Romania - Flood Recovery Project

CIRCULATING COPY BTO E RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1699-RO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE INVESTMENT BANK OF ROMANIA AND TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A FLOOD RECOVERY PROJECT October 22, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1. Official Rate lei 4.97 = US$1.00 lei 1 = US$0.20 2. Tourist Rate lei 12.00 = US$1.00 lei 1 = us$o.08 Conversion Rate for Traded Goods lei 20 = US$1.00 lei 1 = US$0.05 Fiscal Year -- January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE INVESTMENT BANK OF ROMANIA, AND TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY OF ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A FLOOD RECOVERY PROJECT 1. I submit the following report and recommendation on proposed loans of US$20 million equivalent to the Investment Bank of Romania, and of US$40 million equivalent to the Bank for Agriculture and Food Industry of Romania (BAFI), with the guarantee of the Socialist Republic of Romania, to help fi- nance a flood recovery project. The loan to the Investment Bank would have a term of 20 years, including three years of grace, with interest at 8-1/2 percent per annum. The loan to BAFI would have a term of 20 years, including five years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY 2. Romania joined the Bank on December 15, 1972. The latest economic report, entitled "Economic Position and Prospects of Romania" (492a-RO), was circulated to the Executive Directors on November 11, 1974. The third economic mission visited the country in May 1975 and is currently completing its re- port. Social and economic country data are given in Annex I. 3. Since the founding in 1947 of the People's Republic of Romania, which in 1965 was reconstituted as the Socialist Republic of Romania, economic managemerit has been organized along socialist principles which have included state and cooperative ownership of almost all productive resources, and the absence of private enterprise. Economic activity is directed by means of obligatory development planning, coordinated by the central authorities. Productive enterprises operate within the framework of the development plan which defines the scope of their activity, the outlines of their production and investment goals and their targets for operating efficiency. The Plan is elaborated within a five-year time frame, each year having a separate Annual Plan. The country is presently in the fifth year of its Five-Year Plan for the period 1971-1975, and is preparing the next Five-Year Plan for 1976-80. 4. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a common branch or industry without being directly engaged in production. Enter- prises subordinate to the Centrals are responsible for production which is  - 2 - controlled through a system of physical production targets. Production enter- prises generally are not authorized to engage directly in foreign trade and rely on specialized foreign trade enterprises for this purpose. In agri- culture, large State farns and cooperatives are the predominant units of production. 5. Economic development is of paramount concern to the Romanian Government. Rapid industrialization is a major objective with priority being given to heavy industry including steel, machine tools and chemicals. To achieve their growth objectives, the Romanian authorities have made consider- able efforts to mobilize domestic resources for development and to maintain a high rate of capital formation. In the present Five-Year Plan, planned and actual investment rates of around 30 percent of GNP have been the nonn. As a consequence, consumption has been restrained, and the development of the consumer goods industry has been less strongly emphazised than that of heavy industry. In 1972, heavy industry (led by machine tools, chemicals and fer- rous metallurgy) accounted for about 70 percent of industrial production. 6. As a result of this strategy, a marked change has been achieved in the structure of Romania's economy. Rapid industrial growth, which over the last decade has averaged more than 13 percent per annum, has expanded the share of the labor force employed in industry (including power and construc- tion) from about 14 percent in 1950 to 38 percent in 1974. During the same period, the share of labor force engaged in agriculture declined from 74 per- cent to around 40 percent; and while agricultural output almost tripled, its share in GNP amounted to only 15 percent in 1974. 7. Notwithstanding the emphasis on industrialization, more than half of the population (about 57%, in 1974) still lives in rural areas and agricul- ture remains a key sector of the economy. Apart from supplying food, indus- trial inputs and the residuai labor increment for industrial growth (which requires an expansion in agricuiltural productivity), the sector also supplies upwards of 50% of the nation's convertible foreign exchange earnings. These earnings, which are largely used to buy imported inputs for industry, have often been jeopardized as a result of unstable production growth in agricul- ture. The maintenance of the industrial development program, therefore, is dependent on the performance of the agricultural sector. 8. Romania's population growth is around 1.0 percent per annum. Thus, the impact of rapid economic growth on per capita incomes has been only mar- ginally diluted by the population increase. In the last decade, GNP growth has averaged 9.0 percent per annum, implying a growth of about 8.0 percent per annum of per capita GNP. GN]' per capita in 1973 was US$890, estimated ac- cording to World Bank Atlas methodology. 9. The organization of production in both the urban sector and in agri- culture is such that all labor is employed and there is no open unemployment.  -3- There is, however, some labor surplus, mainly in agriculture. Income distri- bution is also relatively equal. In 1974, average monthly wages were 1,663 lei (over $80 equivalent) per month, up 6.4 percent over the previous year. Almost 80 percent of all monthly wages in 1972 were within the range of 900- 2,000 lei and less than 6 percent were under 900 lei. Prices for essential consumer goods and services such as basic foodstuffs, rents and urban trans- port are relatively low and most social services, notably education and health care, are provided without charge. Continuous efforts are made to increase the standard of living. Romania also pursues a positive regional policy which has sought to bring a balanced development of both human and natural resources to all parts of the country. 10. The official exchange rate of lei 4.97 per US$1 is used only for accounting purposes. The rate used for tourist transactions is lei 12 per US$1, having been revalued from a rate of lei 14.38 per US$1 in October 1974. Under a new system introduced in January 1974, the prices of all traded goods are converted at a uniform rate of lei 20 per US$1, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domestic lei price is found by adding to the foreign price converted at the new rate a tariff rate which varies for different types of goods. The rate of lei 20 per US$1 has also been used to convert national income statistics from lei to dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Recent Developments 11. Since the National Party Conference of 1967, which set the stage for major qualitative advances in Romania's economic and social development, there have been important new emphases in Romania's economic management. Measures were taken to improve the institutional basis of planning (e.g. by creating the Centrals to assist in plan administration), to increase the ef- ficiency of economic management and to improve upon the quality of production in industry. In agriculture efforts were made to raise productivity and stabilize growth through irrigation, mechanization and the expanded use of chemical fertilizers. To expand upon the growth of foreign trade and tech- nical-economic cooperation the Romanian Government has concluded trade and cooperation agreements with a wide range of countries. In this context also, Romania has made positive efforts to expand its multilateral external rela- tions and to pursue full cooperation with the international agencies, includ- ing UN, UNCTAD, UNESCO, FAO, UNIDO and GATT. 12. Measures aimed at continued improvement of the management system include a reorganization (involving a reduction from 217 to 95) in the number of industrial Centrals and a concentration of their planning, control and research functions. The pursuit of purely physical goals in production and trade, while still an important element in the system, is being supplemented by much greater emphasis on productive and investment efficiency, product  -4- quality, pricing and foreign competitiveness. To eliminate wasteful invest- ment and production expenditures, a Superior Court of Financial Control has been instituted, among other things, to oversee a new system of financial control. 13. Foreign trade has expanded quite rapidly in recent years both in volume and in regional diversity. There has also been a tendency to move away from trade on a bilateral barter basis toward trade involving multilateral payments. During the period 1971-74, total foreign trade grew at about 34 percent per annum in current prices. As a result of both rapid world price increases and expanded volume of trade, the total value of trade grew by 38 percent in 1974, with exports growing by 32 percent to US$4.9 billion, and imports increasing by about 47 percent to US$5.1 billion. About 59 percent of 1974 trade was with non-socialist countries as against 50 percent in the previous year, a trend largely explained by the more rapid price increases in non-socialist trade. Overall trade deficits have generally remained small, but in 1974 there was an overall trade deficit of $191 million, while the deficit with the convertible area was over $300 million. In recent years imports from East European Socialist countries have been slightly lower than Romania's exports to that region. In Romania's trade with Western industria- lized countries, on the other hand, exports typically have been much less than imports. These deficits have sometimes been increased by deficits on the invisibles account with Western countries. 14. The structure of Romania's trade with the developed market econo- mies remains essentially unfavorable. Raw materials and agricultural commo- dities, both of which are subject to unstable price and production conditions, comprise about 60 percent of total exports to these countries. At the same time imports from these countries are largely of machines and equipment and other manufactures. Because of the present low level of reserves, any instab- ility in export performance, as frequently arises from shortfalls in agricul- ture (paragraph 7 above), tends to place the import program in immediate jeopardy, and shortages of convertible currencies would persist even if Romania were to have recurring overall trade surpluses. 15. Romania is relatively well endowed with energy resources and for this reason has been less affected than some countries by recent developments in this sector. Romania is a marginal (but growing) importer of crude oil but is not dependent on this for fuel, using the imports as chemical feedstock to make products for re-export. Romania has substantial deposits of natural gas, crude oil and solid fuels (mainly lignite) as well as some limited hydro- power, uranium and geothermal energy. There has been a long standing policy to reduce the use of gas and oil as fuels, conserving these for higher value uses while expanding the use of lignite as a combustible. This policy was devised before the events of late 1973, though priorities were thereafter in- tensified under a decree on energy use and development issued in November 1973. One of the implications of the strategies set forth in the decree is that investment needs in the sector will be greater than before, mainLy be- cause technical options favored by the decree for electrical power develop- ment, such as lignite based, hydroelectric and nuclear stations, are all  - 5 - relatively more capital intensive than the alternatives of gas and oil fired stations. The plan for 1976-80, now being drafted, will contain provision for an increased share of investments for energy development. External Assistance 16. The expansion of Romania's trade with the non-socialist industrial countries has led to an increased need to obtain convertible currencies to pay for imports from those countries. Romania has met this need both by borrowing abroad and by mounting a major effort to expand exports and tourism. Gross inflows of convertible currency through medium- and long-term loans were USS1,020 million in 1974, consisting mostly of financial and suppliers' credits with relatively short repayment periods. This gross inflow represented a net inflow of some $685 million after accounting for the country's repayment obligations. 17. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also taken active steps to attract long-term pri- vate capital. A regulation passed in 1972 defines the conditions under which foreign firms can establish joint ventures with domestic enterprises, prefer- ably in foreign exchange earning/saving industries. By mid-1975, five joint venture agreements had been signed, involving direct foreign investment of about US$15-20 million. Romania also receives medium-term trade credits from U.S. Eximbank and trades under ECGD, COFACE, and HERMES credit guarantees with the United Kingdom, France and the Federal Republic of Germany, respectively. Romania succeeded recently in securing a US$60 million, eight-year loan from Kuwait as part of a general cooperation agreement. In addition, Romania has access to non-convertible currency investment credits from the International Investment Bank, Moscow, from which it has borrowed $30 million so far. 18. As it stands, therefore, Romania's access to long-term finance in convertible currencies is still very restricted. The IBRD is the only major source of long-term development finance, though Romania is making efforts to improve its access to the major financial markets. The Bank's presence on a significant scale would have a positive influence in this regard, and the Bank might serve as a catalyst for involving other lenders in Romania. This could serve both to increase the total amount of Bank-sponsored funds available to Romania and to build outside confidence in the country, thereby enhancing in the long-term its independent access to the world's financial markets. Prspe_cts 19. The current Five-Year Plan (1971-75) reflects Romania's continued strategy of rapid growth. The targets contained in the Annual Plan for 1975, for example, included 18 percent growth in industrial production, 12.5 per- cent growth in national income, an investment rate equal to 35 percent of national income and 21 percent expansion of foreign trade. The Plan also  - 6 - lays stress on a range of qualitative aspects of development including tech- nical improvements and diversification in industry and foreign trade, improve- ments in capcacity utilizat:ion, development of the nation's human resource potential and a continued emphasis on regional development. 20. Romania has gooc! potential for further economic growth. Endowed with important natural resources (fuels, some minerals, timber, rich soils and a favorable climate both for agriculture and tourism) and located con- veniently with respect to its major international markets in the East and West, the country has built a broad industrial infrastructure (power, metal- lurgy, chemicals) which will serve as a base for the expansion of secondary manufacturing sectors such as machine building and consumer durables. Above all, Romania has a hard-working and increasingly skilled population. 21. Economic growth and structural change call for the introduction of new technologies, improvements in the quality of products, more economic use of materials and factor inputs, and reductions in production costs. The in- creasing diversity and corplexity of Romania's economic structure require continuing improvements in the efficiency of economic planning and coordina- tion and further refinements in economic management. To keep up with these changes and requirements, large programs of education and manpower training have been mounted, and efforts are being made to strengthen technical coop- eration with industrialized countries and international organizations. Creditworthiness 22. At the end of 1974, Romania's total medium- and long-term external debt amounted to $2,161 million. Most of these debts ($2,089 million) were denominated in convertible currencies, the major creditor countries being Germany, France, UK and Italy. While the total debt does not appear excessive in relation to the volume and growth of external trade, average maturities are relatively short and convertible debt service payments are estimated to be in the order of $448 million a year during 1975-76. The convertible debt service ratio was approxinately 15.5 percent in 1974, and is estimated to be about the same for 1975. 23. The organization of economic activity in Romania and the pursuit of a development strategy involving higih investment/saving rates and rapid in- come growtlh ensure Romania's capacity to service external debt if domestic resources can be converted into foreign exchange for that purpose. Moreover, the country's major effori:s to expand exports (particularly to convertible currency areas), to attract private joint venture capital and to seek other forms of bilateral convertible currency financing are increasing the foreign exchange available for debt service. Convertible export earnings rose from US$830 million in 1971 to US$2,619 million in 1974. The preferential trade status accorced to Romania by the European Communities in June 1973 should facilitate the furthler cxypansion of such exports, as should the recent granting of most favored nation status by the U.S. In 1973, the Government also restricted the use of short-tern credlit facilities from western suppliers in an eflort to improve the structure of the country's external debt. Assuming a continuation of present export and deht management policies, it can be  - 7 - expected that the debt service ratio will stabilize during the second half of the 1970's. The country's present outward-looking posture, the success of both its domestic growth and foreign trade policies, and its potential for continued development, all support the judgment that Romania is creditworthy for substantial Bank lending. 24. With regard to the settlement of claims arising from Romania's pre- war debt, the final payments of U.S. claims began in September and will be completed by April 1976, based upon agreements reached in May 1975. Settle- ment of British claims has proved more difficult, but a breakthrough was achieved during the visit of Prime Minister Wilson to Bucharest from September 16 to 18, 1975. According to the Joint Communique concerning the results of this visit, President Ceaucescu and Prime Minister Wilson approved an aide- memoire on the settlement of the British claims, which "establishes the basis for negotiations, at the soonest possible date, with a view to concluding an agreement on the full and definitive settlement". PART II - BANK GROUP OPERATIONS IN ROMANIA 25. The proposed loan would be the Bank's sixth operation in Romania, and it would bring total bank commitments to Romania to $350 million. Bank lending to Romania began in June 1974 with the $60 million loan for the Bacau Fertilizer Project. This operation was followed in July 1974 by the $70 mil- lion loan for the Otelinox Special Steel Project and the $60 million loan for the Turceni Thermal Power Project, and in January 1975 with the $70 million loan for the Giurgiu-Razmiresti Irrigation Project and the $30 million loan for the Sadova-Corabia Agricultural Credit Project. Initial disbursements under these loans have been slow, but the awarding of contracts during the second half of 1975 is expected to result in increased disbursements by the end of the year. Annex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of September 30, 1975. 26. Foreign exchange, especially in convertible currencies, continues to be a major constraint and one of the major objectives of Bank lending continues to be to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which will expand foreign exchange earnings or savings. Bank lending also aims at supporting the Govern- ment's efforts to introduce new industrial technologies to improve the quality of products and production efficiency, to reduce production costs and to pro- vide for necessary electric power development. Market aspects and marketing, especially for export goods, are also emphasized. Special attention is given to agriculture which is heavily dependent upon favorable weather and where productivity levels are still comparatively low.  - 8 - 27. With regard to the prospects for future lending, further projects for irrigation and power have been appraised an(d are expected to be ready for consideration by the Executive Directors early in calendar 1976. The pos- sibilities of financing projects for agroindustries, anti-friction be,arings, heavv machinery, pulp and paper and canal development are under consideration. There is also a possibility of a longer-term flood protection project as a follow-up to the proposed Flood Recovery Project. 23. Romania is expected to rely upon the IBRD primarily for fundls re-- quired to finance needed convertible-currency imports. At the same time, Romania has developed a relatively advanced industrial structure and is in a position to supplv a large proportion of the equipment and supplies required for the execution of many high priority development projects. 11ence, in a few cases, such as the present one, it may be necessary and appropriate, if the flank's lending is to provide adequate support to Romania in high priority fields, to include some local cost financing in particular 13ank loans. 29. In addition to lending, the Bank (through EDT) has assisted Roi:iania by conducting industrial project appraisal training courses for Romanian of- ficials in Belgrade in October 1973 and in Bucharest in January/February 1975. This assistance will be continued and expanded to include other sectors. 30. The projects, for which assistance has been committed or is being consi(lered, represent only a small portion of Romania's total need for ex- ternal financing and of its total disbursecl convertible debt. Hlowever, they will provide a substantial net addition to the inflow of convertible currency finance, and mav set a pattern for obtainin5 longer term convertible finance from other sources. The disbursed IBRT debt outstanding to the Bank is ex- pected to constitute about 12 percent of Romania's total projected convertible currec\cy debt in 1980; the Bank's share in Romania's debt service payments in 19S0 would be about 5 percenlt. PART III - T1E 1975 FLOODS Background 31. In early July 1975, serious floods caused extensive economic and other damage in Romania. Rainfall had been above average since April, and in earlv June heavy rains caused some localized flooding and saturated soils in many river basins. On June 30, 1975, a heavy storm moved from northwest to southeast over central Europe and covered almost the whole of Romania by the night of July 1. This storm was virtually stationary over the central and southeastern parts of Romania for over two davs and moved out of Romania only on July 11. Total rainfall during these 11 days at several meteorologi- cal stations ranged from 100 mm to 245 mm, of which about 70% to 90% fell from July 1 to 3. At certain stations, 107 mm. to 140 mm fell in 24 hours  from July 1 to 2, exceeding even the normal monthly rainfall for this time of year. The intense rainfall during 24 hours of July 1-2, the saturated ground, mountainous terrain and the storm pattern all contributed to produce flash floods in five major river basins and in a number of others. Flood peaks in many places were the highest ever recorded. Within a few days, about 1.1 mil- lion hectares of land were flooded. Because of these extraordinary circum- stances and resulting damages, the Romanians approached the Bank to request assistance in recovering from the floods. River Basins Most Seriously Affected 32. Five river basins covering about one-third (80,300 square kilometers) of Romania were seriously affected by the floods. Althotugh there was also some damage in the Danube valley and in a number of smaller river basins, thie five river basins which were hardest hit were: (i) the Mures which drains the western slopes of the Carpathians and a large portion of the Transylvanian plateau before flowing west into Hungary: (ii) the Olt wlhich drains the northern Carpathian slopes before turning south through a narrow valley in the Carpathians to the Danube; (iii) the Arges which drains the southern slopes of the Carpathians and includes Bucharest; and (iv) the Ialomita and (v) Buzau which drain the eastern slopes of the Carpathians into the Danube. Over 80 percent of all flood damages occurred in these five basins. Flood Damage 33. Although the toll in human life (62) was mercifully light, the floods have dealt a serious blow to the Romanian economy. It will take at least one or two years to complete rehabilitation of flood damages and several years for the economy to recover fully. Because the Bank mission was in the field with- in two weeks of the storm, it was not possible to quantify the considerable damage to about 250 local industrial enterprises, housing, and community facilities in 1,300 villages and 65 towns which were flooded. However, eleven Ministries were able to supply field damage surveys which show total quantified losses to national industrial enterprises, agriculture, transport and flood protection, irrigation, and drainage works of US$793 million split about evenly between production (including crops) and asset losses. While flash floods and inundation were the most severe hazard, landslides and mud deposits caused major damage in mines, transportation and industry. Much of the loss in orchards and vineyards resulted either from landslides or heavy hailstorms. The quantified production loss represents 1.9 percent of 1974 GNP, and the asset loss 6.2 percent of gross domestic investment in 1974. 34. Flooding in the Mures basin was especially serious and accounted for an estimated US$223 million or over 25 percent of quantified losses. Losses of crops, agricultural facilities and transport works were widespread in the basin. Over 40 percent of industrial damage was concentrated in this region, with chemical and textile and other light industries being particularly hard hit. The Olt basin had exceptional losses to transport, largely because of the rail- ways and national roads located for long stretches beside the river in the narrow valley which characterizes the upper Olt. Relatively high transport  - 10 - losses also occurred in the Buzau basin. There were also significant agri- cultural losses in other basins attributed both to flooding along the Danube and to heavy rains and poor drainage in a number of smaller basins. 35. About half (US$407 million) of the quantified flood losses were to crops (US$324 million), industrial production (US$74 million) and other pro- duction (US$9 million). This figure accounts only for the first order effects of the flood, since it has not been possible to quantify the linkages between these losses and their indirect effect on the economy. Nonetheless, the first order effects alone will seriously reduce export earnings and funds available for investment as discussed in paragraphs 36 and 37 below. In addition, about a third of all flood losses (US$272 million) resulted from damage to infra- structure which must now be replaced or rehabilitated; the major portion of these losses was in transportation. US$53 million of total losses were to machinery and equipment. Concentration of much of the equipment loss in industry, however, has resulted in an estimated US$74 million loss of indus- trial production. This estimate, however, appears to understate the economic effect of these losses because it was incomplete at the time of the Bank mis- sion and because the second order effects of the production losses could not be quantified by the mission. The figures also exclude losses in local in- dustry which could not be quantified. Export Losses 36. Pro.uction losses from the flood are serious because of their negative impact on Romania's balance of trade, particularly on convertible currency eaniings. Romania has relied heavily on agriculture to provide about 50 percent of convertible currency earnings which are essential to the indus- trial investment program. In 1974, a year in which several regions were affected by drought, Romania exported US$1,339 million of raw and processed agricultural produce, the former accounting for about US$600 million. It is estimated that the flood losses will reduce agricultural exports by about US$225 million (including about $125 million to convertible currency areas) in 1975. Such a reduction would be equivalent to 17 percent of agricultural (or 4.6 percent of total) exports in 1974. Although it is not expected that Romania will have to import food to replace losses, the drop in agricultural exports will have serious consequences on the economy and will make it more difficult to recover from tihe US$191 million overall trade deficit in 1974. It has not been possible to quantify the 1975 export losses for industry. Un- like agriculture, in which production is seasonal, the 1975 export performance of industry and mining will depend on the level of shipments in the first half of the year and the speed with which repairs can be made and production re- stored. Impact on Plarned Investment 37. As a result of .he flood, a significant amount of investment planned for 1975 and 1976 will have to be deferred because of (i) resources beino di.- verted for about US$386 million of identified rehabilitation works plus a substantial a-mount of rehabilitation which had not been quantified at the time of appraisal and (ii) the US$407 million in crop and other production  losses which will reduce the funds available for investment. In agriculture alone, the US'M325 million crop loss would result in approximately US$205 mil- lion reduction in funds available for agricultural investment in 1976, while rehabilitation of damaged assets will divert about US$60 million otherwise in- tended for new investment. The resulting US$265 million reduction represents 19 percent of agricultural investments planned for 1976. Damage in Major Sectors 38. The flood damages to agriculture include losses in crop, livestock and poultry production and stocks, permanent damages to tree crops, and damage to farm buildings and equipment. Of the 1.1 million hectares flooded, 55 per- cent were used to grow cereals, 27 percent fodders and pastures, 4 percent vegetables, 3 percent sugar beets and the balance oilseeds, fruits and other crops. The floods, excessive ground moisture and hail resulted in losses of 75 to 90 percent of the expected production of crops in flooded areas. Fur- thermore, abotut 190,000 livestock and 3 million poultry were drowned, 6,500 ha of tree crops were destroyed, and 18,000 tons of stocked cereals and about US$5 million of livestock products were lost. Losses for agriculture amount to US$384 million, including about US$60 million in damaged assets. The floods also damaged 285 flood protection, irrigation, and drainage works throughout the flooded areas. Damage to flood protection works was most serious, followed by irrigation and drainage works. 39. In industry, excluding power and mining, the floods caused an esti- mated US$159 nmillion in damages to 152 (or 20 percent) of 722 national enter- prises under seven ministries and caused extensive losses in about 250 local enterprises. The highest numbers of national enterprises affected are under the Ministry oE Light Industry (46) and the Ministry of Forestry and Building Materials (36). The largest loss of assets (exceeding US$28 million) was in the Ministry of Forestry and Building Materials, which has a number of wood processing plants located in mountain valleys hit by flash floods. Flash floods also damnaged four cement factories. The chemicals industry also suffered heavy losses totalling US$24 million; high water damaged electrical equipment, controls and instruments, while reaction of water with chemicals set off explosions in two plants causing serious damage to equipment and ma- chinery. The linistry of Light Industries lost much precision and automated equipment whic6 is particularly susceptible to damage from water and mud. Fortunately, losses in the Heavy Mlachinery, Machine Tools and Metallurgy Ministries were~ relatively light. Direct losses alone do not reflect the full impact of the damage to industry. Some damaged factories supply basic inputs to other parts of the economy, while others are the only ones of their kind in the country. Continued disruption in their operations could have serious indirect effects on the economy. Also, the floods may severely curtail industrial exports and thus hurt the whole economy, as a substantial part of production of nany units was destined for exports. The floods also caused an estimated US$9 million in damage to electric power installations, and 15 of about 100 mine'; in the country were flooded with estimated damages of US$34 million.  40. An estimated US$187 million in transport and telecommunication damages was caused by flash floods, landslides and general flooding in low- lying areas. The Mures and Olt river basins sustained the most damage. of the 11,000 km national rail network about 2,625 kin (24 percent) was affected by the flooding; 270 km of rail bed and permanent way, and 20 bridges, were destroyed. Of 13,000 km of national roads, traffic on about 3,400 km (25 percent) was disrupted by flooding and landslides. Nearly 120 km were des- troyed in over 630 locations, and 18 bridges were washed out. In the 63,000 km network of secondary roads, about 1,120 km of district roads and 1,170 km of village roads (4 percent of the network) and nearly 680 bridges were des- troyed. Flooding and landslides also damaged about 6,000 km of 25,000 km of forestry roads. Telecommunications links which generally follow road and rail alignments were generally damaged at the same locations where transport facil- ities were damaged. The Need for a National Water Control Program_ 41. Although many Romanian rivers are vulnerable to frequent flooding, such floods normally have occujrred in isolated river basins. Widespread con- current flooding of a large number of river basins with maximum flows has occurred only once before in May and June 1970. In 1970, there were serious floods in the Mures basin and elsewhere in Transylvania, as well as in the rivers of Moldavia, raising the Danube to high levels. Some areas flooded in 1975 were also flooded in 1970, but damage to these areas was less serious in 1975 than it might otherwise have been because of flood protection measures taken since 1970. After the 1970 floods, the authorities initiated a number of flood protection measures and studies. These included channel improvement and dykes, relocation of facilities to higher levels and construction of water channels and dykes around some flood-prone facilities. Even though all of the proposed protective measures wyere not fully completed, the efforts made during the last few years helped prevent even higher losses due to the 1975 floods. 42. The 1975 flood has reemphasized the need for a national program for water control, and the Gov;ernment has already begun a major reorganization of responsibilities for water management in Romania. Responsibility for this work has been assigned to the National Wlater Council (NW1C) which was shifted from the linistry of Agriculture and Food Industry to the Council of Mi,nisters following the July floods. The NWC is concentrating its efforts on the comple- tion of flood protection plans for basins wlhich are most flood prone, including the 'lures, Olt, Arges, Ialomita, and Buzau which were hardest hit in the 1975 floods. The Mures basin flood protection planning effort was undertaken with UNDr assistance and is the most comprehensive that has yet been carried out. Other plans are in varying stages of preparation for each of the major river basins in the country. The total cost of flood protection investment for the five basins most affected by the floods for the next Five Year Plan (1976-1930) is currently estimated at US$474 million. This figure is likely to increase however, following reassessment of design criteria and the extent of works to be undertaken after the experience of the recent floods.  - 13 - 43. The Government is planning to improve its existing hydrological data system to include a flood warning capability by installing US$2 million of hydrometeorological equipment. This equipment includes automatic stations to transmit data on precipitation and air temperature from 74 locations; auto- matic stations to transmit data on water levels, precipitation and air tempe- ratures from another 70 stations; 20 radio relays to data collection centers; and other related testing and maintenance equipment. Government Flood Recovery Effort 44. Immediately following the floods, the Government began an extensive program of flood recovery. In the first instance, this effort included the cleaning up from the floods and restoring to service of as many facilities as possible without external assistance. Many temporary measures were taken to restore services (especially in industry and transport) pending longer term solutions, and the Bank mission was impressed by the speed and thoroughness with which the Romanian efforts were organized and executed. As this work continued, the Government turned its attention to the longer-term needs of recovery. The Government has already begun rehabilitation efforts in all sectors by diverting significant resources from ongoing investment programs. These efforts, together with agricultural investments for which funds have been lost as a result of the floods (paragraph 37), form the basis of the project proposed for Bank financing. PART IV - THE PROJECT Project History 45. On July 10, Romania requested Bank assistance for recovering from the floods which it was only then beginning to get under control. Because of the urgency of the situation, the Bank responded quickly, and a mission visited Romania from July 21 to 30 and reviewed with the Government its over- all measures for flood recovery. The findings of this mission are presented in a separate report entitled "Romania - Flood Recovery Project, Evaluation of Flood Damages" (Report No. 876a-RO, dated October 21, 1975), and the pro- posed project has been formulated on the basis of the mission's review. Negotiations were held in Washington from September 16 to October 3, 1975. The Romanian delegation was led by Mr. Ion Rusinaru, President of the Bank for Agriculture and Food Industry (BAFI) and included representatives of BAFI and the Investment Bank. Project Description 46. The component of the project for industry (including mining and power) consists of all elements of the Government's flood rehabilitation program to be executed in the short-term. These include acquisition and installation of machinery and spare parts to restore production capacity to the extent possible, repairs to the buildings and infrastructure damaged, and  - 14 - replenishment of inventories. The agricultural component of the project con- sists of credit to be extended to farms which have sustained serious flood losses. It would include urgently needed rehabilitation and investments on flood-damaged farms which would otherwise have to be deferred as a result of the floods. The project also includes rehabilitation of damaged flood con- trol, irrigation and drainage works noted in paragraph 38, and the procure- ment and installation of the specialized flood warning equipment described in para 43. The reconstruction of 120 km of national roads, including 18 bridges, and 270 km of railroads, including 20 bridges, is also included in the project. A Loan and Project Summary is attached as Annex III. Eli2ible Beneficiaries 47. Some 223 industrial enterprises (including power and mining) which have sustained physical losses during the floods have been selected by agree- ment between the Bank and the Investment Bank as eligible beneficiaries under the project. Similarly, repairs to flood control, irrigation and drainage works will be carried out at 285 locations agreed between the Bank and BAFI. Farms with losses in excess of 20 percent of planned production for 1975 would be eligible for assistance under the project. These farms will be unable to generate internally the investment funds which are expected from such units under the Romanian system, and a farm with losses equivalent to 20 percent of production will lose a substantial part of the funds which it would otherwise set aside for investment. Project Costs and Financing 48. The estimated cost of the project is USS345.0 million, with an esti- mated foreign exchange component of US$37.9 million or 11 percent of total costs (Annex III). The cost: estimates are based upon current costs of im- ported items and on local unit prices for civil works. The latter are well doctunented and are stable in Romania. It was not possible during appraisal to prepare detailed estimates of the indirect foreign cost of the agricultural credit component of the project, and the mission used average figures drawn fromi the agricultural projects appraised by the Bank and approved earlier this year. Price contingencies of 11.5 percnt in 1975 and 7 percent thereafter have been used for imported materials and equipment. No price contingency is in- cluded for local costs which are controlled under the Romanian pricing system. 49. The proposed Bank loans totaling US$60 million would finance 17.4 percent of total project costs, including an estimated US$37.9 million in for- eign costs and $22.1 million in local costs. Because of Romania's level of industrial development, it is in a position to supply a large portion of goods to the project as noted in paragraph 28 above. For this reason, the foreign exchange components both of Romania's overall recovery effort and of the pro- posed project are relatively small, and local cost financing will be necessary if the Bank is to assist significantly in flood recovery.  - 15 - 50. The loans would finance US$15 million (7.8 percent) of the cost of industrial (including mining and power) rehabilitation; US$30 million (28.5 percent) of agricultural rehabilitation and investments; US$8 million (45 per- cent) of the component for rehabilitation of flood protection, irrigation, AND DRAinage works; US$2 million (100 percent) of equipment for the flood warning and data collection system and US$5 million (9.4 percent) for equip- ment to assist in rehabilitation of the national road and rail systems. About US$5.3 million or 5 percent of the agricultural component would be financed by farms. Because of the severe losses suffered by the farms under the project, this amount would be less than the normal 25 percent contribu- tion of eacharm which is set aside from net earnings for investment each year. The remaining US$279.7 million of project costs would be financed by the Government. The financing plan for the project is presented in Annex ITI. The Government will also have to finance about US$133.8 million of rehabilita- tion costs for local transportation works as well as the rehabilitation of other losses which had not yet been quantified at the time of appraisal. Lending and Relending Arrangements 51. The proposed loans would be made to the Investment Rank of Romania and to the Bank for Agriculture and Food Industry (BAFI) under separate loan agreements with interest at 8-1/2% per annum. The US$20 million of the loan for industrial and transport rehabilitation would be lent to the Investment Bank for 20 years including three years grace. The USS30 million for agri- cultural rehabilitation and investments and US$10 million for flood warning equipment and rehabilitation of flood control, irrigation and drainage works would be lent to BAFI for 20 years including five years grace. It is Romanian practice to invest the major portion of funds in industrv, transportation, agriculture and flood protection works through the Investment Bank and BAFI without formal on-lending agreements, and to recover investment costs from beneficiaries through a variety of financial mechanisms including net income transfers from State enterprises, taxes, pricing differentials, and deprecia- tion payments. 1/ For this reason, there will be no formal onlending of US$30 million in lending for industrial and transport rehabilitation, the flood warning system, and rehabilitation of flood protection works. Agricultural credit investments, however, are recovered by BAFI under loan agreements of un to 20 years, including up to seven years grace, for the types of credit sub- projects included in the project, at three percent per annum for cooperatives and at four percent for State farms. These arrangements are identical to those under the Sadova-Corabia Agricultural Credit Project approved by the Executive Directors in January 1975. The interest rates are considered now, as they were then, to be positive because of the near-zero inflation in Romania. 1/ Payments equivalent to annual depreciation of facilities. They are returned to the State budget.  - 16 - The Borrowers 52. BAFI and the Investment Bank are specialized agencies of the Govern- ment for investment in their respective sectors of responsibility. Both in- stitutions have large technical and economic staffs located in Bucharest, 39 county (Judet) branch offices and sub-branches throughout the country. Both Banks are involved in all phases of project preparation, appraisal, execution and supervision. All investment funds for the economy, except those generated through retained earnings of producing entities, are channelled through the two banks. As a result, both institutions rely heavilv on the State budget for investment funds, and the Guarantee Agreement therefore includes a provi- sion (Section 2.02) that the Guarantor will provide all necessary funds for the implementation of the project. 53. The Investment BPank acts as fiscal agent for the Government for all investment in industry, transport, power and tourism. Its involvement in investment projects begins with project preparation. The Investment Bank staff conducts technical and financial appraisals of all major investment projects. After a particular project and its financial plan have been ap- proved by the Government, all major funds (budget allocations, depreciation funds, share of planned benefits) are channelled through the Investment Bank in accordance with the approved financial plan. All payments in Lei for the execution of a project must be authorized by the Investment Bank which keeps separate accounts for each category in the financial plan for each enternrise. It is the Investment Bank's obligation to ensure that a project is executed according to the financial and technical data included in the approved project study. Its inspectors check whether the project is proceeding according to the schedule approved in the Plan. The Investment Bank's supervision of the proposed project will include review of investments to be made by the agreed beneficiary enterprises to replace flood-damaged equipment and spare parts of types which have been selected by agreement between the Bank and the Invest- ment Bank. 54. Similarly, BAFI acts as fiscal agent for all Government investments in State agricultural units. It also receives interest-free funds from the State budget for investment lending to cooperatives and repays the Government as it receives repayments o,f sub-loans from the cooperatives. BAFI has thor- ough review and approval procedures for all investment projects, and all sub- projects for more than Lei 10,00o,000 (ITTS500,000) would he reviewed and a?- proved by the Bank (Schedule 1 of the BAFI Loan Agreement). In addition to its investment project xwork,, BAFI nrovides short-term credit to, and maintains settlement accounts for, all cooperative and State a'nricultural enterprises; it also acts as fiscal agent for the Government for collection of State revenues from these enterprises. Organization and Implementation 55. The Investment Bank wqould have overall resnonsibility for execution of the industry and transport rehabilitation elements of the project. BArJ would have overall responsibility for execution of the agricultural invest- ments and flood protection components. Actual works would be carried out by  - 17 - the beneficiaries of each component of the loan, or by specialized agencies working under contracts for the beneficiaries. Industrial enterprises would be responsible for rehabilitation of their respective plants, and it is expected that suppliers will assist with installation of specialized equip- ment. Cooperatives and State farms would carry out all agricultural invest- ments, and the construction of flood control works would be done by the Department of Land Reclamation and Agricultural Construction (DIFCA) of the Ministry of Agriculture and Food Industry. The several ministries involved and related foreign trade enterprises would be responsible for procurement. Transportation rehabilitation would be carried out by the construction trusts of the Ministry of Transport and Telecommuncations. Procurement 56. The goods to be financed under the project would be procured in ac- cordance with the Bank's guidelines. Contracts for US$18 million (all figures include contingencies) including earth moving equipment needed to reopen mines (US$5 million), transport rehabilitation equipment (US$5 million), and for equipment to rehabilitate damaged flood control, irrigation and drainage w