Romania - Ialomita - Calmatui Irrigation Project

W CJUD~ C gDocument of The World Bank IFOIR OFFXCIAL USE ONLY Report No. P-1986-RO REPORT AND RECOMMENDATION OF TIHE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRIJCTION 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 IALOMITA-CALMATUI IRRIGATION PROJECT Februarv 2, 1977 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 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 GLOSSARY OF ABBREVIATIONS BAFI Bank for Agriculture and Food Industry  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 IALOMITA-CALMATUI IRRIGATION 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 project. The loan would have a term of 15 years, including three years of grace, with interest at 8.5 percent per annum. PART I - THE ECONOMY 2. The latest economic memorandum for Romania (818a-RO) was circulated to the Executive Directors on December 29, 1975, and an agricultural sector survey (953a-RO) was circulated on November 15, 1976. Country social and eco- nomic data are given in Annex I. Updated economic information is based on the findings of a special economic mission in March 1976 and a basic economic mission in October/November 1976. 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 elabo- rated within a five-year time frame, each year having a separate Annual Plan. The country began its latest Five-Year Plan in January, 1976. 4. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a common branch or industry without being directly engaged in production. Enter- prises subordinate to the Centrals are responsible for production which is controlled through a system of physical production targets. Production enter- prises generally are not authorized to engage directly in foreign trade and rely on specialized foreign trade enterprises for this purpose. In agricul- ture, large State farms and cooperatives are the predominant units of pro- duction. This document has a restricted distribution and may be used by recipients only in the perfonmance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorzation.  - 2 - 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, engineering products 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 1971-75 Five-Year Plan, planned 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 1975, heavy industry (led by engineering and metal working, chemicals and ferrous metallurgy) accounted for about 55 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 approximately 40 percent in 1975. During the same period, the share of labor force engaged in agriculture declined from 74 percent to around 38 percent; and while agricultural output almost tripled, its share in GNP amounted to only 15 percent in 1975. 7. Notwithstanding the emphasis on industrialization, more than half of the population (about 57 percent in 1975) 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 one quarter 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 industrial development program, therefore, is dependent on the performance of the agricultural sector. 8. Romania's population growth is around one 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 nine percent per annum, implying a growth of about eight percent per annum of per capita GNP. It is estimated that GNP per capita in 1975 was US$1,300 based upon official national income information and using the World Bank Atlas methodology. 9. The organization of production in both the urban sector and in agri- culture is such that all labor is employed and there is no open unemployment. There is, however, some seasonal labor surplus, mainly in agriculture. Income distribution is also relatively equal. In 1975, average monthly wages were 1,813 lei (over $90 equivalent) up nine percent over the previous year. About 87 percent of all monthly wages in 1974 were within the range of 1,300-2,500 lei. Four percent were under 1,300 lei and about nine percent were above 2,500 lei. Prices for essential consumer goods and services such as basic foodstuffs, rents and urban transport are relatively low and most social  services, notably education and health care, are provided without charge. Con- tinuous efforts are made to increase the standard of living. Romania also pursues an active regional policy which has sought to bring a balanced develop- ment of both human and natural resources to all parts of the country. 10. The official exchange rate of lei 4.97 per US$1 is used only for accounting purposes. The rate used for tourist transactions is lei 12 per US$1, having been revalued from a rate of lei 14.38 per US$1 in October 1974. Beginning in July 1973, a trading rate of lei 20 per US$1 has been used to convert the prices of all traded goods; this rate is considered representa- tive of the average cost of convertible foreign exchange. 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 calcula- tion in the appraisal. Recent Developments 11. Since the National Party Conference of 1967, which set the stage for major qualitative advances in Romania's economic and social development, there have been important new emphases in Romania's economic management. Measures were taken to improve the institutional basis of planning (e.g. by creating centrals to assist in plan administration), to increase the effi- ciency 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 Government has concluded trade and cooperation agree- ments with a wide range of countries. In this context, Romania has also made positive efforts to expand its multilateral external relations and to pursue full cooperation with international agencies, including UN, UNCTAD, UNESCO, FAO, UNIDO, GATT and more recently, the IMF and the Bank. 12. Measures aimed at continued improvement of the management system include a reorganization (involving a reduction from 217 to 95 in number) of industrial centrals and a concentration of their planning, control and research functions. The pursuit of purely physical goals in production and trade, while still an important element in the system, is being supplemented by much greater emphasis on productive and investment efficiency, product quality, pricing and foreign competitiveness. To eliminate wasteful invest- ment and production expenditure's, a Superior Court of Financial Control has been established, among other things, to oversee a new system of financial control. 13. Foreign trade has expanded 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 basis toward trade involving multilateral payments. During 1971-75, total foreign trade grew at approximately 18 percent per  - 4 - annum in current prices. In 1975, however, after the very rapid growth in the value of trade of 33 percent in 1974, trade grew by only 6.6 percent, with exports increasing by 9.6 percent to US$5.34 billion and imports by 3.9 percent also to $5.34 billion. This slower increase in 1975 was explained chiefly by the floods of July 1975 which resulted in a smaller exportable surplus of agricultural goods and necessitated cancellation of some imports. About 54 percent of 1975 trade was with the convertible currency area. Over- all trade deficits have generally remained small; in 1975 the deficit was only US$135 million, while the deficit with the convertible currency area was US$260 million. In recent years, imports from eastern European socialist countries have been slightly lower than Romania's exports to that region. In Romania's trade with western industrialised countries, on the other hand, ex- ports have typically been considerably less than imports. These deficits have generally been increased by deficits on the invisibles account with western countries. The target for 1976, however, is to attain a trade surplus and indications as of the end of September 1976 were that this target would be met. 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 insta- bility in export performance, as frequently arises from shortfalls in agricul- ture (paragraph 7 above), tends to place the import program in immediate jeopardy. 15. Preliminary estimates for 1976 indicate that all major targets of the 1976 Annual Plan have been met. National income is estimated to have risen by 10.5 percent, gross industrial production increased by about 11 percent, and gross agricultural production was a record, exceeding the flood affected 1975 level by 16 percent. Improved performance is also expected in the external trade sector, where preliminary nine month estimates indicate that improvements in the country's trade balance were ahead of plan targets for that period. In November 1976, Romania's National Assembly approved the country's 1977 Annual Plan and Budget, which calls for continued high rates of growth. National income is expected to rise by 11.3 percent and gross industrial production by 10.5 percent. The Plan provides a range of 1.9- 13.6 percent growth for the gross farm output. This wide range is provided because of the uncertain impact climatic conditions might have on production. Investments in the national economy are expected to increase by 16.7 percent and total foreign trade volume by 15.5 percent. 16. A campaign to increase efficiency in the utilization of existing capacities and to effect significant economies in the consumption of raw materials and intermediate goods is being implemented throughout the economy. Targets have been established to reduce by 30 percent the previously antici- pated construction and assembly costs of industrial projects between 1976-80.  - 5 - Substantial, but as yet unspecified savings have also been prescribed for most other industrial inputs during 1976-80, while maintaining the global produc- tion targets as set in the Five Year Plan. External Assistance 17. 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 bor- rowing abroad and by mounting a major effort to expand exports and tourism. Gross inflows of convertible currency through medium- and long-term loans were US$810 million in 1975, consisting mostly of financial and suppliers' credits with relatively short repayment periods. This gross inflow repre- sented a net inflow of some $440 million after accounting for the country's repayment obligations. 18. 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 or saving industries. As of November 1976, six joint venture agreements had been signed, involving direct foreign invest- ment of about US$10 to 15 million. Romania also receives medium-term trade credits from U.S. Eximbank and trades under ECGD, COFACE, and HERMIES credit guarantees with the United Kingdom, France and the Federal Republic of Germany, respectively. Romania succeeded 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. 19. 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 such 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 might serve as a catalyst for involving other lenders in Romania. This could serve both to increase the total amount of Bank-sponsored funds available to Romania and to build outside confidence in the country, thereby enhancing in the long-term its independent access to the world's financial markets. Prospects 20. The 1976-80 Five-Year Plan reflects Romania's continued strategy of rapid growth. Investment rates of some 30 percent of GNP are to be maintained, and the major thrust is in industry. The plan targets are impressive. National income is expected to grow at 10-11 percent per annum and gross industrial out- put by 10.2-11.2 percent per annum, with more rapid growth in heavy industry. Continued emphasis is to be maintained on foreign trade which is expected to double in real terms, with the aim of securing a continued transfer of tech- nology needed for the modernization and diversification of Romanian industry.  - 6 - 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 application rates by 1980. 21. Romania has good potential for further economic growth. Endowed with important natural resources (fuels, some minerals, timber, rich soils and sources of irrigation water for agriculture, and a favorable climate for agri- culture and tourism) and located conveniently with respect to its major inter- national markets in the East and West, the country has built a broad indus- trial infrastructure (power, metallurgy, 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. In order for Romania to attain its growth objectives, however, it will have to rely on a major expansion of exports of manufactured goods in order to finance an increasing dependence on imported raw materials and fuel. 22. Economic growth and structural change call for the introduction of new technologies, improvements in the quality of products, more efficient 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 and further refinements in economic management. To keep up with these changes and requirements, large programs of education and manpower training have been mounted, investments in scientific and technological research have been emphasized, and efforts are being made to strengthen technical cooperation with industrialized countries and international organizations. Creditworthiness 23. As of June 1976, Romania's total medium and long-term external debt amounted to US$2,900 million. Most of these debts (US$2,864 million) were denominated in convertible currencies, the major creditor countries being Germany, France, UK and Italy. While the total debt does not appear excessive in relation to the volume and growth of external trade, average maturities are relatively short and convertible debt service payments are estimated to be in the order of US$550 million a year during 1975-76. The convertible debt service ratio was approximately 17 percent in 1975. 24. The organization of economic activity in Romania, the pursuit of a development strategy involving high investment and saving rates, and rapid income growth ensure Romania's capacity to service external debt with domestic resources converted into foreign exchange for that purpose. Moreover, the country's major efforts to expand exports (particularly to convertible cur- rency areas) are increasing the foreign exchange available for debt service. Convertible export earnings rose from US$830 million in 1971 to US$2,839 million in 1975, and are expected to be about US$3,250 million in 1976. The preferential trade status accorded to Romania by the European Communities  - 7 - in June 1973 should facilitate in the long run the further expansion of such exports as should the granting of most favored nation status by the U.S. In 1973, the Government also restricted the use of short-term credit facilities from western suppliers in an effort to improve the structure of the country's external debt. Because of unusually high scheduled repayments, the convertible debt service ratio is expected to be 21 percent in 1978, 19 percent in 1979 and 24 percent in 1980. However, assuming a continuation of present export and debt management policies we estimate that the debt service ratio will peak in 1980 and decline thereafter to about 15 percent by 1985. 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. 25. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. Settlements which were still under discussion at that time concerned claims in the United Kingdom and in the United States. With regard to the settlement of these claims, the final payments of U.S. claims began in September 1975 and were completed in October 1976 based upon agreements reached in May 1975. Settlement of British claims proved more difficult, but a final agreement was signed in January 1976. The Bank has also been informed recently of certain Swedish claims concerning public loans from the pre-war period, nationalized Swedish property and other interests such as concessions granted to Swedish companies before the Second World War. The eleventh and most recent meeting to discuss these claims was held in Bucharest in October 1976 and further discussions are planned at a date to be established through diplomatic channels. PART II - BANK GROUP OPERATIONS IN ROMANIA 26. The proposed loan would be the Bank's tenth to Romania and would bring total Bank commitments to Romania to US$520 million. Disbursements under the Bank's initial loans were slow during 1975, but this situation improved considerably during 1976. Annex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of December 31, 1976. 27. Foreign exchange, especially in convertible currencies, continues to be a major constraint and one of the major objectives of Bank lending con- tinues to be to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which will ex- pand foreign exchange earnings or savings. Bank lending also aims at sup- porting the Government's efforts to introduce new industrial technologies to improve the quality of products and production efficiency, to reduce produc- tion costs and to provide for necessary electric power development. Market  - 8 - 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. 28. A number of projects are under consideration for future lending. Projects for bearings production, polyester fibers, glass fibers and pork production and processing have been appraised and are expected to provide the basis for loan proposals during 1977. In addition, projects for further irriga- tion works, grain storage and poultry production, chemical and tire plants, and seamless pipes have been proposed, and further power projects will also be considered in context of a sector investment study currently being prepared by the Government. 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, January/February 1976 and October/ November 1976. Additional courses, including one in agricultural project appraisal, are planned. 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 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 12 percent of Romania's total projected convert- ible currency debt in 1980; the Bank's share in Romania's debt service pay- ments in 1980 would be about 3 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 1975, agriculture accounted for 15 percent of national income and 38 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 63 percent of all arable land is used for grain production (mainly maize and wheat), while industrial crops (mainly sunflower) are the next most important. Vegetables are also produced, often in large-scale com- mercial greenhouses, for domestic consumption and export. Livestock accounts for a relatively high 42 percent of agricultural production.  -9- 32. Investment in agriculture as a percentage of total investment in the economy has lagged behind that in other sectors with 12.7 percent of actual total investment in the 1966-70 plan period and 14.1 percent in the 1971-75 plan period. The proportion of investment for agriculture in the 1976-80 plan period is expected to be 11.6 percent of the total. However, the average annual investment in agriculture during the 1976-80 plah period is expected to increase by about 50 percent in absolute terms above the average investments from 1971 to 1975. In addition to investment, the Government has also taken other measures, including institutional reforms, price incentives, and pro- duction targets and delivery schedules to stimulate agricultural production. Growth achieved in agricultural production has been slower than in other sec- tors and has been characterized by year-to-year variations. The major problems of Romanian agriculture are the instability of its output and low productivity. The proposed project would support improvements in both of these areas. The Need for Irrigation Infrastructure 33. Instability in agricultural production results from vulnerability to erratic weather conditions and the lack of infrastructure to mitigate their impact. Excessive precipitation and flooding during planting and harvest sea- sons, and inadequate rainfall during summer growing seasons, have resulted in year to year fluctuations in national output of the order of 10 to 20 percent. Fluctuations of 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 a relative decline in infrastructure investment and increasing emphasis on investments to make productive use of irrigation facilities already estab- lished. Since 1965, total irrigated land has been increased from about 0.2 million hectares to 1.5 million hectares in 1975; and, the relative reduction in the share of the agricultural budget allocated for irrigation notwithstand- ing, another 1.1 million hectares are expected to be brought under irrigation during the 1976-80 plan period. This continued emphasis on irrigation re- flects the high priority which is being given to reducing vulnerability to weather and to stabilizing production in agriculture. Execution of two earlier Bank-financed projects in irrigation is proceeding satisfactorily (see Annex II), and the proposed project would continue Bank support in this subsector. Agricultural Productivity 34. While some productivity gains have been made in recent years, agri- cultural productivity per worker remains less than one-third of that of indus- try. In addition to improving its irrigation infrastructure, Romania is also taking measures to improve productivity through upgrading the quality of farm mechanization, increases in the supply and utilization of fertilizers, and the promotion of agro-industrial enterprises to provide processing and marketing outlets for increased farm production. Steps are also being taken to reduce inequality between State farms and cooperatives in access to farm  - 10 - 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. Eighty 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 were 390 such farms in 1975 employing about 252,000 people and cultivating 2.1 million hectares of agricultural land. Workers on the farms are employed on salaries which are fixed by law but may also receive bonuses for exceptional performance. The state farms are gene- rally well managed by a director (usually an agricultural engineer) who is ap- pointed by the Director General for State Farms of the Ministry of Agricul- ture and is responsible to a workers' council. The Ministry of Agriculture 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. 36. In 1975 there were 4,400 agricultural production cooperatives with about 3.4 million member families and cultivating about 9.0 million hectares. Workers in cooperatives are guaranteed a minimum salary, which is lower than the salaries of their counterparts on state farms by about 20 percent. Sala- ries of cooperators may be supplemented with the cooperator's shares of profits in excess of plan targets. 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 produce is either self-consumed or sold to consumption cooperatives to supplement other income of the cooperators. A cooperative is managed by a General Assembly of cooperators and its elected President; it reports to the District Director General for Agriculture, the local represen- tative 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 1975, 22.6 percent of the arable land on State farms was irrigated compared with only 13.7 percent on cooperatives. Crop yields per ha average 20 to 30  - 11 - percent higher on state farms than cooperatives. However, it appears that marginal productivity of capital inputs has on average been higher on coop- eratives than on state farms and that there are opportunities for greatly increasing productivity of cooperatives 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 (16 percent of production), meat (13 percent of production), milk (20 percent of produc- tion), eggs (14 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 implementation. 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 respon- sible for processing and marketing specified commodities. Each central obtains produce at the district level and allocates it among domestic retail, process- ing, storage and export channels. A foreign trade company is responsible for the exports of each central. The Borrower 40. The Borrower for the proposed loan would be the Bank for Agricul- ture and Food Industry (BAFI), which is the Government's specialized agency for financing projects in agriculture, irrigation and food processing. BAFI was established in 1968 as a channel for, and administrator of, all invest- ment funds provided under the State plan for the agricultural sector. Finan- cing in agriculture had previously been done by a department of the National Bank of Romania. BAFI is involved in all phases of project appraisal, execu- tion and supervision, and it has a large technical and economic staff located in Bucharest, in 39 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 in some cases State Farms) and repays the Government as it re- ceives repayments of the sub-loans. BAFI has thorough review and approval procedures for all investment projects. In addition to BAFI's review, all agricultural investments for more than Lei 10,000,000 (US$500,000) are re- viewed 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 agricultural enterprises; it also acts as fiscal agent for the Government for collection of state revenues from these  - 12 - enterprises. As the Government's channel for investment financing in agricul- ture, BAFI's primary source of funds is the State Budget; the Guarantee Agreement therefore includes a provision (Section 2.02) that the Guarantor shall provide all necessary funds for the implementation and operation of the project. PART IV - I'HE PROJECT 41. The project is part of Romania's 1976-80 Plan for increasing irri- gated land and was proposed for Bank financing in September 1974. A feasibil- ity study for the project was submitted to the Bank in January 1976 and the project was appraised in April 1976. Negotiations were held in Washington in November and December 1976. The Romanian delegation was led by H.E. Nicolae Nicolae, Ambassador to the United States, and included representatives of BAFI and of the Ministry of Agriculture and Food Industry. Project Description 42. The objectives of the project are to increase and stabilize agricul- tural production in the judets (counties) of Ialomita and Braila 120 kilo- meters northeast of Bucharest and west of the Danube in eastern Romania (see map) and to increase labor productivity. This would be accomplished through construction of a 148,500 hectare irrigation system and related facilities. Irrigation water would be pumped from the lower Danube by a floating pumping station and water would be further lifted and distributed through the canal system by seven fixed pumping stations. About 28,000 hectares of State farms and about 120,500 hectares cultivated by cooperatives would receive water distributed through concrete-lined canals to 115 pressure pumping stations. The pressure pumping stations would supply water to distribution networks of buried pipes for sprinkler and furrow irrigation. Also included in the project would be portable on-farm sprinkler and furrow irrigation equipment, surface drainage works to serve 82,350 hectares, tile drainage for 14,400 hectares, erosion control works on 44,700 hectares, land leveling of 40,000 hectares, reclamation of 2,650 hectares of saline land and drainage of 2,500 hectares of depressions, power lines serving the irrigation system, operation and maintenance equipment, and farm machinery. Annex III contains a loan and project summary; the Appraisal Report (No. 1228-RO, dated January 10, 1977) is being distributed separately to the Executive Directors. Project Execution and Operation 43. The Ministry 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 irrigation 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  - 13 - irrigation works would be operated and maintained by the Ministry's Central for Operation of Land Reclamation Works (CELIF). BAFI would serve as financ- ing agency for all project works under the arrangements noted in paragraph 39 above. All agencies are competent to carry out the proposed works satisfac- torily. Project Cost and Financing 44. The estimated total cost of the project is US$195.0 million, with an estimated foreign exchange component of US$44.6 million (excluding $15.4 million of interest during construction on the Bank loan). 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. The cost of equipment and materials which are likely to be procured from foreign suppliers, has been estimated at the international prices expected to be prevailing at the end of 1976. Because detailed engineering has already been carried out, physical contingencies have been provided at 7.5 percent for irrigation and drainage works and at 5 percent for other minor items. Price contingencies on foreign exchange cost are based on annual increases of 8 percent for 1977 to 1979, and 7 percent thereafter. Due to near zero inflation under the Romanian system of administered prices, annual price contingencies on local costs are one percent. 45. The proposed Bank loan of US$60 million would finance the foreign financing requirements of the project, including US$15.4 million of interest during construction and other charges on the loan; it would cover 29 percent of the total financing requirements of the project, including interest during construction on the Bank loan. The remaining project costs would be financed by the Government budget (US$109.8 million), loans from the Bank for Agricul- ture and Food Industry (US$28.6 million), and cooperatives (US$12.0 million). 46. The proposed loan would be made to the Bank for Agriculture and Food Industry (BAFI) with the guarantee of the Socialist Republic of Romania, and would be for a term of 15 years, including three years grace, at an in- terest rate of 8.5 percent per annum. It is the normal practice in Romania for the State to invest virtually all funds in agricultural infrastructure projects through BAFI without formal lending agreements and to recover in- vestment costs from project beneficiaries through a variety of financing mechanisms including the incomes of state farms, taxes, pricing mechanisms for traded commodities, and payments by cooperatives for mechanization services. For this reason, BAFI would act as a channel for, but would not actually relend, the proceeds of the Bank loan, and funds would be made available to BAFI from the state budget for repayment of the Bank loan. With regard to on-farm irrigation for cooperatives, however, it is Romanian practice for BAFI to finance such investments from its own resources with agricultural credit subloans to the cooperatives at a rate of interest of 3 percent per annum; recovery of funds for these components of the project would be made through subloan repayment. As in the earlier cases of the Sadova-Corabia, Flood Recovery and Rasova-Vederoasa projects, this may be considered a real rate of  - 14 - 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 one percent which allows it to operate profit- ably despite the negative spread on the Bank loan. Audit 47. BAFI would keep separate accounts for all project expenditures and its transactions are subject to continuous control by internal auditors ap- pointed by the Ministry of Finance and to an annual audit by inspectors from 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 48. Although Romanian laws provide for international competitive bidding and for joint ventures involving foreign and domestic enterprises, in practice all irrigation works are constructed by Romanian Construction Trusts, which are experienced and familiar with local conditions, methods and regulations. Therefore, only procurement of equipment and materials equivalent in cost to the estimated direct and indirect foreign exchange cost of the project would be financed under the proposed loan. Items costing US$45 million including contingencies (Annex 7, table 1 of the Appraisal Report) would be procured following international advertising and competitive bidding in accordance with the Bank Guidelines. Romanian manufacturers would be allowed a margin of preference of 15 percent or the applicable custom duty, whichever is lower, but the application of the preference is not expected to significantly affect the outcome of bidding. It is expected that foreign suppliers would win con- tracts for most construction equipment (canal trimming and lining machines, tile laying machines, dewatering equipment and some motor scrapers) estimated to cost about US$6.5 million. Other items to be procured through interna- tional competitive bidding (estimated to cost US$38.5 million) are available domestically and, based on experience with previous Bank-financed projects, it is expected that Romanian manufacturers would be successful in bidding for these items. The remaining equipment and materials (estimated to cost US$41.3 million) would be procured under Romanian procedures and would not be eligible for disbursement under the proposed Bank loan. Disbursements 49. The Bank loan would be disbursed for (i) 100 percent of the foreign expenditures for imported equipment and materials procured through interna- tional competitive bidding, (ii) 100 percent of the ex-factory prices of goods manufactured locally and procured through international competitive bidding, and (iii) interest and other charges during construction until December 14, 1981.  - 15 - International Water Rights 50. There is no international agreement among the Danube river riparian states for the use of its water for irrigation but a convention exists for development of the river for mutual benefits, and for protection of navigation and water quality. The International Water Commission for the Danube, of which Romania is a member, is mainly concerned with schemes which may interfere with navigation and water quality. The maximum diversion for the project, in July, would amount to about two percent of the minimum river flow in that month. The Government has confirmed that diversions for the project would not reduce the Danube flow below the agreed minimum to sustain international navigation. There is, therefore, no reason to expect that the project would raise issues on the use of Danube waters, and no agreement of other riparians would be required. Environment and Health 51. The project area is free of endemic diseases such as malaria and bilharzia. The project would not adversely affect the environment or public health. 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. Some of the lakes in the project area have therapeutic qualities, but none of the waters draining from the project would flow into them. Fertilizer and salt draining from the project area are not expected to damage the quality of the Danube's waters. Benefits and Risks 52. 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 in the project area under rainfed agriculture could be expected to fluctuate from year to year with an annual average gross production of about US$28 million. The project is expected to increase the gross value of output to a relatively stable US$67.5 million annually (an increase of 142 percent). This would be achieved through (i) an increase in area available for production by three percent, (ii) a 10 percent increase in cropping intensity made possible by irrigation, and (iii) increases in the yields of various crops ranging from 55 to 150 percent. The benefits of stabilizing output have not been quantified but are considerable. The project would also reduce underemployment in the project area and would increase labor productivity by 250 percent. About 41,200 members of cooperatives and 16,200 employees of state farms would participate in the project. This group would not share directly in the benefits of the project, which accrue to the state, as their incomes are regulated to corre- spond with those of workers with similar skills elsewhere in the economy. Benefits to the project participants are indirect in the sense that they flow back to the population at large over a period of time through increases in public services and general compensation packages. It is expected that direct and indirect collections from beneficiaries (which include inter alia water  - 16 - charges, profits of state farms credited to the national budget, contribu- tions of state farms to a depreciation fund kept by BAFI, net returns to the government from investments in the development fund for cooperatives, repay- ment of loans to cooperatives for on-farm development and profits made by government trading companies buying output at relatively low domestic prices and exporting them at much higher world market prices) would enable recovery of all project investments. The economic rate of return of the project is estimated at 16.3 percent. The rate of return is relatively more sensitive to variations in project benefits than to changes in investment costs. If project benefits were reduced by 20 percent with costs unchanged, the rate of return would be 12 percent. 53. The risk of not attaining project benefits is low. Designs have been prepared in detail. The Government has satisfactory plans to supply the farms with the necessary complementary inputs and supporting agricultural services. Farm workers are receptive to new technology and would have ade- quate incentives to participate in the project. Anticipated crop yields are comparable to or lower than the average yields obtained from other irrigated areas in the region. The marketing system is well organized. Attainment of the project's objectives is therefore reasonably assured. 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. 55. A special condition of effectiveness of the loan is the approval by the Council of Ministers of the technical and economic indicators of the project (Section 7.01 of the Loan Agreement). This approval of detailed project parameters is normal under Romanian planning procedures and will provide the legal basis for financing and implementation of the project. 56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 17 - PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed loan Robert S. McNamara President Attachments February 2, 1977 Washington, D.C.   TA8LE 3A ANNEX I RONANIA, REP OF - SOCIAL INDICATORS DATA SHEET Pag=eof3 pgea LAND AREA (THOU KM2)