission which visited Romania in November 1990 has undertaken a detailed analysis of the economic reform program launched by the Government. It has found the program courageous and comprehensive, and it endorses its broad directions. A Stand-by agreement was approved by the IMF in April 1991 which initiated the implementation of a stabilization program and provided the framework for strict macro-economic discipline. The Bank is preparing a Structural Adjustment operation (scheduled for Board presentation in December 1991) which will support the reform program for the major economic sectors, and investment operations are also under preparation. 2.8 In spite of Romania's negligible external debt, commercial lenders do not yet seem prepared to extend financing, and due to the continued political uncertainties in the country, other donors, such as the group of 24 represented though the EEC, have only recently initiated negotiations with the Government of Romania. Their financial assistance has so far been largely limited to humanitarian aid. Because of the collapse of the CMEA and for other reasons, foreign exchange reserves are very low. 2.9 Given the importance of the reform measures already undertaken, and of the hesitancy of other donors to provide external resources, rapid involvement of the Bank in the financing of the urgently needed foreign exchange requirements for critical sectors is vital, to avoid further collapse of the production system, and to assure the sustainability of the stabilization program. D. Detailed Proiect Description The Technical Assistance Component IUSS23.0 million) 2.10 The technical assistance program would provide support for: * National Economic Management * Accounting and Auditing * Privatization and Industrial Restructuring * Commercial Banks * Energy Sector Maintenance * Irrigation Sector Maintenance * Employment Services and Social Security * Mining Sector Maintenance  8 * National Comission of Statistlcs * The Project Impl.montatLon Unlt The proposed program has been coordinated with EC-PHARE but no formal co- financlng arrangements hava been made, as flnal financlng decisions under the EC-PHAAE program are still pendlng. Some flexlbllity ln the implementation of technical assiLtance components would be requlred to coordlnate wlth other donors providlng financing for tochnical assLstance. National Economic Manauement IUS92.6 millions 2.11 Lack of famillarlty with markot economLes and the lack of analytlcal tools to analyze, monltor and forecast economic developments are serious impediments to successful implementation of economlc reforms in Romania. The objective of the component is to strengthen the Natlonal Reform Council and the MinLstry of Economy and Finance (NEF) to imprGre policy analyLsi, forecasting and policy formulation. The Reform Council was establlihed to assume the leadlng role ln conceptualizing and implementing the economic reform program, while the ME? is charged with implementing the more routlne features of economlc management. As the tasks of the Reform Councll and the MEF are dlrectly linked, careful coordlnation between the two instltutions is required. As the Reform Councll has so far been primarily involved in the preparatlon of laws, an upgrading of economlc sk'lls L needed to conceptualLze economlc and legal reforms. In MEF, TA is needed to strengthen macroeconomlc analysis, with particular amphasis glven to the development of some technical skllls, such as model buildlng to improve forecasting, balance of payments analysis, fiscal analysis, trade, and monetary policies. 2.12 The Reform Councl would receive support to: (i) enhance the conceptualization and strategy formulation of the Council, its ability to undertake key economlc analysi of issues and add an economlc perspective ln its consLderatLon of all reform-related activlties; and (ii) strengthen the legal capacity of the Council by givlng lt flexibillty and rosources to access external legal assistance in the drafting and review of laws. The TA component would finance one generalist development economist (15 months) and one macroeconomist (12 months). The general economist would help integrate the work of MEF lnto the work of the Council; the macroeconomi-t would help ln the preparation of short-term pollcy analysis and provide macroeconomic policy advice to the Deputy Prime Nlnister ln charge of the Council. In addltlon, the component would finance 24 months of short-term consultancy assignments, primarily for the draftlng of special laws, where legal expertise from other European countries is required, travel funds for attendance at semLnars and tralnlng abroad, and 20 personal computers along with related equipment. 2.13 Support to the Ministry of Economy and Flnance would consLst of providing hlgh level Economic Advisor (18 months) to the Deputy Prime Minister for Economic AffaLrs, who is also the responsLble mlnlster for MEF. The economic advLsor would assLit the Deputy Prime MinLster in overall pollcy formulation. At the same time, the advisor would supervise the work of other long-term consultants provlded to the MEF and the Reform Council and Lntegrate it into a coherent program. Other advlsors proposed to be financed under the  9 loan, are one quantitative methods specialist (12 months), one international monetary/trade economist (12 months), and one advisor (12 months) to work with the task force on the review of the unfinlhed and proposed public investments. In addition, the TA would provide financing for 24 months of short-term consultants for analysis and training in much areas as national accounts, forecasting methods, statistical analysis, fiscal, monetary and labor analysis. Short-term training abroad in such areas as national income accounting, macroeconomic modelling and statistics, and 50 personal computers, partly equipped with supplementary features, required for economic modeling would also be provided. Short-term consultants would also be used to assist the advisor on public investment programming in specialized sectors, where major investment decisions need to be taken. 2.14 The objective of the advisor assisting with public investment reviews would be to: (i) help institutionalize a system of investment programming; and (ii) help prepare an investment program for investments which are fully funded by the central government's budget, and for investments for semi-autonomous agencies. Appropriate investment planning and priority setting is of overriding concern in Romania where many of the major capital intensive investments, begun under the previous regime, remain unfinished, and major additional public investments are required to position the economy to compete in a market economy. Aareement has been reached during negotiations that by August 31, 1992, the GOR would present for Bank review and comments, an investment program for investments funded by the Government central budget and by semi-autonomous agencies. Specifically, the GOR would submit for Bank reviews (i) the proposed public investment program for fiscal year 1993; and (ii) a program of financial allocations and a timetable for completion of priority projects selected from the portfolio of unfinished projects. GOR would uubsequently proceed with implementation of the investment program as agreed upon during joint review. 2.15 The component would be implemented by the MEF and supervised by the economic advisor to the Deputy Prime Minister. To assure that the two long-term advisors provided to the Council of Reform and the four advisors provided to the NEF operate as a team and provide for closer coordination between the Reform Council and the MEF, efforts would be made to recruit the group under one contract from a single consulting organization. This organization would then also be responsible for all logistical arrangements. TORs for long-term consultants have been agreed with the GOR; TORs for short- term consultancies are being prepared and would be approved throughout project implementation. Accountino and Auditina IUSSO.4 millions 2.16 Romania does not have as yet the accounting and auditing capacity required in market economies to provide reliable information on the financial status and performance of enterprises and banks to existing and potential investors and creditors, and to the managements of the enterprises and the banks to take sound decisions in an increasingly competitive environment. A law has recently been passed to establish the introduction of accounting and auditing regulations and standards conforming with international norms. The law will need to be complemented by an appropriate institutional and  10 regulatory framework, and the development of an accounting and auditing profession operating according to international standards and practices. The objective of the component is to provide initial assistance to the MEF in the development of a modern accounting and auditing system, and to help establish an accounting and auditing profession. The component would finance a resident advisor to MEF as well as consultancy services for the Accounting and Auditing Institute, soon to be established, which would be responsible for the certification and development of accountante and auditors in Romania. Provision is also made for short overseas study tours and training. Privptization and Industrial Restructuring (USS2.4 million) 2.17 The Romanian industrial sector needs to undertake major restructuring efforts. Prospecte for survival of many industries are weakened by changes in relative prices and the breakdown of the CMEA system. Major parts of the industrial sector will need to be privatized or liquidated and enterprises will need to be restructured in order to establish a competitive production system. The privatization component has been designed to assist the National Agency for Privatization (NAP) in: (i) designing and formulating a general privatization strategy and legislation; (ii) conceptualizing the institutional structures for exercising ownership; (iii) developing techniques for small-scale privatization; (iv) carrying out on a pilot basis a limited number of operations for privatization of state enterprises; and (v) providing support to the NAP through advisory services and study tours. 2.18 Under the Industrial Restructuring Program, support would be provided to: (i) define sectoral strategies for industrial restructuring and the definition of the appropriate institutional framework to implement restructuring programs; and (ii) develop model restructuring programs for seven or eight enterprises, selected from different subsectors, including ferrous and non-ferrous metals, petrochemicals, machine building, electronics and electromechanics as well as construction materials. only enterprises expected to become economically viable would be selected for restructuring. The preparation of these restructuring programs by joint teams of external consultants and Romanian experts would serve as demonstration cases. They would be disseminated widely to show various analytical and forecasting approaches. Selection of enterprises for the inclusion of model restructuring would be based on the certainty in their ownership and governance and the strong commitment of their managements to the restructuring process. 2.19 The EC-PHARE program is expected to have an important involvement in industrial privatization and restructuring. Financing indications for this component remain preliminary, and might become subject to reallocation. Preliminary allocation provides for US$1.0 million of advisory services, study tours and some selected equipment to the NAP. US$1.4 million has been allocated to the Ministry of Industries for the provision of two senior resident advisors (12 person-months each for one financial analyst and one economist) directly associated with the Minister of Industry. The comnponent would further provide for study tours, training, and some hardware with related software and training. The component would finance 55 person-months  21 of consultancies for the enterprise restructuring teams establishing model restructuring program. Commercial Banks IUSS2.0 million) 2.20 Substantial reforms will be required to transform the banking system in Romania to meet the requirements of a market economy. The National Bank of Romania (NBR) has now been restructured am a central bank performing typical central banking functions much as bank supervision and the .mplementation of monetary policy. NBR is receiving substantial assistance under bilateral programs from the IMF central banking department and from consultants funded by the EC-PHARE Program. The TA component would, therefore, focus on support to the newly-establ!shed commercial banks. Commercial banks are being transformed into profit-oriented companies which are expected to opsrate independently from the budget and to provide full banking services. However, the portfolio situation of the banks is bleak, as a large proportion of loans outstanding are non-performing, because public enterprises are unable to repay their obligations. Audits and portfolio reviews will need to be undertaken urgently to assess accurately the financial situation of the banks. Audits and portfolio reviews as of June 30, 1991 or December 31, 1991 are expected to be financed under the EC-PHARE Program. The TA component would provide financing for the preparation of strategic plans, staff training plans and assessments of computer hardware requirements for the Commercial Bank, the Development Bank, the Agricultural Bank, the Cooperative Bank, and (possibly) the Savings Bank. Studies to be financed under the EC- PHARE and this TA program are essential for the restructuring of the banking system and would provide the basis for future lending interventions in the financial system. Enerav Sector Develo2ment (USS3.8 million) 2.21 The objective of this component is to: (i) prepare an energy cost and oricina studv; (ii) provide advisory services to GOR to prepare recommendations on an appropriate system and level of energy prices and to design a program of full price liberalization and/or economic regulation; and (iii) finance an enerayv olicv advisor to the Ministry of Industry who would assist in analyzing projected energy demand, institutional, policy, and investment requirements to meet future energy demand and facilitate external sources of additional capital and technical assistance. The component would also provide for some computer equipment and related training for selected staff involved in policy formulation at the Ministry of Industries, which is responsible for the energy sector. The component would further finance two important studies for the petroleum and gas sectors: an Oil and Gas Reserves Audit and Assessment of Operations; and an Evaluation of Hydrocarbon Pros2ects in Romania. Given the importance of appropriate energy pricing for supply and demand of energy, agreement has been reached during negotiations that a program for pricing reforms in the energy sector be presented to the Bank no later than September 1, 1992. Based on the recommendations of the Energy Cost and Pricing Study, the program would present proposals for pricing reforms in electricity, hydrocarbon, coal/lignite and district heat to ensure that prices cover economic cost. GOR would subsequently implement pricing reforms as agreed upon between the Bank and GOR during joint review.  12 2.22 The objective of the oil and gas audit is to update oil and gas reserve estimates for Romania. The study would identify the optimum depletion plan for oil and gas reserves, and establish the economic priorities for implementing this plan. The study would formulate an oil and gas production policy and would also introduce advanced technology for reservoir evaluation. The study would make recommendations regarding technological requirements, appropriate computer systems, as well as the reluted institutional training needs. The objective of the evaluation of hydrocarbon prospects in to provide a synthesis of hydrocarbon potential of each major sedimentary basin of Romania. The study is to develop depositional models which would allow better understanding and prediction of the country's petroleum prospects. It would interpret and integrate geological, geophysical, engineering and logging data with the detailed study of rock properties. The study would also utilize atellite imagery technology to prepare an updated and modern geological map of Romania. The study is expected to be of major importance in attracting private investors in the hydrocarbon sector. Irrioation Sector Development (USS2.7 millionl 2.23 Technical assistance would be provided to carry out a major irrigation sector review. Technical assistance in the agricultural sector is limited to this one study, as grant financing is expected to be provided through the EC-PHARE program for a sector study in agroindustries and advisory services for agricultural policy formulation. Irrigation is a key subsector for agriculture since almost one third of all arable land (more than 3 million ha) is irrigated. The technical and economic viability of many of existing schemes is uncertain. The irrigation sector study (155 person months) would be an important effort in assessing the role of irrigation in the altered economic conditions of a market economy. It would examine the viability of various established schemes, make restructuring proposals taking into account competitive conditions, provide recommendations regarding appropriate irrigation and drainage technology, and investigate the impact of privatization on on-farm irrigation. Consultants would further assess the required level of operation and maintenance expenditures and recommend levels of water charges. The study is essential for the preparation of a comprehensive structuring and investment program in the irrigation sector. 2.24 The irrigation study would be carried out in three phases (see also Annex 8 for detailed description). Phase one would undertake a review of completed documents and data and make a selection of typical schemes for detailed study under the second phase. In order to facilitate an overall assessment of different types of the irrigation study area, some typical schemes would be selected for more detailed examination. The results of this first phase should be presented in the form of an inception report, with special emphasis on the criteria for the selection of the typical schemes and the issues which would be studied in greater detail in succeeding phases. Consultant services in the second phase should cover: (i) the preparation of a near-term investment program for immediate preparationu (ii) the detailed examination of the issues concerning irrigation, drainage, soil erosion, and the preparation of preliminary designs and cost estimates for the selected schemos in the three zones. Consultants should also examine the present and  13 future cropping patterns, local and international marketing, and carry out economlc evaluation of the selected schemes on the basis of the proposed remodelling/renovation measures. In the third phase, the consultants should prepare a ten-year program of development and rehabililtation, based on technical and economic priorities. Furthermore, the consultants would prepare the first five-year tranche of thli prlority program. 2.25 Agreement has been reached during negotiations, that the GOR would ensure that no later than September 30, 1992, the first phase of the project would be completed and an immediate priority investment program be presented. By August 31, 1993, the second and third phases of the project would be completed, including the ten-year prioritized indicative program and a detailed five-year investment program. Promptly upon completion of each phase of the study, the GOR would exchange views with the Bank on the findings of the study and arrange joint meetings between the Bank, representatives of the GOR and the consultants to review the findings, to formulate the recomendationr on the proposed investments and to agree on the direction and the contents of the remaining phases of the study. Emolovment Services and Social Security ComDonent IUSS3.6 million) 2.26 Romania will experience significant levels of unemployment, as the country makes the transition from a planned to a market economy. Unemployment has already grown rapidly as uncompetitive factories close down and redundant labor is released from overstaffed companies. Redundant workers still employed are estimated at 500,000 (5 percent of the total labor force). To avoid undue economic hardships and to assure social peace in a country unfamiliar with open unemployment, administrative capacities need to be created to register unemployed workers, to pay unemployment benefits, to provide for labor market information, and to offer possibilities for retraining. Sufficient financial resources have been earmarked under a special fund to finance unemployment benefits, but the Ministry of Labor and Social Protection (MOLSP) has insufficient administrative capacity to handle such numbers of unemployed. Furthermore, the social security system will requLre extensive modifications to adapt to the needs of a market-based economy, including the creation of an independent social insurance fund and the creation of a pension fund. 2.27 The employment and social security component would consist of seven subcomponents, which would: * improve the labor market information system and develop Living Standard Measurement Surveys (22 person months consultancy, 20 person months of fellowships); * improve employment counseling, job search and labor exchange techniques (15 person months consultancies, 6 person months fellowships); * improve productivity, promote inward investment and enhance labor force mobility by retraining the unemployed and improving qualification of low/semiskilled workers to improve their ability  14 to react to structural unemployment (5 person months consultancies, 4 person months fellowships); * assist in generating employment by activating local institutions, mechanisms and systems to *upport the creation and expansion of employment and private micro-enterprises by the unemployed (10 person months consultancies, 4 person months fellowships); * for the social insurance program, assist in designing an independent social insurance fund, in specifying staff training needs to manage the fund, in identifying measures to insure the emerging private sector, and identify measures to improve benefit payments (14 person months consultancies, 3 person months of fellowships); * automate 170 district offices and the national offices through provision of equipment (personal computers) and advisory services (20 person months of consultants and 8 person months of fellowships) for establishment of a comprehensive automation plan of employment services; * provide financing for a project implementation advisor (9 person months), located in the coordination unit of MOLSP and 15 person months of fellowships, to assure the appropriate and timely implementation of this complex component. Mining Sector Development (USSO.9 million) 2.28 Declines ir production in the mining sector have been particularly serious during the last 18 months, mostly due to a shortening of the work week, to unavailability of some essential spare parts and to bad management. The component would therefore provide financing for a management consulting contract (37 person months) to introduce a better use of the existing capital stock and employment of labor. The mining component directly complements the imported spare part component for the power sector. The objective of the component is to assure adequate levels of production to supply the two major power plants, Turceni and Rovinari, equipped under the import component of the project (see paras. 2.34 to 2.41). The management consultants wouldt (i) assist in organizing the mines more efficiently to assure productivity increases at its major low cost surface mines; and (ii) prepare a proposal for long-term productivity improvements. Agrement has been reached during negotiations that the GOR would present to the Bank for review and comment, no later -han January 31, 1993, an action program on: (i) how to improve RAL's economic and financial viability; and (ii) how to ensure in future adequate lignite supplies to the Rovinari and Turceni power plants in line with additional capacities to be restored under the second phase rehabilitation program. The action program should propose measures on how to significantly increase production from low-cost surface mines while decreasing production from inefficient underground mining. GOR would subsequently implement restructuring measures as agreed upon during joint review.  15 MaKonal Commission of Statistic iUSS3.0 million) 2.29 The objactive of the component is to support the National Commission of Statistics (NCS) in the processing and analysiR of statistics required for the monitoring of economic development in a market-based system. Under the previous regime, production data had been falsified systematically to hide shortfalls in production in respect to Plan targets. Unusual progress has been made by the NCS to correct and adjust the statistics system of the country. NCS is already issuing a number of regular publications which monitor important indicators. Progress made is partly due to management having shown unusual initiative in setting up twinning arrangements with other statistics offices in Westarn European countries. There is, therefore, no need for the financing of advisory services. Instead a mainframe computer is required, which would allow NCS to more rapidly process and analyze data. Installation of adequate computing capacity is nseded now, as a National Census is scheduled to begin in January 1992. Processing of Census data would considerably speed up the availability of Census results. The loan would provide a mainframe computer, software, and related training of NCS staff in the use of the computer. Supplementary equipment required for the full use of the computer are expected to be provided under the EC-PHARE program. Proiect Implementation Unit IUSSO.2 million) 2.30 To assure that procurement packages, bid evaluation procedures and contract signing would proceed as scheduled, and that understanding of procurement procedures would expand, the program wou