Romania - Sadova - Corabia Agricultural Credit Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1555-RO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND-FOOD INDUSTRY WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT January 15, 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 It may not be published, quoted or cited without Bank Group authorization.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.o8 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 DEVF LO)PMFNT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY, ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bank for Agriculture and Food Industry (BAFI) of Romania, with the guarantee of the Socialist Republic of Romania, for the equivalent of US$30 million to help finance an agricultural credit project. The loan would have a term of 20 years, including 5 years of grace, with interest at 8 1/2 percent per annum. BAFI would relend the proceeds of the loan to cooperatives, and to State farms and enterprises, at 3 and 4 percent per annum for terms up to 20 years including up to five years grace. PART I - TIE ECONOMY' 2. Romania joined the Bank on December 15, 1972. The second economic mission visited the country in May 1974, and its report, entitled "Economic Position and Prospects of Romania" (492a-RO), was circulated to the Execu- tive Directors on November 4, 1974. 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, eco- nomic management has been organized along socialist principles which have in- clided 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. Pro- ductive 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 titie frame, each year having a separate Anniual Plan. The country is presently in the fiftlh year of its Five-Year Plan for the period 1971-1975, and is currently 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. Sub- ordinate to the Centrals are the enterprises whose principal task is meeting  - 2 - production targets. Production enterprises generally are not authorized to engage directly in foreign trade. For this purpose they use special foreign trade enterprises. 5. Economic development is of paramount concern to the Romanian Gov- ernment. 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 norm. 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 35 percent in 1971. During the same period, the share of labor force engaged in agriculture declined from 74 per- cent to around 42 percent; and while agricultural output almost tripled, its share in GNP amounted to only 16 percent in 1973. 7. Notwithstanding the emphasis on industrialization, more than half of the population (about 58% in 1973) still lives in rural areas and agricul- ture remains a key sector of the economy. Apart from supplying food, indus- trial inputs and the residual labor increment for industrial growth (which requires an expansion in agricultural productivity), the sector also supplies upwards of 40% 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 annumL of per capita GNP. The fortlhcoming World Bank Atlas estimates GNIP per capit.l for 1972 at $810. 9. The organization of production in both the urban sector and in agriculture is such that all labor is employed and there is no open un- employment. There is, however, some labor surplus. Income distribution is also relatively equal. In 1973, average monthly wages were 1,563 lei (over  -3- $75 equivalent) per month, up 4.3 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. Minimum wages are guaranteed by the State; they were raised to 1,000 lei per month for full-time workers in September 1971. Prices for essential consumer goods and services such as basic foodstuffs, rents and urban transport 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, Pomania 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. Recent measures aimed at continued improvement of the management system include a reorganization (involving a reduction from 217 to 89) 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 supplement- ed by much greater emphasis on productive and investment efficiency, product quality, pricing and foreign competitiveness. To eliminate wasteful investment and production expenditures, a Superior Court of Financial Control has been instituted, among other things, to oversee a new system of financial control.  - 4 - 13. One result of these efforts is that 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 to- ward trade involving multilateral payments. During the period 1965-72, total foreign trade grew at about 12 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 1973, with exports growing by 44 percent to US$3.7 billion, and imports increasing by 34 percent to US$3.5 bil- lion. About 50 percent of 1973 trade was with non-socialist countries. Over- all trade deficits have generally remained small, and in 1973 there was a trade surplus of $233 rmillion, while the deficit with the convertible area was re- duced. During 1968-72, the total annual trade deficit averaged about $75 mil- lion (i.e. less than 8 percent of average exports). However, the results varied as between different trade regions. Imports from East European Socialist countries were slightly lower than Romania's exports to that region. In Romania's trade withi Western industrialized countries, on the other hand, ex- ports typically have been much less than imports. These deficits have some- times been increased by deficits on the invisibles account with Western countries. 14. The structure of Romania's trade with the developed market economies remains essentially unfavorable, despite the decline in deficit in 1973 and expectations of a surplus on the convertible account for the first time in 1974. Raw materials and agricultural commodities, 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 coun- tries are largely of machines and equipment and other manufactures. Thus, the present rather strong position in the convertible trade balance could well just be cyclical and should not be interpreted as an indication that Romania's chronic shortages of convertible currencies is at an end. Because of the pre- sent low level of reserves, any instability in export performance, as frequently arises from shortfalls in agriculture (paragraph 7 above), will 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 h-ias 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 intensified in the form of a decree on energy use and development issued in November 1973. Among other things, the decree imposed rationing of gasoline, though this was suspended in March 1974, following an increase in the domestic selling price of gasoline. 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 because technical options favored by the decree for electrical  -5- power development, such as lignite based, hydro electric and nuclear stations, are all relatively more capital intensive than the alternatives of gas and oil fired stations. The plan for 1976-80, now being drafted, will contain provi- sion 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 US$542 million in 1973, having grown from US$276 million in 1967. Romania's access to convertible finance, however, has been almost exclusively confined to financial and suppliers' credits with relatively short repayment periods. The net inflow of convertible capital in 1973, therefore, was only US$238 million. 17. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also takeni 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-1974, four joint venture agreements had been signed, involving direct foreign investment of about US$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. 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 finance providing funds at terms beyond ten years, 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 inarket. Prospects 19. The current Five-Year Plan (1971-75), for which original targets in most sectors appear likely to be exceeded, reflects Romania's continued strategy of rapid growth. The targets contained in the Annual Plan for 1974, for example, include a 16.7 percent growth in industrial production, 14.6 percent growth in national income, an investment rate equal to 35 percent of national income and a 41 percent expansion of foreign trade. In convertible trade, the plan stipulates a 76 percent increase in export earnings and a 51 percent growth in imports. Figures comparable to these have probably been  achieved which will imply a balance of trade surplus with the convertible areas this year. The Plan also lays stress on a range of qualitative aspects of development including technical improvements and diversification in industry and foreign trade, improvements in capacity utilization, development of the nation's human resource potential and a continued emphiasis on regional devel- opment. 20. Romania has good potential for furtlher 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 devoted to the achievement of the country's development objectives. 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 complexity 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 withi 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 1973, Romania's total medium- and long-term external debt amounted to $1,519 million. Most of these debts ($1,404 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 $340 million a year during 1974-75. The convertible debt service ratio was approximately 19 percent in 1973, reflecting the unfavorable terms of foreign credits available to the country. The ratio for 1974 is thought to have declined (to around 10 percent), following a very rapid growth in exports. 23. The organization of economic activity in Romania and the pursuit of a development strategy involving high investment/saving rates and rapid in- come growth 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 efforts to expand eA;)orts (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 earnings rose from $585 mil- lion in 1967 to $1,902 million in 1973. The preferential trade status accorded to Romania by the European Communities in June 1973 should facilitate the further expansion of such exports as could the granting of most favored nation status  by the U.S. In 1973, the Government also restLicted the use of short-term credit facilities from western suppliers in an effort to improve the structure of the country's external debt. Assuming a continuation of preseut export and debt management policies it can be expected that the debt service ratio will gradually decline during the second half of the 1970's. The country's present outward-looking posture, tha 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. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. The only settlements which were still under discus- sion at that time concerned claims in the United Kingdom and in the United States. The Romanian authorities have rzpeatedly assured the Bank of their intention to settle these old claims, and have from time to time advised the Bank staff of progress towards settlement. In September, 1974, agreement was reached on procedures for settling the US claims, and Romania has deaposited $300,000 with a fiscal agent (Manufactures Hanover Trust) for advertisemient and registration of bonds held by US nationals. The UK claims are larger and more complicated, and meetings to discuss settlement were held in London and Bucharest in No- vember 1973 and June 1974, without any decision being reached. More recent contacts between the two countries have narrowed somewhat the difference in their positions, and the discussions are continuing. PART II - BANK GROUP OPERATIONS IN ROMANIA 25. The proposed loan would be the Bank's fifth operation in Romania. Together with the $70 million loan for the Giurgin-Razmiresti Irrigation Proj- ect being proposed concurrently, it would bring total bank commitments to Romania to $290 million. Bank lending to Romania began in June 1974 with the $60 million loan for the Tecuci Fertilizer Project. This operation was fol- lowed in July by a $70 million loan for the Otelinox Special Steel Project and a $60 million loan for the Turceni Thermal Power Project. Anr.ex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of December 31, 1974. 26. Our knowledge of the Romanian economy is improving, but it will take some time to build up the detailed knowledge of the economy which would allow a sharper focus on the outstanding development problems. At present, foreign exchange, especially in convertible currencies, appears to be a major con- straint. During the early phase in the Bank's relations with Romania, there- fore, one of the major objectives of Bank lending is 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 sav- ings. Bank lending will also aim at supporting the Government's efforts to introduce new industrial technologies to improve the quality of products, to make more economic use of materials and factor inputs and to reduce production costs. Market aspects and marketing, especially for export goods, will also be emphasized. Special attention is also being given to agriculture where productivity levels are still low relative to industry and there is heavy dependence upon favorable weather. The Government is aware of these problems  and has stepped up efforts to develop the agricultural sector as evidenced by rapid expansion of irrigation, the increasing use of fertilizer and the con- tinuing pursuit of institutional improvements in this sector. 27. The proposed project, and the Giurgiu-Razmiresti Irrigation Project, would support these objectives by assisting in improvement of agricultural infrastructure and productivity. The possibilities of financing a pulp and paper project, and second projects for power and irrigation, are also being considered, and the Bank is currently reviewing a list of project proposals submitted by the Government during the 1974 Annual Meeting. 28. Romania is expected to rely upon the IBRD primarily for funds required to finance needed convertible-currency imports, and all of the loans hitherto proposed for Romania have been based solely upon the Bank's financing of foreign exchange needs. At the same time, Romania has developed a relatively advanced industrial structure and is in a position to supply a large propor- tion of the equipment and supplies required for the execution of many high priority development projects. Hence, in a few cases, such as the present one, it may be necessary and appropriate, if the Bank's lending is to provide adequate support to Romania in high priority fields, to incorporate limited amounts of local currency financing in particular Bank loans. 29. In addition to lending, the Bank (through EDI) has assisted Romania by conducting a project appraisal training course for Romanian officials in Belgrade in October 1973. A similar course is being given in Bucharest in January and February 1975. 30. The projects, for which assistance has been committed or is being considered, represent only a small portion of Romania's total need for ex- ternal financing and of its total disbursed convertible debt. However, they provide a substantial net addition to the present inflow of convertible cur- rency finance, and may set a pattern for obtaining longer term convertible finance from other sources. The disbursed IBRD debt outstanding to the Bank is expected to constitute about 25 percent of Roniania's total projected con- vertible currency debt in 1979; the Bank's share in Romania's debt service payments in 1979 would be about 6 percent. PART III - THE AGRICULTURAL SECTOR IN ROMANIA Agriculture 31. Romaniia continues to be a hiighly agrarian country in which progress in other sectors (especially in industry) depends upon stable growth in agri- cultural production to provide botlh convertible foreign exchange earnings and industrial raw materials. Agriculture accounted for 16 percent of 1973 GNP. In 1973, 58 percent of the population lived in rural areas, and 42 percent of the labor force was employed in agriculture compared with 74 percent in 1950. About 14.9 million hectares, or almost two-thirds of the land area, are used for agriculture; and of this, 8.5 inillion hectares are in Wallachia, the region composed of the southern plains of the Danube Valley. Approximately 65 percent  - 9 - of all agricultural land is used for grain production (mainly maize and wheat), while industrial crops (mainly sunflowers) are the next most important. Vege- tables are also produced, often in large-scale commercial green houses, for domestic consumption and export. Livestock accounts for 39 percent of agri- cultural production, and the national livestock population consisted of 5.8 million cattle, 14.4 million sheep, 8.8 million pigs and 64.5 million poultry in 1973. 32. Investment in agriculture has lagged behind that in other sectors with 12.7 percent of actual investments in the 1966-70 Plan period, and 14.2 percent planned in 1971-75. The investments so far achieved in the first three years of the current Plan are 12.4 percent of total for that period. In response to this investment shortfall, the Government has relied on other measures, including institutional reforms, price incentives, and production targets and delivery schedules to stimulate agricultural production. Agri- cultural production is estimated not to have increased at all from 1966 to 1970, though it was characterized by sharp year-to-year variations. The major problems of Romanian agriculture are the instability of its output and low productivity. The proposed project would support improvements in both of these areas. The Need for Irrigation Infrastructure 33. Instability in agricultural production results from vulnerability to erratic weather conditions and the lack of infrastructure to mitigate the impact of weather changes. Excessive precipitation and flooding during plant- ing and harvest seasons, and inadequate rainfall during summer growing seasons, have resulted in the considerable fluctuations in net output noted above. Only production of vegetables has increased steadily, reflecting the relatively more controlled conditions under which they are produced. The Government is well aware of this problem and has placed high priority within the agricultural sec- tor on solving it. Forty-five percent of agricultural investment in the cur- rent Five-Year Plan is for land reclamation, irrigaticn and drainage. Since 1965, total irrigated land has been increased from about 250,000 hectares to 1.25 million hectares, and during the next Five-Year Plan (1976-80) another 750,000 to one million hectares are expected to be brought under irrigation. This reflects the high priority which is being given to reducing vulnerability to weather and stabilizing production in agriculture. Agricultural Productivity 34. W4hile some productivity gains have been made in recent years, agri- cultural productivity per worker remains at only about one-third that of in- dustry. In addition to improving its irrigation infrastructure, Romania is also taking measures to improve productivity through upgrading the quality of farm mechanization, increases in the supply and utilization of fertilizers, and the promotion of agro-industrial enterprises to provide processing and marketing outlets for increased farm production. Steps are also being taken to reduce inequality between State farms and cooperatives in access to farm inputs. State farms, which cultivate 30 percent of agricultural land in the socialist sector, have been receiving about 42 percent of on-farm investment in the current Plan period. Cooperatives, on the other hand, which have  - 10 - 60 percent of such land, have been receiving only about 58 percent of agri- cultural investments. Productivity on State farms is correspondingly higher than that on cooperatives, but the Government is now moving toward elimination of the disparities between the two types of farm organization in order to stimulate general improvement in agricultural productivity. Sector Organization 35. State enterprises and cooperatives account for the major portion of agricultural production; individual farmers play a much less significant role, except in production of a few selected commodities. State enterprises are generally large scale, capital intensive farms which have been favored in terms of land allocation, fertilizer distribution and investments in irriga- tion and mechanization. There are about 360 such farms employing about 300,000 people and cultivating 4.5 million hectares of agricultural land. Workers on the farms are employed on salaries which are fixed by law. The State farms are generally well managed by a director (usually an agricultural engineer) who is appointed by the Director General of State farms of the Ministry of Agriculture and is responsible to a workers' council. The Ministry of Agricul- ture determines the production plans for individual State farms; it also has a role in determaining the use of their profits, a portion of which are remitted to the State treasury. 36. There are about 4,500 agricultural production cooperatives with about 3,500,000 member families and cultivating about 9.0 million hectares. Workers in cooperatives are guaranteed a minimum income, which is generally lower than the incomes of their counterparts on State farms, but they are entitled to a share in profits after allowances for reserves and reinvestment. More than one member of a cooperative family frequently works (on a full- or part- time basis) in the cooperative, and some members are employed outside of the cooperatives. Cooperators are also allowed to farm about 0.3 hectares per family in and around their villages for their personal use, and they are allowed to own livestock. Production on personal plots is always intensive, and produce is either self-consumed or sold to consumption cooperatives. A cooperative is managed by a General Assembly of cooperators and its elected President; it reports to the District Director General for Agriculture, the local representative of the Ministry of Agriculture. About half of the on- farm investment in the project would be made in cooperatives. 37. Individual farmers number only about 150,000 families and own about 10 percent of total agricultural land. Their land is often located in moun- tainous regions. The individual farming subsector has not received strong Government support but is significant in production of potatoes (15 percent of production), meat (14 percent of production), milk (19 percent of produc- tion), eggs (18 percent of production) and wool (12 percent of production). The Government is aware of the continuing importance of individual farmers in these areas, and more technical assistance is likely to be provided to them in the future. 38. At the national level, the State institution in the agricultural sector is the Ministry of Agriculture, Food Industry and Waters. It plays a  - 11 - major role in preparing the Five-Year Plan for the sector and is the super- visory institution for plan fulfillment. In each district, the Ministry is represented by a General Directorate, which is responsible for all agricultural activity in the district including both cooperatives and State farms. Mar- keting is organized nationally under ten Centrals accountable to the Ministry and responsible for processing and marketing specified commodities. Each Central obtains produce at the district level and allocates it among domestic retail, processing, storage and export channels. A specialized agency is responsible for the exports of each Central. The Borrower 39. The Borrower for the proposed loan would be the Bank for Agriculture and Food Industry (BAFI), which is the Government's specialized agency for in- vestment projects in agriculture, irrigation and food processing. BAFI was established in 1968 as a channel for, and administrator of, all investment funds provided under the State plan for the agricultural sector. Financing in agriculture had previously been done by a department of the National Bank of Romania. BAFI is involved in all phases of project appraisal, execution and supervision, and it has a large technical and economic staff located in Bucharest, in 39 county (Judet) branch offices and 100 sub-branches throughout the country. One of BAFI's more important functions is that of fiscal agent administering, for the account of the national budget, all Government invest- ments in State farms and enterprises. BAFI also receives interest-free funds from the State budget for investment lending to cooperatives and repays the Government as it receives repayments of sub-loans from the cooperatives. BAFI has thorough review and approval procedures for all investment projects. In addition to BAFI's review, all subprojects for more than Lei 10,000,000 (US$500,000) are reviewed and approved by the Ministry of Agriculture and those greater than Lei 70,000,000 (US$3.5 million) must be approved by the Council of Ministers. In addition to its investment project work, BAFI pro- vides short term credit to, maintains settlement accounts for, all coopera- tive and State agricultural enterprises; it also acts as fiscal agent for the Government for collection of State revenues from these enterprises. As the Government's channel for investment financing in agriculture, BAFI's primary source of funds is the State Budget. The Guarantee Agreement, therefore, in- cludes a provision (Section 2.02) that the Guarantor shall provide all neces- sary funds for the implementation and operation of the project. PART IV - THE PROJECT Project History 40. In 1970 Romania began construction of the 74,600 hectare Sadova- Corabia Irrigation Project which was completed in south-western Romania along the Danube in May 1974. In anticipation of the completion of irrigation works, Romania requested in January 1973 that the Bank finance a portion of the on-farm development in the region. Bank missions reviewed this proposal  - 12 - in June and November/December 1973 and January 1974, and the project was ap- praised in May 1974. Negotiations were held in Washington in December 1974. The Romanian delegation was led by Mr. Ion Rusinaru, President of BAFI, and included representatives of the Ministry of Agriculture and Ministry of Finance. Project Description 41. The project is based upon the ten-year investment program for on-farm development and agro-industries required to bring the Sadova-Corabia irrigation scheme into full production. This investment program was started in 1971 in order to increase production and incomes in what has been, because of its sandy dunes and insufficient water supply, one of the poorest regions of Romania. The basic strategy of the program has been (i) to intensify cultivation of crops benefitting most from irrigation and also in demand domestically and interna- tionally, (ii) to develop the important livestock sector, and (iii) to provide the necessary agro-industrial processing capacity to handle the production of the region. The project consists of about 40 percent of the ten-year investment program and covers subprojects to be started between 1975 and 1978. It also includes dairy farming in the region surrounding the irrigation scheme. 42. Credits under the project would be used to establish about 2,050 hectares of modern orchards (peaches, apricots and cherries) and about 2,000 hectares of grapes. A fruit handling and storage complex would be constructed to handle the increased production, and 15 refrigerated trucks would be pur- chased to transport fruit and vegetables to domestic and export markets. A leaf analysis laboratory would also be established to determine the types and amounts of fertilizers which should be used in orchards and vineyards. The project also includes a substantial dairy farming component with eight complete dairy farms and imported heifers for four additional farms which are already being constructed. Integrated with dairy farming would be two beef-fattening farms which would purchase and fatten male calves from the dairy farms. In support of these livestock components, the project would finance a feed mill and silo, and a premix feed plant would be constructed to supply protein con- centrates to this and other feed mills. The project would also include machinery and equipment for farm mechanization services to cooperatives. Training would be provided under the project for technicians in dairy farming, beef fattening, livestock research, fruit handling and storage and leaf analysis, as well as economists in agricultural appraisal, financing, production and marketing techniques. Annex III contains a loan and project summary; the Appraisal Report (No. 582a-RO, dated January 14, 1975) is being circulated separately to the Executive Directors. Project Execution 43. The project would be administered by BAFI and its branches in the Dolj and Olt districts. BAFI's branch offices would be responsible for direct supervision of the financial and administrative execution of the subprojects which would be executed by cooperatives, State farms and State agro-industrial  - 13 - enterprises. Subprojects costing $500,000 or more would also be reviewed by the Bank, and a number of stch subprojects have al_:eady been reviewed and approved. Technical assistance to the cooperatives, State farms and State enterprises carrying out subprojects would be provided by units of the Ministry of Agriculture under a well developed program of assistance to such entities. The Ministry would also malke all necessary arrangements for international procurement which would be coordinated by its Directorate for the Land Re- sources, Organization, Standardization and Remuneration. Project Cost and Financing 44. The estimated total cost of the project is US$59.5 million, with an estimated foreign exchange component of US$22.6 million or 38 percent of total costs. A price contingency of 11 percent in 1975 and 7.5 percent annually thereafter has been used for imported materials and equipment. Local costs are based upon fixed Romanian prices. A relatively low physical contingency of 7 percent has been included as final plans and specifications have already been completed for most subprojects. 45. The proposed Bank loan of US$30 million would finance 50 percent of total project costs representing an estimated US$22.6 milllon in foreign ex- change costs and US$7.4 million in local costs. An explanation is provided in paragraph 28 above of why it may be appropriate to provide some local cur- rency financing for projects in Romania which have high economic priority but relatively small foreign exchange components. The remaining project costs would be financed by yearly allocations from the Government budget (TJS$24.3 million), couperatives (US$1.3 million), and State farms and enterprises (US$3.9 mill ioIl) . Lending and Relending Terms 46. The proposed loan to the Bank for Agriculture and Food Industry (BAFI) would be guaranteed by the Government and would be for a term of 20 years, including five years grace, at an interest rate of 8 1/2 percent per annum. BAFI would relend the proceeds of the loan, together with funds received from the Government, for anortization and grace periods no longer than those on the Bank loan aud consistent with the expected implementation periods and yields of subprojects and with the repayment capacities of subborrowers (Section 3.02(b) of the Loan Agreement). Current Romanian practice is to lend to cooperatives at tlhree percent, and to State farms and enterprises at four percent, for up to 20 years, including up to five years grace. Although this will be the first time that State farms have undertaken major investments with non-budget financing (i.e. with long term, interest bearing loans), it is proposed to maintain these interest rates in lending operations under the present loan. 47. These interest rates appears low in comparison with other member countries, but there is virtually no inflation in Romania. The State sets and controls almost all prices, and it exerts direct control over incomes and money. The central principle of pricing in Romania has been that prices for given goods remain fixed for long periods. Production enterprises, which are  - i4 - confronted with fixed prices for both inputs and outputs, are expected to pur- sue profit increases through cost minimization. Wage increases are controlled to be always less than productivity growth and the economy has been insulated from foreign inflation by a system which automatically offsets foreign price movements through internal equalization payments. Producer (wholesale) prices were last reset in 1963. The retail price index of 100 in 1963 was 101.4 in 1973. 48. The new price law introduced in 1971 provides for a more frequent adjustment of producer prices, the first round of which is now being imple- mented. The law, in conjunction with a regime of foreign trade pricing in- troduced in January 1974, increases the scope for price changes of imports to be reflected in the cost structure of domestic industry. In principle this increases the possibility that Romania's domestic prices will be influ- enced by world inflation. However, indications are that such effects will be kept to a minimum, for at least three reasons: (a) under the new foreign trade regime the tariff component of the price of an import is to be used as a cushion against foreign inflation, the tariff being reduced when foreign prices rise; 1/ (b) increases in the price of imports will result initially in reduced profit margins rather than domestic price increases; (c) while some price increases may be inevitable, these will continue to be offset by price reductions in those industries where costs have declined. A measure of the influence of these factors is thiat, in the resetting of producer prices presently being implemented (to be completed by the end of 1975), it is expected that the final movement in the index of these prices will be a 3.3 percent increase over the level in 1963 (i.e. an annual average increase of 0.3 percent over a period of twelve years). 49. Interest rates in Romania are paid on investment credits, working capital loans and loans to individuals. These rates are institutionally deter- mined by the central authority and are not influenced by the forces of demand and supply of capital, since there is no money market in Romania. Conceptually, therefore, they are more akin to a tax on capital than to a "price" of capital. By the same token, they do not necessarily reflect the social opportunity cost of capital because the return of resources to capital investments is made not only througlh interest payments but tlhrough taxes and the net surplus after operations which is retunied by the state enterprises to the state budget. Interest rates, tlherefore, are relatively low. However, from the absence of significant inflation in the economy, it follows that the relatively low nominal interest rates result in real rates whicii are quite high in comparison witi real rates of interest prevailing in many countries today. 1/ The Romanians are applying the new regime with considerable caution which illustrates their determination to prevent internal inflation. Since recent price increases for raw materials lhave been more marked than the tariff cushion could allow for, ttue operation of the new pricing regime has been temporarily suspendecl on this category of goods, which are now priced under the previous system which provides a cushion against foreign inflation through automatic payments from the equalization fund.  - 15 - Audit 50. BAFITs transactions are subject to continuous control by internal auditors appointed by the Ministry of Finance and to once-a-year audit by inspectors from the Court of Superior Control whose reports may go to the Coun- cil of Ministers and the President himself, if necessary. BAFI's accounting system and the audit of its transactions are satisfactory and BAFI's audited operating and financial results would be reported to the Bank not later than five months after the end of BAFI's fiscal year (Sections 6.01 (c) and (e) of the Loan Agreement). Procurement 51. US$37.1 million of materials, equipment and livestock to be used for the project would be procured either through international competitive bidding, or on the basis of international price quotations, in accordance with the Bank Guidelines. Contracts for US$21.6 million of materials and equipment which can be bulked for tendering in amounts of US$100,000 or more will be awarded on the basis of international competitive bidding; included among these con- tracts would be specialized equipment needed for the feed mills and the fruit storage unit which would be procured on the basis of equipment orders whose composition will be determined in agreement with the Bank to guarantee the technical integrity of these facilities. For purposes of bid comparison under international competitive bidding, local suppliers would be accorded a preference of 15 percent or the applicable customs duty, whichever is lower. In the spring of 1974, a law was passed to allow bidding between local and foreign suppliers; and it is expected that at least one-third of the amount of i.c.b. contracts would be won by foreign suppliers. Cost estimates are based upon a conversion rate of US$1 = 20 lei. Since Romanian currency is not freely convertible, international tender documents would state the conversion rate to be used for bid evaluation. About US$2.9 million of small contract items not available in Romania and female dairy cattle expected to cost $12.6 million would be procured on the basis of price quotations from suppliers in at least three countries (Schedule 4 to the Loan Agreement). Disbursements 52. The Bank loan would be disbursed for (i) 58 percent 1/ of the amounts disbursed by BAFI for approved subprojects and (ii) 100 percent of the foreign cost of the leaf analysis laboratory and training financed under the project. Benefits 53. The project would increase the gross value of annual agricultural production in the project area by an estimated US$13 million annually at full development. The principal output of the project would be peaches, grapes, milk and beef. The project would help to meet growing domestic demand, im- prove incomes of about 1,700 families working on cooperative farms and yield 1/ Percentage computed to disburse 50 percent of estimated total costs (including contributions of cooperatives and State entities) in five years.  - 16 - direct revenues to the State from general taxes and State farm earrings. The economic rate of return for the project is estimated at 16.5 percent. 54. Full-time employment would be provided by the project to some 2,600 skilled and unskilled workers. In addition, it is estimated that temporary work for about three months a year would be available to some 3,300 persons. The most striking improvement would occur in the incomes of permanent coop- erative workers and the seasonal workers (who also come from cooperatives). Their incomes are expected to rise by at least 50 percent, and incomes of permanent cooperative workers would approacih those of State farm employees. In addition, indirect employment would result from the provision of input sup- plies and from handling and processing of project output. The project would also increase labor productivity. The project would have no adverse effect on the environment. PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Loan Agreement between the Bank and the Bank for Agricul- ture and Food Industry of Romania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, the report of the Committee pro- vided for in Article III, Section 4(iii) of the Articles of Agreement and the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. The special features of the loan documents are described above. 56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments January 15, 1975 Washington, D.C.  Page of- 2 page3 COUNRYT DATA - ROMANIA1 AREA POPULATIONw DENIm7 237,500 2sa 20.70 slie(mid-1972) Per keSsf aruble land SOCIAL ThOSCATORI Reference Countries Romania Cuosaia Italy W4. Oersany IW 1970 IWO170 97 197 GNP PER CAPITA 112$ (AT.AflBASIS) 330 /u 6104I 810/b 1,9~60 /b 3,3flO/l DEMOORAF9IIC C_3.bthrate (Per tAhoosad) 19 19.6 /uf 1d.2 ab lb.,I 11.6 Il Crude denth rate (per thousand) 9 9.5 /uf 5.6 ab 9.6 /i1 11.0 IL" Wnant eurtality rate (per thousand ljbs births) 75 6.2.1 TK5 0.7 2 7,.; 'of 23.3 7-0f Life especta..ry at birth (years) 66 70 67 71.1 69.4 Oruse repruductio rat 0.6 /c 1.3 1.3 0.9 1.2 Population grauti rut 1.1 1.0 /d 1.0 Id 0.7 /d 0.9 Id Population growth rain - urban 4 Is 3 75 3 7? 0.7 5h Ago st-utors (par cent) 10-16 28 /c 20 28 26.3 23.0/s 15-6L 65 75 65 64 66.y 63.6 ref 65 and os-r 77 9 8 10.8 13.4 Taf De,a.sdecy ratio 1%0.5 72C 0.7 0.8A/ 1.0 /1 0.6 Uriac perclatioc as prerost uf tutal3 0 4A 5I 5 Fanily planning: R- of acceptors ccltvs(thuos.) 32Is 6 jjIh~ /, 38 t..k No. of users (8 Of macrind cso EMhLOYMNTS Tata1 labor force (thoo=sad) 9,600 /1 9,900 11 9,600 1 9,n00 /s 26,800 /n,uf Peroategs ssploysd in agricultore 66 75 49 751 52 17 8.2 7r7r7- Perc..ctags oos,epioyed 0 0- 8 o.8 7C7C-f INIOME DISTRIBUTION Porcot of catisnal booms rciv-d by highost 5% I.s- 5I/, Percet of satic...l ico.o received by highest 20% .. ..4 P.erot of outiocal i -u-rcived by lowest 20%..s 77 P.rcent Of outio..al iscm roceis-d by loanni 60% . .19 lISThRC710iO OP LARD OWNISHIHP % osod by top 10% of ownrs % onood by seallest 10% of aoners .. HEALTH AND NUTRI TION FPp.alatioo Per physician 760 /a 860 / 1,010 550 680 PPeplatio Pe r cursing per-o 300 200 -370 /r 70 /s 350 .Peplation Pe r hospital bed 160 120 180 - 90) 90 Per capita caoiespply as 5 Of rqieet 1)0 110 125 ic I2l It 120 /t Per capita protein ripply, total (grmas per day) 6 82 82 927 68 75 83 75 Of which, animal and poles 26 28 29 75 ul 75t 56 75 Death rate 1-6 years /7 5 Ic 3 /l 2.c 7 5.0 0.9 La0 EDUICATION Adjusted /Q primary sohool orol1leect ratio 92 109 9. 107 132 Adjosetd secondary ecthl unrolset ratio L2 62 65 59 62 Tears cf sach.olin.g provided, first and s.eond level 12 12-li 12 13 12-151 Vocetio-l sosoll..ot as 5 Of e.- schuol s4oroll,7ss2t c Adult litoracy rate S 9/1589/o 7 26 6 ROUSIN Average No. Of pere..n per eons (urban) .1.3I /c .1/aa1 1. /v 0 7 c Percent Of occuPied units ithont piped auter .. si 7