Romania - Rasova - Varderosa Irrigation and Agricultural Development Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-1809-RO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIO21AL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY OF ROMANIA WITH THE GUARANTEE OF THE: SOCIALIST REPUBLIC OF ROMANIA FOR THE RASOVA-VEDEROASA IRRIGATION AND AGRICULTURAL DEVELOPMENT PROJECT April 7, 1976 This document has a restrictd distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS 1. Official Rate lei 4.97 = US$ 1.00 lei 1.00 = US$ 0.20 2. Tourist Rate lei 12.00 = US$ 1.00 lei 1.00 = US$ 0.08 Conversion Rate for Traded Goods lei 20.00 = US$ 1.00 lei 1.00 = US$ 0.05 FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY 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 OF ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA, FOR THE RASOVA-VEDEROASA IRRIGATION AND AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bank for Agriculture and Food Industry of Romania, with the guarantee of the Socialist Republic of Romania, for the equivalent of US$60 million, to help finance an irrigation and agricultural development 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 US$20.5 million equivalent of the proceeds of the loan to cooperatives and State Farms, at an average interest rate of no less than 3 percent per annum, for terms of up to 25 years includ- ing up to 5 years of grace. PART I - THE ECONOMY 2. The latest economic memorandum for Romania (818a-RO), was circulated to the Executive Directors on December 29, 1975. Country social and economic 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- cluded 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 in- vestment 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 has just begun its 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 Centra]s, which coordinate and supervise activities within a com- mon branch or industry without being directly engaged in production. Enterprises This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - subordinate to the Centrals are responsible for production which is controlled through a system of physical production targets. Production enterprises gen- erally are not authorized to engage directly in foreign trade and rely on spe- cialized foreign trade enterprises for this purpose. In agriculture, large State farms and cooperatives are the predominant units of production. 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 consid- erable efforts to mobilize domestic resources for development and to maintain a high rate of capital formation. In the Five-Year Plan just completed, plan- ned and actual investment rates of around 30 percent of GNP were the norm. As a consequence, consumption has been restrained, and the development of the consumer goods industry has been less strongly emphasized than that of heavy industry. In 1974, heavy industry (led by machine tools, chemicals and ferrous metallurgy) accounted for about 58 percent of industrial production. 6. As a result of this strategy, a marked change has been achieved in the structure of Romania's economy. Rapid industrial growth, which over the last decade has averaged more than 13 percent per annum, has expanded the share of the labor force employed in industry (including power and construc- tion) from about 14 percent in 1950 to 38 percent in 1974. During the same period, the share of labor force engaged in agriculture declined from 74 per- cent to around 40 percent; and while agricultural output almost tripled, its share in GNP amounted to only 16 percent in 1974. 7. Notwithstanding the emphasis on industrialization, more than half of the population (about 57 percent in 1974) still lives in rural areas and agriculture remains a key sector of the economy. Apart from supplying food, industrial inputs and the residual labor increment for industrial growth (which requires an expansion in agricultural productivity), the sector also supplies about 27 percent 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 agriculture. The maintenance of the industria]. development pro- grain, 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. A preliminary estimate for GNP per capita in 1974 is US$910 (as presented in the 1975 World Bank Atlas). 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 seasonal labor surplus, mainly in agriculture. Income distribution is also relatively equal. In 1974, average monthly wages were  - 3 - 1,663 lei (over $80 equivalent) per month, up 6.4 percent over the previous year. Almost 80 percent of all monthly wages in 1972 were within the range of 900-2,000 lei and less than 6 percent were under 900 lei. Prices for essen- tial 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 usecd only for accounting purposes. The rate used for tourist transactions is ]ei 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 clevelopment, 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 tD 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 promote the growth of foreign trade and technical- economic cooperation the Romanian Government has concluded trade and coopera- tion agreements with a wide range of countries. In this context also, Romania has made positive efforts to expand its multilateral external relations and to pursue full cooperation with the international agencies, including UN, UNCTAD, UNESCO, FAO, UNIDO and GATT. 12. Measures aimed at continued improvement of the management system include a reorganization (involving a reduction from 217 to 95) in the number of industrial Centrals and a concentration of their planning, control and research functions. Th,s pursuit of purely physical goals in production and trade, while still an important element in the system, is being supplemented by much greater emphasis on productive and investment efficiency, product quality, pricing and foreign competitiveness. To eliminate wasteful invest- ment and production expienditures, a Superior Court of Financial Control has been established, among other things, to oversee a new system of financial control.  --4 - 13. Foreign trade has expanded quite rapidly in recent years both in volume and in regional diversity. There has also been a tendency to move away from trade on a bilateral barter basis toward trade involving multilat- eral payments. During the period 1971-74, total foreign trade grew at about 34 percent per annum in current prices. As a result of both rapid world price increases and expanded volume of trade, the total value of trade grew by 38 percent in 1974, with exports growing by 32 percent to US$4.9 billion, and imports increasing by about 47 percent to US$5.1 billion. About 59 percent of 1974 trade was with non-socialist countries, compared with 50 percent in the previous year, a trend largely explained by the more rapid price increases in non-socialist trade. Overall trade deficits have generally remained small, but in 1974 there was an overall trade deficit of $191 million, while the deficit with the convertible area was over $300 million. In recent years imports from East European Socialist countries have been slightly lower than Romania's exports to that region. In Romania's trade with Western industrial- ized countries, on the other hand, exports typically have been much less than imports. These deficits have sometimes been increased by deficits on the in- visibles account with Western countries. 14. The structure of Romania's trade with the developed market econo- mies remains essentially unfavorable. Raw materials and agricultural commod- ities, both of which are subject to unstable price and production conditions, comprise about 60 percent of total exports to these countries. At the same time imports from these countries are largely of machines and equipment and other manufactures. Because of the present low level of reserves, any instab- ility in export performance, as frequently arises from shortfalls in agricul- ture (paragraph 7 above), tends to place the import program in immediate jeopardy, and shortages of convertible currencies would persist even if Romania were to have recurring over<all trade surpluses. 15. During July 1975, serious floods caused extensive economic and other damage in Romania with losses to agriculture, transport and national industrial enterprises estimated at about US$800 million. The floods also damaged about 250 local industrial enterprises, housing, and community facil- ities in 1,300 villages and 65 towns which were flooded. It will take at least one or two years to complete rehabilitation of flood damages and several years for the economy to recover fuLly. 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 in- flows of convertible currency through medium- and long-term loans were US$1,055 million in 1974, consisting mostly of financial and suppliers' credits with relatively short repayment periods. This gross inflow represented a net inflow of some $643 million after accounting for the country's repayment obligations.  - 5 - 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. In November 1975, six joint venture agreements had been signed, involving direct foreign investment of about US$10 to 15 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, 7rance and the Federal Republic of Germany, respec- tively. Romania succeeded recently in securing a US$60 million, eight-year loan from Kuwait as part of a general cooperation agreement. In addition, Romania has access to non--convertible currency investment credits from the International Investment Bank, Moscow, from which it has borrowed US$30 mil- lion so far. 18. As it stands, therefore, Romania's access to long-term finance in convertible currencies is still very restricted. The IBRD is the only major source of long-term development finance, though Romania is making efforts to improve its access to the major financial markets. The Bank's presence on a significant scale would have a positive influence in this regard, and the Bank might serve as a catalyst for involving other lenders in Romania. 'rhis could serve both to increase the total amount of Bank-sponsored funds available to Romania and to build outside confidence in the country, thereby enhancing in the long-term its independent access to the world's financial markets. Prospects 19. The new Five-Year Plan (1976-80) reflects Romania's continued strategy of rapid growth. Investment rates of 33 to 34 percent of national income are to be maintained, and the major thrust is in industry. While light industry is to continue its growth, the heavy industry branches are to grow more rapidly. Continued emphasis is to be maintained on foreign trade and cooperation, with the aim of securing a continued transfer of technology needed for the modernization and diversification of Romanian industry. Greater emphasis than in the 1971-75 Plan is to be given to developing the infrastructure in agriculture, particularly with regard to irrigation and drainage and the plans for fertilizer production envisage an increase in supply sufficient to double the 1974 per hectare application by 1980. 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. 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 con- tinuing improvements in the efficiency of economic planning and coordination  - 6 - 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 cooperation with industrialized countries and international organizations. Creditworthiness 22. As of December 1975, Roinania's total medium and long-term external debt amounted to US$2,653 million. Most of these debts (US$2,578 million) were denominated in convertible currencies, the major creditor countries be- ing Germany, France, UK and Italy. While the total debt does not appear ex- cessive in relation to the volume and growth of external trade, average maturi- ties are relatively short and convertible debt service payments are estimated to be in the order of US$550 million a year during 1975-76. The convertible debt service ratio was approximately 16 percent in 1975. 23. The organization of economic activity in Romania and the pursuit of a development strategy involving high investment/saving rates and rapid income 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 export earnings rose from US$830 million in 1971 to US$2,619 million in 1974. The preferential trade status accorded to Romania by the European Communities in June 1973 should facilitate the further expansion of such exports as should the recent grant- ing 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 present export and debt management policies it can be ex- pected that the debt service ratio will stabilize during the second half of the 1970's. The country's present outward-looking posture, the success of both its domestic growth and foreign trade policies, and its potential for continued development, all support the judgment that Romania is creditworthy for substantial Bank lending. 24. 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. With regard to the settlement of claims against Romania's pre-war debt, the final payments of U.S. claims began in September and will be completed by October 1976 based upon agreements reached in May 1975. Set- tlement of British claims proved more difficult, but a major breakthrough was achieved during the visit of Prime Minister Wilson to Bucharest in September 1975 and a final agreement was signed in January 1976.  - 7 - PART II - BANK GROUP OPERATIONS IN ROMANIA 25. The proposed loan would be the Bank's ninth to Romania. Together with a loan of US$50 million for the Riul Mare-Retezat hydropower project, also being proposed for consideration by the Executive Directors, it would bring total Bank commitments to Romania to US$460 million. Disbursements under previous loans were slow during 1975, but this situation has improved in recent months. The awarding of contracts under several of the loans is expected to result in continued improvement in disbursements during 1976. Annex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of February 29, 1975. 26. Foreign exchange, especially in convertible currencies, continues to be a major constraint and one of the major objectives of Bank lending continues to be to help alleviate the country's shortage of foreign exchange by providing long-term external cap:ital and by financing projects which will expand foreign exchange earnings or savings. Bank lending also aims at supporting the Govern- ment's efforts to introduce new industrial technologies to improve the quality of products and production efficiency, to reduce production costs and to pro- vide for necessary electric power development. Market aspects and marketing, especially for export goods, are also emphasized. Special attention is given to agriculture which is heavily dependent upon favorable weather and where productivity levels are still comparatively low. 27. With regard to the prospects for future lending, a further project for irrigation and possibilities of financing projects for agricultural credit, anti-friction bearings and heavy machinery are under consideration. 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 except those for agriculture and flood recovery 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 conducting industrial and transportation project appraisal training courses for Romanian officials in Belgrade in October 1973 and in Bucharest in January/ February 1975, November/December 1975 and January/February 1976. This assist- ance will be continued and expanded to include a course in agricultural project appraisal. 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  - 8 - will provide a substantial net addition to the inflow of convertible currency finance, and may set a pattern for obtaining longer term convertible finance from other sources. The disbursed IBRD debt outstanding to the Bank is ex- pected to constitute about 11 percent of Romania's total projected convertible currency debt in 1980; the Bank's share in Romania's debt service payments in 1980 would be about 4 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. In 1974, agriculture accounted for 16 percent of national income and 40 percent of the labor force (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 these, 8.5 million hectares are in Wallachia, the region composed of the southern plains of the Danube Valley. Approximately 65 percent of all agricultural land is used for grain produc- tion (mainly maize and wheat), while industrial crops (mainly sunflowers) are the next most important. Vegetables are also produced, often in large-scale commercial green houses, for domestic consumption and export. Livestock accounts for 42 percent of agricultural production, and the national live- stock population in 1975 consisted of 6.0 million cattle, 14.4 million sheep and goats, 8.6 million pigs and 67.7 million poultry. 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 achieved in the first four years of the 1971-75 Plan period were 14.4 percent of total for that period, and the proportion of investment for agriculture in the 1976-80 Plan period is ex- pected to be 11.6 percent. However, the average annual investment in agri- culture during the 1976-80 Plan period is expected to increase by about 50 percent in absolute terms above the average investments from 1971 to 1974. In addition to investment, the Government has also taken other measures, includ- ing institutional reforms, price incentives, and production targets and de- livery schedules to stimulate agricultural production. Growth achieved in agricultural production has been slower than in other sectors and has been characterized by sharp year-to-year variations. The major problems of Romanian agriculture are the instability of its output and low productivity. The pro- posed 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 their impact. Excessive precipitation and flooding during planting and harvest seasons, and inadequate rainfall during summer growing seasons, have resulted  - 9 - in year to year fluctuations in national output of the order of 10 to 20 per- cent. Fluctuations oi production in particular regions can be even greater. 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 percent of agricultural investment in the 1971-75 Five-Year Plan was for land reclamation, irrigation and drainage; the compar- able figure for the 1976-80 Five-Year Plan is about 20 percent, reflecting the increasing need for relatively more investment to make productive use of irrigation facilities already established. Since 1965, total irrigated land has been increased from about 0.2 million hectares to 1.2 million hectares in 1974; and, the relative reduction in the share of the agricultural budget al- located for irrigation notwithstanding, another 750,000 to one million hectares are expected to be brought under irrigation in the next five years. This re- flects 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-fourth of that of industry. In addition to improving its irrigation infrastructure, Romania is also taking measures to improve productivity through upgrading t:he 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 own 30 percent and cultivate 14 percent of agri- cultural land, received about 42 percent of on-farm investment in the 1971-75 Plan period. 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. Seventy 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 the 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 370 such farms employing about 245,000 people and cultivating 2.1 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 for 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 determining the use of their profits, a portion of which are remitted to the State treasury.  - 10 - 36. There are about 4,420 agricultural production cooperatives with about 3.4 million 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 family frequently works (on a full- or part-time basis) in the cooperative, and some family members are employed outside of the cooperatives. Cooperators are also allowed to farm about 0.15 hectares each in and around their villages for their personal use, and they are allowed to own livestock. Production on personal plots is always intensive, and pro- duce is either self-consumed or sold to consumption cooperatives. A coopera- tive is managed by a General Assembly of cooperators and its elected Presi- dent; it reports to the District Director General for Agriculture, the local representative of the Ministry of Agriculture. 37. Agricultural production has been increased much more by State farms than by cooperatives in the last decade. Gross agricultural production of State farms rose by 61 percent and that of cooperatives by 29 percent from 1965 to 1973. Although land area in different kinds of production units has not changed significantly since 1962, use of fertilizer and other inputs has been increased much more on State farms than on cooperatives. Investments per hectare also have been much larger on State farms than on cooperatives. In 1973, 22 percent of the arable land on State farms was irrigated compared with only 11 percent on cooperatives. Crop yields per ha average 30 to 40 percent higher on State farms than cooperatives. It appears that marginal productiv- ity of capital inputs has on average been higher on cooperatives than on State farms. In any event, there are opportunities for increasing productivity of cooperatives greatly by expanding the irrigated area and using additional capital inputs to apply improved technology. 38. 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). 39. At the national level, the state institution in the agricultural sector is the Ministry of Agriculture and Food Industry. It plays a major role in preparing the Five-Year Plan for the sector and is the supervisory institu- tion 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. Marketing is organized nationally under 13 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 40. The Borrower i:or 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 in 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 investments in State farms and enterprises. BAFI also receives interest-free funds from the State budget for investment lending to coopera- tives 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. BAFI also provides short-term credit to, and maintains settlement accounts for, all cooperative and State agricul- tural enterprises; it also acts as fiscal agent for the Government for collec- tion 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 includes a provision (Section 2.02) that the Guarantor shall provide all necessary funds for the implementa- tion and operation of the project. PART IV - THE PROJECT Project History 41. The project is part of Romania's 1976-80 Plan for increasing irri- gated land and was proposed for Bank financing in June 1974. Feasibility studies for the irrigation and agricultural development components of the project were submitted to the Bank in December 1974 and March 1975 respec- tively, and the project was appraised in June 1975. Negotiations were held in Washington in February 1976. The Romanian delegation was led by Mr. Ion Rusinaru, President of BAFI, and included representatives of the Ministry of Agriculture and Food Industry and of BAFI. Project Description 42. The objective Df the project is to increase and stabilize production in a relatively poor region west of Constanta and south-east of the Danube in south-eastern Romania (see map), and in the process to increase farm incomes in the area. This would be accomplished through construction of Et large irri- gation system and provision for related agricultural development investments.  - 12 - About 65,400 hectares of previously rainfed agricultural plateau would be irri- gated by water pumped from the lower Danube by five main and four secondary pumping stations. About 19,500 hectares of State farms and about 45,900 hec- tares cultivated by cooperatives would receive water distributed through about 170 kilometers of concrete-lined canals to 39 pressure pumping stations sup- plying water to the pipe distribution networks for 31,400 hectares of sprinkler and 34,000 hectares of furrow irrigation. Also included in the irrigation component of the project would be portable on-farm sprinkler and furrow irriga- tion equipment, land leveling works on about 13,000 hectares, soil erosion control works on 7,000 hectares and in steep ravines draining the project area, and power transmission lines and transformers serving the pumping stations. 43. The agricultural development component of the project would include farm machinery and implements for production of maize, wheat, sunflower, alfalfa, soybean and other annual crops. It would also establish a 450 hectare vine- yard and a 350 hectare orchard. Several interrelated investments in livestock development would include a feedmill with annual capacity of 140,000 tons, a 44,000 ton silo, 11 dairy farms of 830 cows each and two beef fattening farms with annual meat production of 1,000 tons each. About half of the dairy cows imported under the project would be used to upgrade stock in dairy farms in eight judets (counties) in eastern Romania. Also included in the project would be the provision of a potable water supply to about 15,000 people lo- cated in 17 communities in the project area. Annex III contains a loan and project summary; the Appraisal Report (No. 1112-RO, dated March 29, 1976) is being distributed separately to the Executive Directors. Project Execution and Operation 44. The Mlinistry of Agriculture and Food Industry (MAIA), through its various departments and trusts, would be responsible for planning, construc- tion and supervision of all project activities. Planning and design of irri- gation works would be carried out by the Institute for Land Reclamation Studies and Design (ISPIF), and construction by the Construction Trust for Land Reclamation Works (TCIF). Both organizations are part of the Ministry's Department of Land Reclamation and Agricultural Construction (DIFCA). The irri- gation works would be operated and maintained by the Ministry's Central for Operation of Land Reclamation Works (CELIF). The farm development components of the project would be planned and implemented by beneficiary enterprises and cooperatives under the general supervision of the Directorate General of Plan- ning and Development (DGPD) of the Ministry of Agriculture and Food Industry. BAFI would serve as financing agency for all project works under the arrange- ments noted in paragraph 40 above. All agencies are competent to carry out the proposed works satisfactorily. Project Cost and Financing 45. The estimated total cost of the project is US$130.5 million, with an estimated foreign exchange component of US$41.7 million or 32 percent of total costs. The cost estimates are based on unit rates of work that are prevalent in Romania under the system of regulated prices of materials and wages. Cost of equipment, materials and livestock, which are likely to be  - 13 - procured from foreign suppliers, has been estimated at the international prices prevailing in early 1976. Because detailed engineering has already been carried out for the irrigation component, which constitutes about 75 percent of the project cost, physical contingencies have been provided at 7-1/2 percent. Price contingencies on foreign exchange cost are based on annual increases of 8 percent from 1977 to 1979 and 7 percent thereafter. Due to near zero infla- tion under the Romanian system of administered prices, price contingencies on local costs are one percent. 46. The proposed Bank loan of US$60 million would finance the full for- eign costs of the project plus US$10.8 million of interest during construction on the Bank loan and US$7.5 million of local costs. Paragraph 28 above dis- cusses the need to provide some local cost financing for projects in Romania which have high economic priority but relatively small foreign exchange com- ponents. The remaining project costs would be financed by the Government budget, loans from the Bank for Agriculture and Food Industry (BAFI) and cooperatives. Lending and Relending Arrangements 47. The proposed loan would be made to BAFI with the guarantee of the Socialist Republic of Romania, and would be for a term of 20 years, including five years grace, at an interest rate of 8-1/2 percent per annum. It is the normal practice in Romania for the State to invest virtually all funds in agricultural infrastruct:ure projects through BAFI without formal lending agreements and to recover investment costs from project beneficiaries through a variety of financing mechanisms including the incomes of State farms, taxes, pricing mechanisms for t:raded commodities, and payments by cooperatives for mechanization services. For this reason, BAFI would act as a channel for, but would not actually relerid, US$28.7 million (all figures include contingencies) of the Bank loan for thE irrigation system, and funds would be made available to BAFI from the State budget for repayment of the Bank loan. The agricultural development component of the project, to which US$20.5 million of the proposed loan would be allocated, would be financed by BAFI through agricultural credit subloans to cooperatives at an effective rate of interest of 3 percent per annum, and to State farms and enterprises at 2 percent during the construction period and 4 percent thereafter (i.e. at an average rate of no less than 3 percent throughout the entire life of the subloan). As in the earlier cases of the Sadova-Corabia and Flood Recovery projects, these may be considered real rates of interest because of the near-zero rate of inflation in Romania. Since BAFI receives most of its funding from the government budget at very low rates, its overall borrowing cost is below 1 percent which allows it to operate profitably despite the negative spread on the Bank loan. Subloans for more than Lei 20 million (US$1 million) would be subject to IBRD review and approval. Audit 48. BAFI would keep separate accounts for all project expenditures and its transactions are subject to continuous control by internal auditors ap- pointed by the Ministry of Finance and to an annual audit by inspectors from  - 14 - the Court of Superior Control which reports directly to the Council of Minis- ters and the President. BAFI's accounting system and the audit of its trans- actions are satisfactory and BAFI's audited operating and financing results 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 49. Major equipment and materials for the irrigation system totalling about US$38 million (including contingencies) would be procured following international competitive bidding in accordance with Bank Guidelines. A margin of preference for local equipment manufacturers of 15 percent or customs duty, whichever is lower, is proposed. It is expected that about 40 percent of the contracts would be won by foreign suppliers. Since Romanian currency is not freely convertible, international tender documents would state a conversion rate of US$1 = 20 Lei to be used for bid comparison. An esti- mated US$13 million (including contingencies) of heifers to be imported for the project would be procured on the basis of price quotations from suppliers in at least three countries. The estimated total value of procurement follow- ing international tendering in accordance with the Bank's Guidelines would thus be about US$51 million. Disbursements 50. The Bank loan would be disbursed for (i) 100 percent of the foreign expenditures for imported equipment, materials and dairy cows, (ii) 100 percent of the ex-factory expenditures for goods procured locally through international competitive bidding, (iii) 25 percent of BAFI loans disbursed, and (iv) interest during construction. Submission of a certificate evidencing necessary govern- ment approvals of agricultural credit subprojects would be a condition of dis- bursement for each of the subprojects under the agricultural development compo- nent of the project. International Water Rights 51. The normal water flow in the Danube at Rasova declines from about 13,000 cubic meters per second (m3/sec) during the spring (March through May) to about 6,000 m3/sec in July, and continues to decline to as low as 2,000 m3/sec in October and November. The project would utilize water pumped from the Danube at a peak rate of 49 m3/sec in July when the Danube flow is seldom less than 6,000 m3/sec. This rate of extraction would be less than one percent of normal flow, and the project does not present any practical problem on the use of the international waters of the river. Romania has advised the Bank (i) that it has undertaken towards the other riparian states to maintain the Danube in navigable condition with a minimum flow of 935 m3/sec, (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 obligations 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.  - 15 - Environment and Healthl 52. The project area is free of endemic diseases such as malaria and bilharzia. The project would not adversely affect the environment or public health; in fact the project would improve the health of about one-half of the project area's population by providing piped drinking water supply to replace less sanitary open wells currently in use. Construction of irrigation works, with variable water flows in the canals, and a piped distribution network would not promote mosquito breeding and spread of malaria. Benefits 53. The project would contribute to Romania's overall effort to increase and stabilize agricultural production through investment in irrigation and re- lated farm development. Without the project, production under rainfed agri- culture could be expected to fluctuate by as much as 20 percent from year to year with an annual average gross production of about US$8.5 million, and the project area could be expected to remain a relatively undeveloped region of the country. The project is expected to increase the gross value output to a relatively stable US$32.5 million annually, an increase of 280 percent. This would be achieved through (i) a 17 percent increase in cropping intensity made possible by irrigation, (ii) increases in crop yields ranging from 100 to 240 percent, and (iii) a shift of cropping patterns to emphasize production of higher yielding crops such as maize, soybeans and sugar beets. As noted in paragraph 47 above, project costs would be recovered through a variety of direct and indirect mechanisms. As far as the irrigation component is con- cerned, the anticipated direct and indirect collections from the beneficiaries (which include inter alia water charges; profits of State farms and enterprises credited to the budget; incremental income tax on increased personal income of members of cooperatives; contributions of State farms and enterprises to a depreciation fund) would recover, over the component's assumed Life of 40 years, its full operation and maintenance cost and about 55 percent of the investment cost at 3 percent interest. Farm development investments would be financed through BAFI loans, which would be recovered from the beneficiary entities in accordance with the agreed terms of these loans. Net foreign exchange earnings as a result of the project are estimated at US$10 million annually. Six thou- sand members of cooperatives and their families, totalling 13,000 people, would be the principal beneficiaries of the project. Their incomes per family member are expected to increase on average from the present US$190 to US$400 after the farm develop.ment components of the project achieve full production in 1984. Average monthly wages of the cooperators are presently only about half the national average monthly wage. In addition, the project would pro- vide piped drinking water supply to 15,000 people in 17 communit:ies in the project area. The economic rate of return of the irrigation component includ- ing orchards and vineyards (about 66 percent of total cost), is 17.9 percent. The return for dairy farms (about 13 percent of total cost) is estimated at 14.2 percent, beef fattening farms (about 1 percent of total cost) 20.2 percent, and the feedmill (about 4 percent of total cost) 10.8 percent. The economic rate of return of the project as a whole is estimated at 17.4 percent.  - 16 - PART V - LEGAL INSTRUMENTS 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 features of the Loan and Guarantee Agree- ments of special interest are referred to in paragraphs 40 and 50 of this report. Approval by the Council of Ministers of the technical and economic indicators for the irrigation components of the project (i.e. authorization to begin execution of this part of the project) would be a condition of effectiveness of the proposed loan (Section 7.01 of the Loan Agreement). 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments April 7, 1976 Washington, D.C.  ANNVEX I Page 1 of 3 pages ROMANIA. REP OF - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KH2)------------------------- --------------- ~~~~~ROM4ANIA, REP OF REFERENCE COUNTRIES (1970) TOTAL 237.5 HOST RECENT AGRIC. ].b.0 1960 1970 ESTIMATE YUGOSLAVIA ITALY GERMANY, FED REP. Opa. GNP PER CAPITA (USS) n.a.5 nl.a. 690. 0 7 40.0 1 900.0 4 2 10. 0 POPULA4TION A ND V IT AL S TA4TIS5T IC S POPULATION (RIO-YR. MILLION) 18 .4 2 0. 3 20. 8 20. 4 5 3.6 6 0.1' POPULATION DENSITY PER SQUARE ER. 7 7.0 85.0 80.0 80.0 178.0 2 40,0 PER SQUARE' KM. AGREIC. LAND .... 14 0.C 202 .0 ..- VITAL STATISTICS CRUDE BIRTH RATE PER THOUSAND 19.0 21.1 18.2 17.8 16.8 13.4 CRUDE DEATH RATE PER THOUSAND 9. 0 9. 5 9 .8 8 .9 9 .7 12. 1 INFANT MORTALITY RATE (/THOU) 75 .0 4 9. 4 3 8. 1 55.5 2 9. 6 2 3. 6 LIFE EXPECIANCY AT BIRTH TYRS) 66.0 68.6 69.1 67.0/a 7 1 .9 7 0 .3 GROSS REPRODUCTION RATE 0.6/a 0.9 1.3 1.3 1.3 1.2 POPULATION GOWOTH RATE (%) TOT AL 1.2 1.0 1 .0 1.I 0. 8 1 .0 URBAN 3. 8 3. 4 3. 0 3 .3 URBAN POPULATION (C OF TOTAL) 32.0 4 1. 0 4 2. 0 3 8.7 51 .5 2 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 27.9/s 2 5.9 25. 2 2 6 .9 2 4.64 2 3.2 IS5 TO 64 YL ARS 66.977 6 5.5 65.6 65 .1 65. 2 6 3. 6 65 YEARS AND OVER .z,7-a 8. 6 9. 2 8.0 10.4 1 3.2 AGE DEPENDENCY R AT 10 0.5 0. 5 0.5 0 .5 0. 5 0. 6 ECJNOMIC DEPENDENCY RATIO 0.7/b 0.7/a 0. 7 /a 0.7/A 0.-9 /a 0 .9 FAMILY PLANNING- ACCEPTORS (CUMULATIVE. THOU) USERS IX OF MARRIED WOMEN) . .. EMPLOYMENT TOTAL 14t900 FORCE (THOUSAND) 9 600.0 9 90 0.0 IOICO.0/b 9 600 .0 1960 0. 0 2650 0. 0 LABOR FORCE ON AGRICULTURE (1) 66.0 4 9.0 h0.0/b 5 2.0 19 .0 8. 9 UNEMPLOYED AZ OF LABOR FORCE) . . 8 .0 3 .1 0.7 INCOME DISTRIBUT ION I OF PRIVATE INCOME REC-D 8Y- HIGHEST SI OF POPULATION . 6. 3/b 5.2 /b,c 15. 1/c HIGHEST 201 OF POPULATION . .. 41.4 7 LO.IEST 201 OF POPULATION . 24. 3/b 23.0 /b,c 6.6 7- LOWEST 400 OF POPULATION . . 18.4/c DISTRIBUTION OF LAND OWNERSHIP I OWNED AY TOP 101 OF OANERS 15 .. .d % OANED BY SMALLEST 10Z OANERS 8.. . 697d- HEALTH AND NUTRITION POPULAIION PER aHYSICIAN 740.0/C 680.0 630.0 1010. 0 5 50 .0 5 80. 0 POOULATION PER NURSING PERSON 300. 0 200.0 .. 10 .0 470.0/b 35 0. 0 PO-ULAT ION PER HOSPITAL BED 1640 .0 12 0.0 120.0 /d 18 0.0 9 g. 077 90. 0 PER CAPITA SUPPLY OF CALORIES (0 OF REVUIRERENTSI 105.0 108.0 118.0 124.0 126.0 121.0 PROTEIN (GRAAMS PER DAY) 81.0 9 2. 0 9 0. 0 9 2 .0 1o00.0 8 8. 0 ,OF AHICH ANIMAL AND PULSE 24 .0 2 8.0 .2 9 .0 4 2.0 5 6.0 DEATH RATE C/THOU) AGES 1-4 4.9/s 3.0 . 2.5 1.0 0.9 EDUCA TION ADJUSTED ENRULLMENT RATIO 'RIMARA SCHOOL. 917. 0 10 9.0 lOO.0/e 9 4.0 107.0 1 32. 0 SECONDARY SCHOOL 4 2 .0 6 2.0 6 r, oT 4 5.0 59 .0 61. I0 YEARS OF SCHUOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12-13 12-13 12 .0 1 3.0 1 5. 0 VOCATIONAL ENROLLMENT (I OF SECONDARY) 5 4.0 5A.0/c 5 9. 0 7 2. 0 2 6.0 468.0 ADULT LITERACY RATE CCI 8 9. 0 98.0/b,f 85.0 . 99. 0 4-OUSING P-E-R BINS PER ROOM (AVERAGE) . 1.3/i .. 0.7/s OCCUPIED DWELLINGS WITHOUT P IPED WATER (C) . 88.0/dec . .. 0.3/b ACCESS TO ELECTRICITY (I OF ALL UWELLINGS) . 4 9. 0/d ... . 100.0 RURAL DWELLINGS CONNECTED TOD ELECTR IC ITY () .. 2 7.0/d . CONSUMPTION RADIO RECEIVERS (PER THOU POP) 1 09 .0 1 52. 0 14 8. 0 16 3.0 21 8.0 318. 0 PASSENGER CARS (PER THOU POP) . . 3 5.0 1 90. 0 2 23. 0 ELECTRICITY (KWH/YR PER CAP) 614.0 1615.0 1911.0 1288.0 2266.0 4128.0 NEWSPRINT (RG/VR PER CAP) 2. 1 2. 6 3 .0 4 .3 5. 3 1 7. 5