Romania - Giurgiu - Razmiresti Irrigation Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1556-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 GIURGIU-RAZMIRESTI IRRIGATION 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 It may not be published, quoted or cited without Bank Group authorization.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. I  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$0.03 Conversion Rate for Traded Good 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 A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY, ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE GIURGIU-RAZMIRESTI IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bank for Agriculture and Food Industry, Romania, with guarantee of the Socialist Republic of Romania, for the equivalent of US$70 million to help finance an irrigation project. The loan would have a term of 25 years, including 5 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 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 Executive 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, economic management 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 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 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 Government. Rapid industrialization is a major objective with priority being  -2- 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 annum of per capita GNP. The forthcoming World Bank Atlas estimates GNP per capita for 1972 at $810. 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. There is, however, some labor surplus. Income distribution is also relatively equal. In 1973, average monthly wages were 1,563 lei (over $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 food- stuffs, 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  - 3 - 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. Recent 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 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. 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 re- sult of both rapid world price increases and expanded volume of trade, the to- tal 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 billion. About 50 percent of 1973 trade was with non-socialist countries. Overall trade deficits have generally remained small, and in 1973 there was a trade surplus of $233 million, while the deficit with the convertible area was reduced. During 1968-72, the total annual trade deficit averaged about $75 million (i.e. less than 8 percent of average exports). hiowever, lhe results varied as between different trade regions. Imports from East European Socialist countries were slightly lower than Romania's exports to that re- gion. In Romania's trade with Western industrialized 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 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 present low level of reserves, any instability in export performance, as fre- quently arises from shortfalls in agriculture (paragraph 7 above), will place the import program in immediate jeopardy, and shortages of convertible cur- rencies would persist even if Romania were to have recurring overall trade surpluses. 15. Romania is relatively well endowed witlh 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 lhas 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 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 Marci 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 be- fore, mainly because technical options favored by the decree for electrical power development, such as lignite based, hydroelectric 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.  -5- 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 finan- cial 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 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-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 Romiania 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 market. Prospects 19. The current Five-Year Plan (1971-75), whose 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, included 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 indus- try and foreign trade, improvements in capacity utilization, development of  the nation's human resource potential and a continued emphasis on regional development. 20. Romania has good 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 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 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 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 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 earnings rose from $585 million 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 restricted 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  -7- present 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, 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. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. The only settlements which were still under dis- cussion at that time concerned claims in the United Kingdom and in the United States. The Romanian authorities have repeatedly 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 deposited $300,000 with a fiscal agent (Manufacturers Hanover Trust) for advertisement 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 November 1973 and June 1974, without any decision being reached. More recent contacts between the two countries have narrowed somewliat 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 fourth operation in Romania. Together with the $30 million loan for the Sadova-Corabia Agricultural Credit Project 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. Annex 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 forei;n 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  - 8 - dependence upon favorable weather. The Governneint 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 Sadova-Corabia Agricultural Credit Project, would support these objectives by assisting in improvenient of agri- cultural infrastructure and productivity. The possibilities of financing a pulp and paper project, and of 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 re- quired 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 proportion 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 establishing a project appraisal training course for Romanian officials (held 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 Romania'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. Romania continues to be a highly agrarian country in which progress in other sectors (especially in industry) depends upon stable growth in agri- cultural production to provide both 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 million hectares are in Wallachia, the region  - 9 - composed of the southern plains of the Danube Valley. Approximately 65 percent 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 aclhieved in the first tlhree 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. Agricul- tural 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 prob- lems of Romanian agriculture are the instability of its output and low produc- tivity. 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 sector on solving it. Forty-five percent of agricultural investment in the current Five-Year Plan is for land reclamation, irrigation 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. The proposed project would be a part of this program. Agricultural Productivity 34. While 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, have been receiving about 42 percent of on-farm investment in the current Plan  - 10 - period. Cooperatives, on the other hand, which have 60 percent of such land, have been receiving only about 58 percent of agricultural investments. Pro- ductivity 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. Eighty-two percent of the land to be irrigated under the project is owned by cooperatives. 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 fanrs 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 Agri- culture determines the production plans for individual State farms; it also has a role in detenmining 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 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 representa- tive of the Ministry of Agriculture. 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 Govermnent 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 Water Management. It plays a major role in preparing the Five-Year Plan for the sector and is the supervisory institution for plan fulfillment. In each district, the Ministry is represented by a General Directorate, which is responsible for all agri- cultural activity in the district including both cooperatives and State farms. Marketing 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, execu- tion and supervision, and it has a large technical and economic staff located in Bucharest, in 39 country (Judet) branch offices and 100 sub-branches through- out the country. One of BAFI's more important functions is that of fiscal agent administering, for the account of the national budget, all Government investments 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 provides short- term credit to, and maintains settlement accounts for, all cooperative and State agricultural enterprises; it also acts as fiscal agent for the Govern- ment for collection of State revenues from these enterprises. As the Govern- ment's channel for investment financing in agriculture, BAFI's primary source of funds is the State Budget. The Guarantee Agreement, therefore, includes a provision (Section 2.02) that the Guarantor shall provide all necessary funds for the implementation and operation of the project. PART IV - THE PROJECT Project History 40. The project was proposed for Bank financing in April 1973 and was reviewed by Bank missions in June and December 1973. It was appraised in May 1974 on the basis of a feasibility study submitted to the Bank in September  - 12 - 1973 and additional information provided before and during appraisal. Nego- tiations 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. Approval by the Council of Ministers of the main indicators of the technical and economic study for the project (i.e. authorization to proceed with the project) would be a condition of effectiveness of the proposed loan. Project Description 41. The project would use water from the Danube to provide pumped irri- gation for about 100,800 hectares located between the towns of Giurgui and Razmiresti 60 km southwest of Bucharest. It would serve about 18,500 hectares under cultivation by State farms and 82,300 hectares owned by cooperatives, including about 3,200 hectares used by individual members of cooperatives. The project includes (i) two main pumping stations and two repumping stations, (ii) about 240 km of lined canals and about 2,170 km of buried distribution pipelines, (iii) related pressure pumping and power transmission facilities, (iv) drainage works for 33,600 hectares and erosion control works for 6,000 hectares, (v) operation and maintenance equipment and farm machinery, and (vi) consultants' services and training. Annex III contains a loan and proj- ect summary; the Appraisal Report (No. 530a-RO, dated January 9, 1975) is being circulated separately to the Executive Directors. Project Execution 42. The Department of Land Reclamation and Agricultural Construction (DIFCA) of the Ministry of Agriculture, Food Industry and Water Management would be responsible for all aspects of project execution except those relat- ing to electricity. DIFCA's Technical Direction for Investments and Coopera- tion would administer the project and would oversee the work of the Institu- tion of Studies and Designs (ISPIF), the Direction for Construction and Local Development (DCAL) and supporting administrative and supply staffs. The MIinistry of Electrical Energy would be responsible for construction, operation and maintenance of power transmission facilities, and for supplying power to the project area. Project Operation 43. The Ministry of Agriculture's Central for Exploitation of Land Recla- mation Works (CELIF) would be responsible for operation and maintenance of the project facilities (Section 4.01 (a) of the Loan Agreement and Section 2.03 of Guarantee Agreement). Two enterprises organized geographically under CELIF, with responsibilities in their respective counties, would operate and maintain major project works, and their subunits would be responsible for minor facilities within the individual cooperative and State farms. Each subunit would be responsible for 20-25,000 hectares. Administrative and financial responsibilities, including collection of water charges for the State, would be retained at CELIF's headquarters at Bucharest.  - 13 - Project Cost and Financing 44. The estimated total cost of the project (including interest during construction) is US$151.8 million, with an estimated foreign exchange compo- nent of US$53.7 million or 35 percent of total costs. The foreign exchange costs include an estimated US$25.3 million (including contingencies) of direct foreign costs for equipment and materials, consulting, and suppliers post-sale services, and training, an estimated US$17.6 million (including contingencies) in indirect foreign costs of imported capital assets and materials used by local manufacturers of equipment for the project, and US$10.8 million interest during construction. A price contingency of 11 percent in 1975 and 7.5 per- cent annually thereafter has been used for imported materials and equipment. Local costs are based upon fixed Romanian prices, and a price contingency of one percent per annum has been used to account for possible wage increases and some probable upward revision in domestic prices affecting the major civil works components of the project. A relatively low physical contingency of 7.5 percent has been included as detailed final designs and specifications have already been completed. 45. The proposed Bank loan of US$70 million would finance 47 percent of total project costs representing an estimated US$50.5 million in foreign costs (some foreign costs would be financed by the Government), and US$19.5 million in local costs. An explanation is provided in paragraph 28 above of why it may be appropriate to provide some local currency financing for projects in Romania which have high economic priority but relatively small foreign ex- change components. The remaining project costs would be financed by the Gov- ernment budget. Lending Terms 46. The proposed loan would be made to the Bank for Agriculture and Food Industry (BAFI), guaranteed by the Government, and would be for a term of 25 years, including five years grace, at an interest rate of 8-1/2 percent per annum. It is Romanian practice for the State to invest virtually all funds in such projects through BAFI without formal lending agreements and to recover investment costs from project beneficiaries through a variety of financial mechanisms including the incomes of State farms, taxes, pricing mechanisms for traded commodities, payments by cooperatives for mechanization services, and (only to a limited extent) 3 percent loans of up to 25 years (paragraphs 5.14 through 5.18 of the Appraisal Report). For this reason, BAFI would not actually relend the major portion of the Bank loan. Its investment costs would be recovered by the State, and funds would be made available to BAFI from the State budget for repayment of the Bank loan. Audit 47. BAFI would keep separate accounts for all project expenditures and its 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 which reports directly to the Council of  - 14 - Ministers and the President. BAFI's accounting system and the audit of its transactions are satisfactory and BAFI's audited operating and financial re- sults would be sent 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 48. Contracts for the supply of major equipment and materials listed in Annex 7 Table 1 of the Appraisal Report and totalling US$59 million (in- cluding contingencies) would be put to tender on the basis of international competitive bidding, in accordance with Bank guidelines for procurement. A margin of preference for local equipment manufacturers of 15 percent or cus- toms duty, whichever is lower, is proposed. In the spring of 1974, a law was passed to allow bidding between local and foreign suppliers, and it is expect- ed that one-fifth of the contracts would be won by foreign suppliers. Specifi- cations for these contracts would provide sufficient flexibility to permit choice between equally suitable alternatives proposed by different manufac- turers. Cost estimates are based on the 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 in bid evaluation. Up to US$700,000 of locally available items would be procured under Romanian procedures because the contract amounts would be too small to attract international interest. All contracts for equipment and materials eligible for Bank financing would be pro- cured in accordance with Bank Guidelines (Schedule 4 to the Loan Agreement). Disbursements 49. The Bank loan would be disbursed for (i) 100 percent of the c.i.f. cost of imported equipment, (ii) 100 percent of the ex-factory costs of locally purchased goods (iii) 100 percent of foreign expenditures for consultants' services and training, and (iv) interest during construction. International Water Rights 50. The average peak 3flow of the Dantube at the project site is 12,000 cubic meters per second (m /sec) and is reached between March and3June. River flows decline during the summer to an average low flow of 2,000 m /sec in October and November. The proposed project would utilize 'aters pumped from a side channel of the3Danube at a peak rate of 80.6 m /sec in July, declining to a low of 20 m /sec in September, or less than 1 percent of the lowest river flow recorded during that month. Romania has advised the Bank (i) that it has undertaken towards the other riparian states to maintain the Danube in navigable condition, (ii) that the use of water by Romania's current and proposed irrigation projects will not interfere with navigation and (iii) that it is under no international legal obligation to obtain agreement of the other riparians to the project and that no objections have been received from the other riparians on Romania's use of Danube waters. The project is not expected to raise issues on the use of international waters from the Danube.  - 15 - Environment 51. The project would have no adverse effect on the environment. The project area is already populated and cultivated. There are no project-related epidemic or endemic health problems. The irrigation would be piped and drain- age would be provided for marshy areas. Excavation and backfill for the side canal at Giurgui would be controlled to create a lake for recreation and com- mercial pisciculture. Benefits 52. The project would increase the gross value of annual agricultural production in the project area from US$33.0 million without the project to US$90.2 million after full development is achieved in 1985. Similarly, the value of net annual agricultural production would increase from US$20.9 million without the project to an estimated US$64.5 million. The project would also help to stabilize output by eliminating current dependence upon unreliable weather. Cropping intensity would be increased by about 15 percent, and the project would improve yields and permit a shift to higher value crops. The principal crops to be produced under the project are alfalfa, maize, maize fodder, sugar beets, tomatoes and soybeans. The additional net foreign exchange earnings and savings resulting from the project are estimated at about US$40 million per annum. The project would also help to meet growing domestic demand, improve incomes of about 17,000 families working on coopera- tive farms and yield direct revenues to th-le State from general taxes and State farm earnings. The economic rate of return for the project is estimated at 13.5 percent. 53. Direct annual farm employment would increase from 1.1 million man- days without the project to 2.9 million man-days with the project, a high degree of mechanization notwithstanding. Project employment benefits would begin in the mid-1970's with the initial employment in project-related con- struction, which would be gradually replaced by production activities. In addition, indirect employmlent would result from the provision of input sup- plies and from handling and processing of project output. The project would also increase labor productivity. PART V - LEGAL INSTRUIENTS AND AUTHORITY 54. The draft Loan Agreement between the Bank and the Bank for Agricul- ture and Food Industry of Romania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, the report of the Committee pro- vided for in Article III, Section 4(iii) of the Articles of Agreement and the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. The special features of the loan documents are described above.  - 16 - 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOnIENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments January 15, 1975 Washington, D.C.  ARNEX I Page 1 of 2 pages O3UNTRY DATA - ROMANIA ARKA POPULATIDN ENSI.Y 237,500 kzz 20.70 illion (mid-1972) - .. ~~~~~~~Per kes2of ...abl. land SOCIAL IMDICATORS Reference Coutries Romania ugoslaevia Italy W. German-ny 1960 0_ 1970 19 7 0 1 RNP PER CAPITA U5$ (ATLAS RASIS) /1 330 /a 811J lb 3 /b 1,960 Is 3,310 /b DEMARAPHII C 761i0Tbirth rntn (per thoussnd) 19 1!9.6 /nf Ld.2 Z 16.3It 11.1 /h Crude donth rnts (per thousand) 9 9.5 /oP /i /b 3.6 50 It.B T Infant mortality rats (par thousand tem births) 75 42.14 a 103.2 50 2.3 L214 '3.3 3 f Life expctancy at birth (years) 66 70 67 71.1 69.4 Oroan reproductioe rate. g o.6 /c 1.3 1.3 0.9 1.2 Population growth rate r 1.1 1.0 /d 1o0 /d 0.7 /d 0.9 /d Population grnuth rate - urban 4/s 37T 37? 0.7 7g Ags structure (percent) 0-1h4 28 /c 26 28 24.3 23.0 /sf 15-64 65 Tc 65 6f4 64.9 63.6 Tsf 65 and ove 7 7Y 9 5 10.8 13.1, 76-f Deoesdeooy ratio /, 0.5 7_ 0.7 o.8 /i 1.0 /I 0. 4- Uribe population us Percent of total 32 Is 4L 35 If 95 /ah 38 ljk PFcily plasisg: Na of orceptore uocluti-e (thouc.) - - - aI No. of use, (% of married enee) EmPLO1Memr Total labr force (thousande) 9,600 /1 9,900 /1 9,600 19,600 /n 26,800 10,0f Percentege em.ployed in agricuLture 66 71 49 71 52 17 8.2 7/o,f Per.entage eoosployod 0 0 8 3 0.8 7ni f INCOME DISTRIBUTION Fercent of octie..l income received by highest 5% .e 15 /o,P Percent of cetiosal incows ros-i-ed by highest 20% * .. 42 /p .. Peroent of netitoe in .oce received by lowest 20% * 7 7.. Pero6nt of national income received by lowest 40% .. .. 19 7 PISTEIBUTION OF LAND OWNERSRIP % saned by top 10% of swer. % 0aeed by sarLlent 10% Of of ns RNALTH AND NUTRITION Population per phynician 740 /q 8140 /I 1,010 550 580 Population per n-nsing pernon 300 200 370 /r 470 /I 350 PFpulaAen pen hospital bed 11I0 120 180 90 90 Per sapite celerin supply ae 5 of requireeents 0 110 110 125 /0 121 /t 120 /t Per capita protein nupply, total (graen per day) 50 82 82 92 71 88 T7 83 7T Ofe hich, asi,sl sod pulse 24 28 29 71 142 7 56 714 Death rate 1-4 years /7 5Ic 3 /1 2.67 1.0o 0.9 75 EDUCATION AdJusted /8 primary sobol esncflanet ratio 97 109 94 107 132 Adjested 78 secondary echool ..rollnent ratio 42 62 45 59 61 Tears of nchooLing provided, first end secod level 12 32-14 12 13 12-15 V'catiocal enrollment as 5 of sec. school enrell.ent 54 Ia 58 Io 72 26 48 Adult literacy rete 5 .. .. 85 91 /v,. 99 /j,X.a ROUSIN3 Average No. of personn per roos (urban) .. 1.3 Iy 4.1 Is am 1.1 Iv 0.7 ic Percent of occupied units aitbhut piped eater .. 8 yab 37 Tc . 38 T, nb I f Accens to eleotricity (as S of total pepelatics) .. 149 /yd 98 7d 96 loa 99 7. Percent of rural populatio connected te electricity .. 27 /ye - CONSUMPTPION RLdio receiver- per 1000 population 109 10S/b 171 It 23 /h 329/0 Passenger cane pe. DlOC poplatioe 35 190 220 Electric pe-er csneueptien (kch p.c.) ii. 1,615 1,288 2,262 4.067 Nenoprint connueption p.c. kg per year 2.1 2.8 14.2/b 5.5 /1 16.55L Neins: Figures refer either to the latest periods or to ancoaot of environrental tempersatr, bndy asighta, an the latest yeana. Latent periods refer in prisciple ti dietributias by age and aex sf untioes1 populatians. the y-mrs 1956-60 or 1966-70, the l.te3t years in prin- /6 Protein etmodarde (rquirewente) fPr aLl countries as eatab- ciplr ta 1960 and 1970. Iiehid by UtSI Eoonsmie Raenarch Sr-iem provide for a wimnLuw /I The Per Cpits OGNP entiiate i