Romania - Brasov Bearings Project (Vol. 1 of 2) : The main report

Report No. 1381a-RO FILE COPY Romania: Appraisal of the Brasov Bearings Project (In Two Volumes) Volume 1: The Main Report May 10, 1977 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Romanian Lei and US Dollars. For all calculations, the following conversion rate has been used: US$1 = Lei 20 Lei 1 = US$0.05 Lei 1,000 US$50.00 WEIGHTS AND MEASURES All units are metric. 1 metric ton = 1,000 kilograms (kg) 1 metric ton = 2,204.6 pounds 1 kilometer (km) = 0.62 miles 1 meter (m) 3 39.3 inches 1 cubic meter (m') 35.32 cubic feet ABBREVIATIONS AND ACRONYMS IB - Banca de Investitti (Investment Bank) NB - Banca Nationala a Republicii Socialiste Romania (National Bank) CIROA, the Central- Industrial Central for Bearings and Assembly Components The Enterprise, Brasov - Brasov Bearings Enterprise The Design Center - Design and Research Center for Bearings and Fasteners The Central Design Institute - Ministry of Machine Building Central Institute for Machine Tool Design TECHNOEXPORTIMPORT- Technoexportimport Foreign Trade Enterprise UZINEXPORTIMPORT - Uzinexportimport Foreign Trade Enterprise OCIR - Central Organization for Bearing Producers and Consumers OEM - Original Equipment Manufacturers ROMANIAN FISCAL YEAR January 1 - December 31 Industrial Projects Department May 1977  FOR OFFICIAL USE ONLY ROMANIA APPRAISAL OF THE BRASOV BEARINGS PROJECT TABLE OF CONTENTS VOLUME I Page No. SUMMARY AND CONCLUSIONS .............. ........ ........ i-iv I. INTRODUCTION ................................. . ........ 1 II. BEARINGS INDUSTRY AND ORGANIZATION ................ ....... I A. Brief Historical Background 1........................ 1 B. Industry Rationalization Program ....*........... O.. 3 C. Organization of Bearings Industry .... o...o ......... 3 III. THE ENTERPRISE ..o....o ........... o ....*... o..................... 0....O. 4 A. Plant Facilities ......... . . . . . .. ..... 4 B. Organization and Management ....o.o., ....oo ..... 4 C. Romanian Financial System ..5 ...... ...oo 5 D. Financial Performance - Brasov Enterprise . ......... 6 E. Investment Bank - The Borrower ...6....... ... .. 6 IV. MARKET AND MARKETING ....... ... .o ..... .o..... 7 A. Domestic Market - Recent Consumption and Production . 7 B. Domestic Market - Projected Demand and Supply ....... 8 C. Export Markets for Romanian Bearings ................ 10 D. Brasov Enterprise's Market ............s..* ......o. 11 E. Prices .... .................. ............. 13 F. Distribution System ....* ......... ...... ... . . 14 G. Export Marketing Organization ..o...................* 14 V. THE PROJECT .......... ................ o ................ 15 A. Scope and Objectives ........ . ..... . ..... o.o.o. .. ..... . 15 B. Project Components. ........ ............ 15 C. Quality Improvement . .. ........ . . . . . . . ......... .... . . . 17 D. Product Mix ......o .......... 17 E. Labor Needs and Training N.ed aTin..g...18..........o.. 18 F. Industrial Engineering ...o ...... ....o.. 19 G. Raw Materials and Utilities ..............O- ... 19 Ho Ecology .....oo..oo.......o.o...................... o..o..... oo.o. 20 This report has been prepared by Messrs. Kohli, O'Neil and Sinha of the Industrial Projects Department and Mr. Davey (consultant) based on missions to Romania in November 1975 and May and November 1976. 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 discloed without World Bank authorization.  -2- Page No. VI. PROJECT IMPLEMENTATION AND ORGANIZATION .... .............. 20 A. Implementation Schedule ..... ........................ 20 B. Project MIanagement ..... ............................. 20 VII. CAPITAL COST AND FINANCING PLAN .......................... 21 A. Project Costs ....................................... 21 B. Working Capital ..................................... 23 C. Financing Plan ........... .......................... 23 D. Procurement ......................................... 24 E. Allocation of Bank Loan and Disbursements ........... 24 VIII. FINANCIAL ANALYSIS ........................... ... 25 A. Revenue and Operating Cost Estimates from the Project 25 B. Financial Projections for the Enterprise ........... . 26 C. Major Risks, Breakeven Point and Financial Returns 27 D. Fiscal Impact Analysis .......... . . ................... . 28 E. Auditing and Reporting . ...................... . 28 IX. ECONOMIC ANALSIS ....... .................................. 29 A. Economic Benefits and Costs ........... .. ............ 29 B. Economic Rate of Return .. 29 C. Competitiveness .. 30 D. Foreign Exchange Savings and Other Economic Benefits. 30 X. AGREEMENTS ............................................... 31 MAP (IBRD 12361) Volume II List of Annexes Annexes 1 Description of Technical and Manufacturing Terms 2-1 History and Organization of Romanian Bearings Industry 2-2 A Brief Note on Production Processes at Brasov 2-3 Organization Structure of Romanian Bearings Industry 3-1 Organization Structure of Brasov Bearings Enterprise 3-2 Brasov Bearings Enterprise - Income Statements 1971 - 1975  - 3 - 3-3 Brasov Bearings Enterprise - Balance Sheet Statements 1971 - 1975 3-4 Brasov Bearings Enterprise - Sources and Application of Funds, 1971-75 4-1 Domestic Bearings Market and Marketing 4-2 Export Markets for Romanian Bearings 4-3 Brasov Bearings Enterprise - Sales by Volume, 1971-85 4-4 Brasov Bearings Enterprise - Domestic Sales by Sector (Volume), 1971-85 4-5 Brasov Bearings Enterprise - Export Sales to Market Economies, 1971-85 4-6 Pricing in Bearings Industry in Romania 5-1 Improvement of Product Quality 5-2 Project Description 5-3 Process Flow Chart - Hi-Volume Component 5-4 Process Layout - Hi-Volume Component 5-5 Process Flow Chart - Low-Volume Component 5-6 Plant Layout - Low-Volume Component 5-7 A Brief Analysis of Product Mix 5-8 Labor and Work Force 5-9 Training of Personnel 5-10 Environmental Aspects of the Project 6-1 Implementation Schedule 6-2 Planned Growth of Production 6-3 Expansion Project Implementation Organization 7-1 Capital Costs 7-2 Breakdown of Capital Costs between Project Components 7-3 Basis of Capital Cost Estimates 7-4 Wording Capital Requirement 7-5 Financing Plan 7-6 Disbursements and Debt Repayment Schedule 7-7 Procurement Arrangements 8-1 Revenue Estimates for the Project 8-2 Operating Cost Estimates for the Project 8-3 Projected Income Statements - Project Components 8-4 Projected Income Statements - Brasov Enterprise 8-5 Projected Working Capital Needs - Brasov Enterprise 8-6 Projected Balance Sheet Statements - Brasov Enterprise 8-7 Projected Sources/Applications of Funds - Brasov Enterprise 8-8 Breakeven Analysis - The Project 8-9 Rate of Return Calculations and Sensitivity Analysis for Project 8-10 Fiscal Impact of the Project 9-1 Calculation of Economic Costs and Benefits 9-2 Economic Rate of Return and Sensitivity Analysis   ROMANIA APPRAISAL OF THE BRASOV BEARINGS PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the expansion and modernization project of the Brasov Bearings Enterprise, Romania's largest and oldest bearings pro- ducer, which will increase production from 20.0 million bearings in 1976 to 33.5 million in 1985, expand its product mix and substantially improve product quality. The total cost of the project is estimated at Lei 1,755 million (US$88 million), including Lei 760 million (US$38 million) in direct and indirect foreign exchange costs. ii. Since the inception of the Brasov plant in 1949, the Romanian bearings industry has made rapid progress. In 1975, four domestic plants produced about 71 million bearings valued at approximately Lei 1.9 billion (US$95 million), of which nearly one-third were exported. Substantial changes have taken place in the industry since the late 1960's, when the Government invited Koyo Seiko, a major bearings manufacturer in Japan, to help establish large modern production facilities at Birlad and Alexandria. This was part of a major expansion and rationalization program designed to improve industry efficiency by introducing the latest production processes and increasing product specialization among different plants. After the completion of Brasov's proposed expansion and modernization, the basic objectives of this rationalization program will have been achieved. iii. Overall, the Romanian economy -- particularly the industrial sec- tor, which is the main consumer of bearings -- has been growing at a very high rate. As a result, consumption of bearings in Romania over the last 25 years has increased from 0.4 million pieces in 1950 to 46.6 million in 1975, representing an annual growth rate of 20%; though, since the early 1960s, growth has slowed somewhat to an average of between 12-15%. Demand for bearings in Romania is likely to continue expanding rapidly in the fore- seeable future, though somewhat slower than in the recent past due to the lower growth rates planned for the major consuming sectors during 1976-80. It is estimated that domestic consumption will reach 65 million pieces in 1980 and 85 million in 1985. In addition to meeting a major portion of this domestic demand, the industry is also planning to continue exporting. Exports are expected to reach 63 million pieces in 1985 (43% of total pro- duction) compared to the 35 million (47%) estimated for 1976. The increased domestic production would also help reduce the imports of special bearings from about 6.4 million pieces in 1975 to 4.0 million in 1985. iv. A major part of exports would be under medium- to long-term sales contracts with international bearings manufacturers and centrally planned economies. However, to meet its ambitious export targets, the industry will also have to substantially increase its own direct sales in market-oriented economies. Due to the present lower product quality and lack of appropriate marketing organization and customer service, Romanian bearings are currently  - ii - being sold in these markets at prices often substantially below those obtained by other established international bearings manufacturers. As product quality improves and Romanian bearings become better known to major consumers, the export prices realized are expected to increase. However, it is also apparent that the above export targets can be achieved at profitable prices only if the marketing arrangements abroad are strengthened. The Romanian authorities have recently become aware of the need to improve the export marketing organi- zation, and if this is indeed done as contemplated, the projected export sales to market economies are expected to be realized. v. The Brasov Enterprise produces the largest mix of bearings amongst Romanian producers. In 1976, it had planned to produce 28 million 1/ bearings, of which 21.7 million (78%) were expected to be sold locally to supply 40% of total domestic market needs. By 1984, Brasov plans to nearly double its output to 53 million bearings, including some sizes and types currently not produced locally. In that year, Brasov expects to place 75% of total sales domestically and export the balance, including 7.7 million pieces (14% of total sales) in Bank member countries. These sales targets are considered realistic, provided the anticipated improvements in the export marketing organization are carried out. vi. Like all other productive assets in the country, Brasov Enterprise is owned by the State and has limited autonomy and decision-making responsi- bilities outside production. It belongs to the Ministry of Machine Building and is under the control of the Industrial Central for Bearings and Assembly Components. Brasov's performance in recent years has been satisfactory and its management group is considered capable of effectively running the Enter- prise under the Romanian system. vii. The proposed project, designed to increase production capacity as well as to manufacture a wider range of bearings of significantly improved quality, consists of two distinct and technically separable components: (a) erection of one new, fully automated high volume production line (the Hi-Volume Component) with an annual capacity of 5.5 million bearings; and (b) modernization and expansion of low volume facilities (the Low-Volume Component) to reach a final capacity of 28.0 million pieces. An important feature of the latter component is to increase the production of tapered roller bearings from 2.6 million to 14.0 million pieces. Not part of the Bank financed project is the contemplated expansion of the production of needle, cardan and special bearings, which is being implemented and financed with assistance from Koyo Seiko. viii. The Bank has worked closely with the Romanian authorities in the formulation and improvement of the project scope and design. Since the submission of the original project proposal in the fall of 1975, important changes, aimed at improving the project's economic viability, have been made in the product mix, timing, market orientation, and export marketing arrange- ments. The Government has also agreed to create an industrial engineering 1/ Including needle and cardan bearings produced at facilities separate from project components.  - iii - group at Brasov to review the possibilities of further improving the proj- ect's product mix, labor productivity and working capital requirements, and to identify on a continuous basis opportunities to further enhance the effi- ciency of Brasov's operation. ix. Physical implementation of the project started in January 1977 and will be completed in December 1981, though some Low-Volume component facil- ities wouLd start production in the second half of 1979. The Brasov Enter- prise will have the primary responsibility for project design, engineering and implementation, and has on its staff personnel with prior experience in executing similar projects. Buildings, civil works and erection will be handled by the Enterprise for Erection of Special Industrial Buildings, as it did for the new bearings plants at Alexandria and Birlad. x. Total financing required for the project, including interest during construction, is estimated at Lei 1,861 million (US$93 million). The pro- posed Bank loan of US$38 million would cover the estimated total foreign exchange cost of the project. The remaining financing would be provided by the Government of Romania in the form of equity. The Bank loan is proposed to be extended to the Investment Bank. As in the case of other Bank projects in Romania, the Investment Bank would pass on the loan proceeds to the Enter- prise as state funds. However, annual depreciation and benefit remittances will have to be sufficient to equal notional payments of a 10% interest rate and principal on the Bank loan to the Investment Bank. xi. Due to the severe foreign exchange shortage in the country, the Romanian authorities have set a value limit on direct imports from Bank mem- ber countries to be permitted for the project of approximately US$26 million as compared to the Bank's estimate of about US$31.5 million. To ensure that the project remains technically acceptable and is executed along the lines presented to the Bank, two complementary agreements obtained are critical: (a) the equipment and division of sources of supply between local and im- ported equipment as approved by the Government and agreed with the Bank would remain essentially unchanged unless otherwise agreed to by the Bank; and (b) the Government would permit imports above the value limit set by it in case it becomes technically necessary in line with the assurance under (a) above. However, should, contrary to current Bank expectations, the cost of agreed imports be lower than the US$31.5 million being made avail- able under the Bank loan, a part of the loan equivalent to the resultant re- duction in the total foreign exchange cost of the project, will be cancelled. xii. The Bank loan would finance foreign currency cost of imported equip- ment, spares and services estimated to cost US$31.5 million, on which only foreign suppliers are expected to bid, and other equipment and machinery totalling US$6.5 million, on which both foreign and Romanian suppliers are likely to bid. Goods to be financed by the Bank will be procured under some 30 bid packages through international competitive bidding in conformity with Bank guidelines. xiii. The financial situation of the Enterprise is projected to remain satisfactory during and after project implementation, though under the  - iv - Romanian financial system the financial position of an enterprise is neither a true measure of its performance nor a factor in determining its viability. The economic return of the project is calculated at 14.0%, com- posed of an 18.9% return for the Hi-Volume Component and 11.2% for the Low- Volume Component. The project would annually save about US$49 million in foreign exchange, create some 500 new jobs, and also accrue substantial additional revenues to the national budget through depreciation and bene- fit remittances. It would significantly improve the quality of Romanian bearings, which in turn would help improve the quality and competitiveness of a wide range of industrial products manufactured for domestic and export markets. Finally, the project would make Romania more self-sufficient in bearings and introduce up-to-date technology in a critical industry. xiv. The risks associated with the project, which are considered moderate and acceptable, are basically two-fold. First, as part of the national policy, the project is expected to use some local equipment and components not cur- rently produced domestically. While most critical equipment is ear-marked for imports, there is always a modest risk that any equipment purchased from a relatively new producer may present some initial teething problems. Second, actual export volume (or prices) to market-oriented economies may be lower than projected. However, since such sales are planned to be less than 15% of the total by volume (and even less by value) and because domestic market forecasts are considered conservative, the market risk is moderate. xv. With the agreements and commitments obtained from the Government and the Investment Bank, the project is considered suitable for a Bank loan of US$38.0 million equivalent to the Investment Bank for a period of 13 years, including 3 years of grace, at 8.2% interest.  I. INTRODUCTION 1.01 This report appraises the expansion and modernization project of Brasov Bearings Enterprise (the Enterprise), the oldest and largest bearings manufacturer in Romania and the seat of the Industrial Central for Bearings and Assembly Components (CIROA). The plant is located at Brasov, the coun- try's fifth largest city, about 200 kilometers north of Bucharest (Map). The proposed project is designed to (a) increase capacity from 20.0 mil- lion bearings in 1976 to 33.5 million bearings in 1982 1/; (b) introduce up- to-date technology and modernize existing facilities; (c) expand the product mix; and (d) substantially improve product quality. 1.02 The project is part of the Government's overall development strategy to promote rapid expansion of domestic industry based on advanced technology and to minimize reliance on imports of critical products needed by the indus- trial sector. It would also allow the share of bearings exports to total production to remain at about the present level and earn critically needed foreign exchange. The total cost of the project is estimated at Lei 1,755 million (US$88 million), including Lei 760 million (US$38 million) in foreign exchange costs. The proposed Bank loan would be US$38 million, equivalent to the total foreign exchange cost of the project. 1.03 The project was identified in April 1975 by an industrial sector mission, and preappraised in December 1975, when the need to make certain modifications in the project scope, to improve its economic viability, became apparent. The Government presented a modified project, which substantially reduced the market risks, to the appraisal mission - comprising of Messrs. Kohli (Chief), O'Neil and Sinha of the Industrial Projects Department and Mr. Davey (consultant) - which visited Romania in April/May 1976. At the Bank's suggestion, the Government agreed to review the possibilities of further improving the project design to make the proposed investment economically more attractive. These changes were reviewed by the Bank in the field in November 1976 and in Washington in March 1977. 1.04 A brief description of bearings industry technical terms, as well as explanatory sketches of the principal types of bearings, are given in Annex 1. II. BEARINGS INDUSTRY AND ORGANIZATION A. Brief Historical Background 2.01 Romania enjoys some important advantages that have favored the devel- opment of a domestic bearings industry. First, the country has a large number of disciplined, well-trained and skilled workers available at a fraction of 1/ Aside from this project, another section of the plant, technically and physically separate from the project, is also expected to increase the capacity of needle, cardan and special bearings from 10.5 to 19.5 mil- lion units, making the total plant capacity 53 million units in 1985.  - 2 - the wages paid in developed countries, a crucial advantage in this formerly labor-intensive industry. Second, even though bearings are a precision product, the industry, until recently, used relatively simple and easily available machine tools. Third, in recent years the Romanian domestic market has been large enough to support volume production of selected bearings. And finally, due to the very large variety of products involved in this industry, inventory and/or production costs can be reduced to some extent if certainty of demand and supply can be assured, which the Romanian system of centralized planning can generally do. Thus, the country is well-placed to develop a competitive bearings industry, if the plants are properly designed and operated (para. 9.05). 2.02 The Romanian bearings industry started in 1949 and has made rapid progress. In 1975, it supplied about 86% of domestic bearings needs (47 million pieces), while also exporting 22 million bearings (31% of produc- tion) from four bearings plants; total domestic production totalled 71 mil- lion bearings valued at approximately Lei 1,900 million (US$95 million). This would make CIROA, the Central which controls all four bearings enter- prises (Brasov, Birlad, Alexandria and Ploiesti; Map IBRD 12361), one of the fifteen largest bearings producing companies in the world. The growth in the domestic production is summarized below: Romania: Buildup of Domestic Bearings Production, 1950-1976 (Million Pieces) 1950 1955 1960 1965 1970 1975 1976 (estimate) Brasov 0.2 1.1 3.2 11.0 20.8 28.5 27.8 Birlad - 0.6 1.3 2.5 3.7 25.4 25.8 Alexandria - - - - - 16.8 20.8 Ploiesti - - - - NA/a NA/a NA/a Total 0.2 1.7 4.5 13.5 24.5 70.7 74.4 /a Ploiesti annually produces large bearings totalling approx. 1,500 tons. 2.03 Initially, bearings were produced on a relatively small scale and with know-how largely developed in Romania. However, in the late 1960s the Government invited Koyo Seiko of Japan to help establish large modern pro- duction facilities at Birlad and Alexandria, which were commissioned in 1974. Similarly, in 1975 an agreement was signed with Rollway Bearings of the US for the production of large-sized bearings at Ploiesti. Finally, in early 1977, Brasov reached an agreement with Koyo Seiko for the supply of the advanced technology needed to produce needle and special bearings not yet manufactured locally. This policy of combining locally developed skills with foreign know-how and technology, wherever critically needed, is expected to provide also in future the necessary technological base for this fast expand- ing industry in Romania. A brief history of the Romanian bearing industry and its organization is given in Annex 2-1.  -3- B. Industry Rationalization Program 2.04 Major changes took place in the bearings industry during the 1971-75 Plan period and are continuing. Not only were two major and modern new facili- ties commissioned (Alexandria and Birlad), but the industry also launched a major production rationalization program to improve efficiency by (a) producing on new automated facilities large-volume bearings which were earlier produced by less efficient low-volume production techniques; (b) eliminating manufacture of most variations of the same basic bearings, and thus streamlining produc- tion processes; and (c) increasing specialization of different plants by type (groups) of bearings. A brief description of the production processes used by the industry, and the changes being introduced, is given in Annex 2-2. 2.05 The basic concepts behind the rationalization program are in line with the recent trends in the bearings industry elsewhere. Increased special- ization in production is generally considered as the key to achieving lower production costs and higher plant and labor productivity in bearings plants. With the proposed expansion and modernization of the Brasov plant and the opening of the new Ploiesti plant, most of the objectives of the rationaliza- tion program would have been achieved by 1982. But the full potential benefits of this program in terms of lower costs can be attained only after a review of Brasov's proposed product mix (para. 5.08). C. Organization of Bearings Industry 2.06 Like most other productive assets in the Romanian economy, the bear- ings industry is owned and managed by the State, which sets specific production and other targets and makes available the necessary resources to meet such tar- gets. 1/ The organization structure of the industry, depicted in Annex 2-3, has a three step hierarchy consisting of the Technical Ministries (nine in all) at the top, Industrial Centrals in the middle and the Enterprises at the bottom. The bearings industry belongs to the Ministry of Machine Building Industries, which - through 10 Centrals - controls about 150 enterprises that produce automobiles, trucks, earthmoving machinery, machine-tools, power generating equipment, and other heavy machinery in addition to engineering goods like bearings. The Ministry is responsible for the overall performance of the sub-sector, coordinates its activities with other parts of the economy, translates overall national economic objectives into specific financial and physical targets for individual industries, and approves specific investments. 2.07 Under the Vice Minister responsible for the planning and execution of new projects in the Ministry, are the Central Design Institute and the Construc- tion Trusts 2/ responsible respectively for engineering and construction. However, unlike most other cases, the Ministry of Machine Building does not have under 1/ See also Bank Report No. 492A-RO "Planning and the Planning System in Romania", dated October 11, 1974. 2/ Although, technically, all construction trusts belong to the Ministry of Industrial Constructors.  - 4 - its control the export and import of bearings; this function is exclusively handled by the TECHNOEXPORTIMPORT Enterprise, which belongs to the Ministry of Foreign Trade. This organizational separation of the foreign trade responsi- bilities from other aspects of the bearings industry is under review by the Romanian authorities (para. 4.23). 2.08 CIROA, the Central, is responsible for the production and domestic distribution of bearings and industrial fasteners. Under its jurisdiction, there are the four plants engaged in the production of bearings (para 2.02); five plants producing industrial fasteners; an enterprise responsible for domestic sales and distribution; and the Design and Research Center for Bear- ings and Fasteners. CIROA's basic role is in the planning area. It acts as a conduit between the Ministry and the enterprises and is responsible for co- ordination, preparation and monitoring of annual and five-year financial and production plans in the sub-sector. The General Managers of all enterprises report to CIROA's General Director, who chairs the executive committee of the Central composed of worker representatives and managers of the enterprises. III. THE ENTERPRISE A. Plant Facilities 3.01 Since its inception in 1949, Brasov has remained the largest bearings producer in Romania. After the plant was designated as Brasov Bearings Enter- prise in 1959, its production increased rapidly from 3.2 million pieces in 1960 to 28.5 million in 1975. The plant produces the largest mix of bearings amongst Romanian plants, including: (a) single row radial ball bearings; (b) double row radial axial and self-aligning ball bearings; (c) tapered roller bearings; (d) needle and cardan bearings; (e) plain bearings; and (f) other special bearings. Brasov sells part of its ball production and some forgings to the Birlad plant and is also responsible for producing certain specialized equipment needed by the Romanian bearings industry. B. Organization and Management 3.02 The Enterprise, like other industrial enterprises in Romania, is primarily a production-oriented organization with only limited autonomy and decision-making responsibilities outside production. While it has its own pro- duction plans (based on targets set by the Plan), prepares separate financial statements, and can borrow money from designated banks, any substantive changes in its organizational structure, investment programs, production targets, or in product mix must be approved by the Council of Ministers. 3.03 The Enterprise's organization structure is shown in Annex 3-1; it is adequate under Romanian conditions for fulfilling production functions. Tech- nically, the ultimate decision-making power lies with the Workers' General As- sembly, which normally meets twice a year to examine the operating results and review the performance of the Working People's Executive Committee. This  - 5 - Executive Committee, consisting of elected representatives of workers and also some key members of the management, is chaired by the General Director of the Enterprise who is normally appointed by the Minister of Machine Building. The General Director is responsible for the day-to-day operations and implementation of the decisions taken by the Executive Committee, through a team of key managers, such as for production and other technical matters, sales and procurement, as well as finance and accounting. 3.04 The Enterprise is well managed. The General Director has delegated most of the day-to-day operational responsibilities to the Technical Director, a dynamic and capable manager, who has been associated with the industry in various senior positions for more than 25 years. He is well versed in the technical developments in the industry outside Romania and is supported by a group of experienced and dedicated engineers. The management group is con- sidered capable of effectively running the Enterprise under the Romanian system. C. Romanian Financial System 3.05 The conventional financial analysis applied by the Bank to evaluate the performance of commercial organizations is of limited significance in the case of Romanian enterprises, which draw up their annual financial plans to meet the specified targets allocated to them; together these make up the so- called National Financial Plan. The National Financial Plan and the State Budget are submitted to the Council of Ministers for approval and then to the Grand National Assembly; after its approval they become law. The State also determines all prices. Therefore, as noted above, since the primary responsi- bility of Romanian enterprises is to meet the physical production targets set for them by higher authorities and make optimum use of resources provided to them and since the product mix and prices of all inputs and outputs are pre- determined, the financial profitability neither fully reflects an enterprise's efficiency nor is an important factor in investment decisions (see also Bank report No. 459-RO" Appraisal of Tecuci Fertilizer Project", dated May 21, 1974). The following financial analysis of the Enterprise should be viewed in this context.  - 6 - D. Financial Performance - Brasov Enterprise 3.06 The Enterprise's performance in the recent past has been satisfac- tory. Detailed financial statements are presented in Annexes 3-2, 3-3 and 3-4 and summarized below. Brasov Enterprise: Summary of Financial Statements 1971-1976 (In Million Lei) Year Ending December 31 1971 1972 1973 1974 1975 1976 (Estimate) Production (million units) 21.1 24.0 25.9 28.0 28.4 27.8 Sales Value of Production 631.7 739.3 798.7 842.5/a 853.0/a 1,103.0 Operating Expenses 529.7 589.3 616.2 690.0 760.4 940.4 Benefits (Profit before Tax) 102.0 150.0 182.5 152.5/a 92.6/a 162.6/a Benefits as % of Sales 16.1% 20.3% 22.8% 18.1% 10.9% 14.7% Working Capital 150.1 156.3 176.9 213.9 215.5 458.9 Gross Fixed Assets 991.5 1,125.9 1,231.8 1,325.7 1,356.2 1,600.6 Projects Under Construction 124.2 286.5 44.3 60.6 141.5 - Total Assets 960.2 1,188.6 1,064.0 1,156.0 1,347.0 1,413.0 State Funds for Investment 635.5 702.4 762.0 793.9 835.2 901.2 /a In mid-1974 the production price of bearings was temporarily reduced. It was again raised in Jan. 1976, about 15% above the pre-1974 level. 3.07 During the 1971-75 Plan period, the Enterprise's sales value in- creased by 32% and sales volume by 35%, while net profits (benefits) as a percentage of sales declined from 16.1% to 10.9%. However, this decline in financial profitability is due mainly to the Government's decision in mid-1974 to temporarily reduce the price of bearings by an average of 14.4% (para. 4.16). In case mid-1974 prices were still in effect, 1975 revenues would have been Lei 940 million (instead of Lei 853 million) and benefits 19.1% of sales (instead of 10.9%). 3.08 Brasov has a satisfactory financial structure considering the special characteristics of Romanian investment practices and the cash flow system. Like most Romanian enterprises, Brasov has incurred practically no long-term debt in recent years except for some medium-term credits extended by the Investment Bank for the financing of equipment for projects under construction. These credits are paid off, through the infusion of equivalent equity funds (State advances), as the plant is commissioned. As a result, at the end of 1975, Brasov had no long-term debt outstanding and "equity" accounted for about 78% of total assets. E. Investment Bank - The Borrower 3.09 The Investment Bank (IB) administers and controls all investment funds of the State Budget (except for agriculture and food processing) and acts as the channel for all sources of major domestic investment financing in industry. Recently, IB has also started to make credits on its own, though  - 7 - funds available for this purpose are still relatively small. The President of IB reports directly to the Minister of Finance who has comprehensive authority in the planning and financing of all projects. 3.10 The IB has wide-ranging responsibilities in the implementation of projects and plays an important role in project evaluation, procurement and execution. For all projects, IB reviews the techno-economic study before submission to the Council of Ministers for formal approval, and later ensures that the projects are executed accordingly. In the case of the proposed project, IB will review, with the assistance of Brasov and UZINEXPORTIMPORT, all orders for equipment before they are placed, will comment on any contract changes, and can impose penalties on defaulting parties. During the oper- ational phase of the project, IB's functions are limited to checking whether the enterprise is meeting the targets set in the Investment Plan. IB has no legal authority to bring its views to bear directly on the management of an enterprise. In practice, however, IB ccn recommend necessary operational actions to the Ministry of Finance, which, in turn, can act through the ministry concerned with the project. As in case of previous Bank loans to it, the Investment Bank has agreed to submit its properly audited financial reports to the Bank in an agreed form and withirn agreed dates. IV. MARKET AND MARKETING 4.01 In 1975, about 79% of Brasov's production was marketed in Romania and the balance exported to some 50 centrally planned economies and Bank member countries. After project completion, in 1985 about 75% of its produc- tion will be sold domestically and the balance 25% exported, including about 10% to COMECON countries as part of long term bilateral trade agreements. The recent developments and future prospects of the Romanian bearings industry's main markets are discussed in Annex 4-1 (domestic market) and Annex 4-2 (export markets). This chapter first discusses the overall domestic and export markets for Romanian bearings and then reviews Brasov's role and plans in these markets. A. Domestic Romanian Market - Recent Consumption and Production 4.02 Consumption of bearings in Romiania over the last 25 years increased from 0.44 million pieces in 1950 to 46.6 million pieces in 1975, representing an average annual growth rate of 20%. While consumption growth has slowed down somewhat since the early 1960's, it has still been averaging about 12-15% annually with only relatively minor fluctuations over the past fifteen years. Historically, over a third of bearings consumed locally had to be imported. However, with the commissioning of the major new production facilities at Birlad and Alexandria (paras. 2.02-2.03) in 1973 and 1974, domestic produc- tion has increased faster than consumption; this has not only made Romania more self-sufficient in bearings but also allowed it to more than triple exports, as shown in the table below:  - 8 - Romania: Bearings Market 1950 - 75 (Millions of Pieces) 1950 1955 1960 1965 1970 1971 1972 1973 1974 1975 Total Domestic Market 0.4 2.1 6.5 13.1 25.6 28.4 34.2 37.7 42.7 46.6 Domestic Production 0.2 1.7 4.5 13.5 24.5 26.1 28.3 31.1 50.2 70.7 Imports 0.5 0.7 3.0 4.8 9.1 11.6 13.8 14.6 10.1 6.4 Exports - - 0.3 4.5 7.4 6.8 7.1 7.3 13.9 21.6 Imports/Domestic Consump.68% 31% 46% 37% 36% 41% 40% 39% 24% 14% Exports/Domestic Prod. - - 7% 33% 30% 26% 25% 23% 28% 31% 4.03 The Romanian economy overall and, in particular, the industrial sector which is the main consumer of bearings, have recently shown a very high growth rate. The past development of demand for bearings by major consumers is detailed in Annex 4-1 and the following table compares the sectoral growth rate during 1950-75 with bearings consumption. Romania: Annual Growth Rate of Production in Major Bearing Consuming Sectors 1950 - 1975 1950-55 1955-60 1960-65 1965-70 1970-75 1950-75 Transp. incl. Tractors 39.0% 3.9% 6.8% 13.1% 12.0% 14.4% Equip. & Machine Tools NA 53.0% 11.2% 8.7% 14.4% 16.1% Electrical Equip. 12.9% 26.1% 19.2% 18.2% 14.1% 17.3% National Economy 14.0% 7.0% 9.0% 7.7% 11.3% 9.7% Bearings Consumption 37.0% 23.0% 15.6% 13.2% 12.7% 20.5% 4.04 The primary industrial bearings consumers in Romania, as in other countries, have been in the transportation sector, machine-tool and techno- logical equipment building sector and the electrical equipment manufacturing sector, all of which have historically experienced rapid growth thereby gen- erating an equally rapid growth in demand for bearings. B. Domestic Romanian Market - Projected Demand and Supply 4.05 A high growth in demand for bearings in Romania is likely to con- tinue in the foreseeable future, although below the rate achieved in 1970-75. This is due, during the 1976-80 period, to the lower planned growth rates of the Romanian economy in general and of the major bearings consuming sectors more specifically. CIROA's projections of the bearings market for 1976-85 are discussed in detail in Annex 4-1 and summarized below:  Romania: Projected Demand of Bearings 1975-85 (Millions of Pieces) Growth Rate 1975 1976 1977 1978 1979 1980 1985 1975-80 1980-85 (Actual) Est. - - - Projected - - - - - - Transp. incl. Tractors 14.5 15.6 16.0 17.0 18.0 17.6 22.1 4.0% 4.7% Machine Tools, Equip. 4.2 4.7 5.5 6.5 7.4 7.8 12.8 13.3% 10.2% Electrical 4.6 5.2 6.0 7.1 8.1 9.1 12.7 14.6% 6.9% Other OEM 11.6 14.0 14.3 14.2 13.0 15.6 18.7 5.9% 3.7% Total OEM 34.9 39.5 41.8 44.8 46.5 50.1 66.3 7.4% 5.8% Replacement 11.7 12.5 13.2 14.2 15.5 14.9 18.7 5.0% 4.6% Total Demand 46.6 52.0 55.0 59.0 62.0 65.0 85.0 6.9% 5.5% 4.06 The forecast indicates an average annual growth rate of 6.9% between 1975-80 and 5.5% during 1980-85, compared to 12.7% experienced during the last Plan period (1970-75). In Romania, consumption is more a function of State planning and allocation than of market and price consideration. Therefore, demand projections should be evaluated less on an extrapolation of historical consumption figures but primarily on an end-use analysis, taking into consid- eration plans approved for individual sectors and actual users of bearings. Such an analysis, detailed in Annex 4-1, indicates that the market growth projected in the above table may be overly conservative, if the national economy indeed grows at the rate specified in the 1976-80 Plan and visual- ized for 1981-1990. 4.07 Industry plans call for an increasing share of the total market to be supplied from domestic production with a parallel increase in exports as indicated by the table below. However if the actual domestic demand indeed turns out to be higher than projected by CIROA, as seems possible, then the surplus left for exports would be reduced. Romania: Projected Demand/Supply of Bearings 1975-1985 (Millions of Pieces) 1975 1976 1977 1978 1979 1980 1985 Actual Est. - - - Projected