Document of The World Bank FOR OFFICIAL USE ONLY Roort No. 5723 PROJECT PERFORMANCE AUDIT REPORT ROMANIA - OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) June 20, 1985 Operations Evaluation Department This document h a restict dibule= sad my be used by recipients only in the performmace of their efladl dau Ifts cmteas my Mt otherwise be disclosed without Word Bank authwiztio. ABBREVIATIONS AND ACRONYMS AOD - Argon-oxygen decarbonization CPE - Centrally Planned Economy ERR - Economic Rate of Return FRR - Financial Rate of Return IB - Banca De Investitii (Investment Bank) ICB - International Competitive Bidding IPROLAM - Institute for Engineering of Rolling Mills NETAROM - Equipment Export-Import Agency under the Ministry of Metallurgical Industries NEM - New Economic and Financial Measures OED - Operations Evaluation Department PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report SAR - Staff Appraisal Report FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT ROMANIA - OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) TABLE OF CONTENTS Page No. Preface... ................. i Basic Data Sheet ................................................... ii Highlights ........................................................ iii PROJECT PEIFORMANCE AUDIT MEMORANDUM I. INTRODUCTION.....................................1....... II. PROJECT OBJECTIVES....................... ............. 3 III. PROJECT SCOPE............................................ 4 IV. PROJECT IMPLEMENTATION................................... 5 V. TECHNOLOGY TRANSFER...................................... 9 VI. OPERATING PERFORMANCE..................................... 11 VII. FINANCIAL AND ECONOMIC VIABILITY......................... 11 VIII. CONCLUSIONS AND OVERALL ASSESSMENT....................... 12 Attachment: Comments from Borrower 14 PROJECT COMPLETION REPORT PART I: Borrower's Completion Report............................ 21 I. Project Description and Implementation................... 22 II. Project Operation....................................... 31 III. Otelinox Products Market ............................... 39 Graph: No. I & 2 Local Consumption and Production of Stainless Sheets and Strips ........................ 40 Annexes: 1. Production Facilities..................................... 46 2. Implementation Schedule................................... 47 3. Capital Goods Estimates.................................... 48 4. Disbursement Schedule..................................... 49 5. Production Cost Estim-tes - Stainless Steel Mill.......... 50 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. TABLE OF CONTENTS, (continued) 6. Production Cost Estimates - Bar Mil. ..... 51 7. Revenue Forecast..... ww ............. ...w...... 52 8. Historical Balance Sheets............... ...... . 53 9. Income Statement.....w- ..-........ w ...... 55 10. Financial Rate of Return................ ... 56 11. Ecology............... .............. ........ ..w.......... 57 12. Staff Training........................................ 58 PART II: Comments of Industry Department........... 60 Annexes: 1. Income Statement....................................... 73 2. Financial Rate of Return................................ 74 3. Economic Rate of Return.................................. 75 PROJECT PERFORMANCE AUDIT REPORT ROnANIA - OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) PREFACE This report presents a performance audit of Loan 1027-RO, approved in July 1974 for the amount US$70 million which was one of the first opera- tions in Romania after that country joined the Bank in December 1972. Pro- ceeds were used for the construction of two mills for the production of special steels organized under the management of the Otelinox Steel Enter- prise, the executing agency; the Borrower was the Investment Bank of Romania. The mill, to produce stainless steel which was the more costly com- ponent, was completed with a delay of 28 months, while the second component, a bar mill for high alloy steel products, was completed with a delay of 46 months. The loan was closed on December 31, 1979, with the last disbursement occurring in March 1980. The Project Performance Audit Report (PPAR) consists of a Project Performance Audit Memorandum (PPAK) prepared by the Operations Evaluation Department, and the Project Completion Report (PCR). The PCR is composed of two parts; the first contains a completion report prepared by the Borrower while the second contains comments on that report prepared by the Bank's Industry Department. The PPAK is based on the PCR, the Staff Appraisal and President's Reports, loan documents, sector studies, economic reports, tran- script of the Board discussions, review of the project files and discussions with Bank staff. The PCR reviews the main elements of project implementation, in particular the factors which contributed to the delays in completion of the project. The PPAM pays particular attention to the problems of technology transfer which was one of the main objectives of the project, drawing also on the experience under other recently completed industrial projects financed by the Bank in Romania. Copies of the draft report were sent to the Borrower. Comments were received from the Investment Bank; they have been reflected in the report and are reproduced as an attachment to the PPAM. - Li - PRORAr PERF00MCE AMDrr REPORr RO~UatA - 0TELt= SPEraL STEEL PRW=ECT (LON 027-f0) (Amnt in CSS giioan BASIC DATA SNEET KEY PRWECT DATA Appra~u1 Ac~n or Expcttims Oarrent Eatite Total Project Co~t . 185.3 187.9 Ove~n (2- 1.4 Loa nt 70 69.95 Disbaued - 69.95 CL~dL- 0.05 Repaid as of 10131/84 - 31.01 oater-anding.> -37.66 Date Physica co.a-~ coperma ~ol4 ill Jn 1978 Octoeer 1980 sar 2l.U June 1978 Septe=ber 1982 Proportio of Time Dverrun Cold nu ()- 70 Bar Kill (2) [28 Econo~c Race of Rturn 14.6 13.0 Finanal Rate of Rtur 13.0 17.6 CæMULATIVE LOAN DISBURS&4EMS FY75 FW7h FY77 1m7s kW79 FM8 (1) Plnne 12.65 28.6 56.0 70.0 70.0 70.0 (I) Actual - 2.7 6.8 48.8 66.8 69.95 Iii) CU) as Z of (1) - 9.4 12.1 69.7 95.4 99.9 OlER PERDJECF DATA Orfein~l Actfal ar l~ Date le-estimateå Bard Approval - 07/05/74 Lon Agraement - 07/10/74 Effectienes 02/28175 04/03/75 Lan Cosing 12/31/79 03/07/60 Borromær nsatm~=t Bank X£estent 8ank Eewting Agency OTELDIMX OFTLN=r Fisecal Ter af Borroer Jaury I - Deffhi r 31 MISSIGE DATA 4o. af so. af Date of Honch, Year Week Persona ja~mek t Identficat:on 03/73 - - - - Prepsratian 08173 [.5 3 4.5 09/07/73 PreappraiaL - - - - - Appe~ua 11/73 3.0 4 12.0 12/05/73 Post-appraisal - - - - - Supervision 1 01174 0.7 I 0.7 01/27/74 2 02/74 0.7 3 2.1 03/18/74 3 12/74 0.7 1 0.7 12/09/7& 4 02/75 0.9 2 1.8 03/19/75 5 04/75 0.6 2 1.2 05123175 6 05/75 1.5 2 3.0 06/23/75 7 10/75 0.6 2 1.2 11/07/75 8 05/76 0.5 2 1.0 05/28/76 9 06/77 0.7 2 1.4 06/25/77 10 02/78 0.6 1 0.6 03/07/78 i 09/78 0.6 1 0.6 10/19/78 12 05/79 0.7 1 0.7 06/25/79 13 01/80 0.5 1 0.5 02/11/80 14 10/80 0.7 1 0.7 10/23/80 15 03/81 0.9 2 1.8 04/24/81 Completlon 1 11/81 0.7 1 0.7 12/24/81 2 03/82 1.7 2 3.4 03/16/82 -Total22.1 Total - PROJECT PERFORMANCE AUDIT REPORT ROMANIA - OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) HIGBLIGHTS The Otelinox special steel project was one of two industrial projects which were accepted for early implementation shortly after the entry of Romania in the Bank in Decemer 1972; it was appraised in late 1973 and approved by the Bank in July 1974. The project consisted of two separate mills organized under one enterprise and located relatively close to the main consuming areas (PPAM, paras 14 and 15). The principal objectives of the project were efficient import substitution and to contribute to the transfer of technology required for the production of stainless steel and steel alloy products (PPAM, para. 11). The first component, which represented some 55% percent of total project costs and 61% of Bank finance, consisted of a cold rolling mill for the production of stainless steel sheet and strip from hot-rolled coils. The second component was a bar (hot-rolling) mill to produce high alloy steel rod and bar products and high strength low alloy steel products (PPAM, para. 13). The project also included necessary support facilities including quality control laboratories as well as pollution control equipment. No significant changes in scope of the project were introduced during the implementation period. For purposes of procurement, the major facilities of the project were grouped in two large single responsibility packages, one for each mill, and a staged bidding process was elaborated. The procedure developed, although somewhat unusual for the Bank, was consistent with its guidelines for international competitive bidding for Bank-financed projects; it represented, however, a substantial departure from previous Romanian procurement practices (PPAH, para. 19). The first operating facilities for the cold rolling mill were completed with a delay of 18 months while the remaining units were commissioned one by one, the last completed ten months later. Among the reasons for the delay were the additional time required to negotiate the main procurement package, time required for Bank approval of the basic contract as the Bank insisted on the inclusion of certain technical assistance provisions by the contractor, lack of familiarity of the Romanian officials with Bank procurement procedures, and the need to adjust some locally made equipment which was rejected by the contractor (PPAM, paras 20-22). The Bank believed that failure of the Romanian authorities to contract a technical advisor to assist in the evaluation of the procurement contract contributed to the additional time needed for Romanian approval (PCR, Part II, para. 34). - iv - The first productive facilities of the bar mill were commissioned 33 months later than expected, with the final units coming on line one year later. A major factor in the delay was the difficulty in negotiating the procurement contract which required 15 months more than expected, due lar- gely to limited interest in bidding shown by foreign-led consortia (PCR, Part I, para. 1.03). Other factors which contributed to the delay included the complexities arising from the decision to limit foreign purchases to the amount of Bank finance (PCR, Part I, para. 1.03 and Part II, para. 6) and the need to adjust some of the local equipment which was rejected by the contrac- tor (PCR, Part II, para. 7). In spite of the delays the actual cost of the project was only slightly above appraisal estimates. However, because of prevailing account- ing and contractual practices in Romania, the cost data have to be interpret- ed with caution; it appears that the real costs of the project are not fully known (PPAK, paras. 27-30 and PCR, Part II, para. 24). The re-estimated financial rates of return (FRR) for the two mills based on recorded costs is 17.6% as compared to 13% at appraisal; since this essentially reflects the Government's policy to adjust sale prices to the cost of production, the FRR is not considered an adequate measure of project benefits (PPAR, para. 40). The economic rate of return (ERR) has been re-estimated at 13%, only margin- ally lower than the appraisal estimate of 14.6Z. This reduction reflects the recent fall in world steel prices; an adjustment for the real investment costs, which are probably higher than recorded, would not appreciably affect the ERR (PPAM, para. 41). While the project has been slow in increasing capacity utilization, there has nevertheless been substantial import sav- ings. Full capacity utilization for the two mills is expected in 1985; the slow buildup of capacity output reflects to some extent a longer than expected learning curve (PCR, Part II, para. 33). In addition, the increase in stainless steel consumption in Romania has been slower than estimated at appraisal (PCR, Part II, para. 15). Technology transfer has been a critical issue in the design of the project involving, in the case of stainless steel products, processes not previously available in the country, and, in the case of the high alloy mill, more efficient techniques as compared to those already available. Extensive provision was made for technical assistance and training for local staff in these instances. In addition, the Bank believed that the special needs of hot-rolled coils for stainless steel production would require technical assistance to the existing mill producing those inputs and should be part of the package to be provided by the contractor supplying the stainless steel technology. However, no formal arrangements were actually undertaken. Following rejection of a high proportion of the locally produced coil which was sent abroad for testing, arrangements were made for technical assistance and training to remedy defects (PPM!, paras. 36-37 and PCR, Part II, para. 42). - v - A further objective of the Romanian authorities related to tech- nology transfer was to develop a local capacity for the production of equip- ment or components used in the two steel mills. Some difficulties were experienced in producing items acceptable to the contractors responsible for erecting the two plants and these contributed to the delays in projectcomple- tion (PPAM, paras. 22 and 25). In spite of the delays in implementation, the project has been a successful one, in particular leading to considerable import savings. The efforts at technology transfer which were the main factors for the delays had as a cost the loss of domestic output and thus the loss of certain import savings during the extended time period. The main lesson to be learned, therefore, is the need for a more realistic evaluation of the time and other inputs which are required to achieve the extent of technology transfer which was desired, to permit a proper analysis of the cost and benefits (PPAM, para. 47). - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM ROMANIA - OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) I. INTRODUCTION Background 1. Romania joined the Bank on December 15, 1972. In early 1973 the Romanian authorities submitted a list of possible projects for financing by the Bank. High priority was given to the productive sectors, particularly industry, where emphasis was put on projects promoting technology development and transfer. Following a review by the Bank, two industrial projects were selected for early implementation, including the Otelinox Special Steel Project; it was appraised in late 1973 and a loan was approved by the Bank in July 1974 for an amount equivalent to US$70 million. 2. It was recognized at the very outset of the Bank's relationship with Romania that time would be required to build up detailed information of the country's economy to allow the appropriate focus of the Bank's activities on the outstanding development problems; this was more so the case for Romania than- for other new borrowers because of the special features of its centrally planned economy, as well as the different project financing arrangemenrts. In the early phases of the Bank's relationship with the country, the main objective was to help alleviate the shortage of foreign exchanre by providing long-term capital and by financing projects which would expava foreign exchange earnings or result in import savings. Bank lending would also aim at supporting efforts to introduce new technologies, leading to improved product quality, more efficient production and, thus, to improved international competitiveness. 3. In the period from mid-1974 through mid-1979, the Bank approved 22 projects in Romania, of which eight were in the industrial sector while three were designed to assist in flood recovery and earthquake reconstruction. The total value of approved loans for industry (some USS600 million) represented about 35Z of the total Bank lending during that period. Completion reports on four of the industrial projects have now been prepared; three, namely the Glass Fiber, Polyester and Fertilizer Projects, have not been audited by OED.1/ The present Otelinox Project is being audited in accordance with the selective audit procedures. The four remaiuing projects have recently been or will shortly be completed and completion reports are expected in the course of Calendar Year 1985. 1/ PCR, Romania - Bucharest Glass Fiber, Loan 1447-RO, dated 1/28/85; PCR, Romania - Cimpulung - Muscel Polyester, Loan 1448-RO, dated 1/28/85; PCR, Romania - Bacau Fertilizer, Loan 1020-RO, dated 5/21/85. -2- Economic Organization 4. Because of the special characteristics of Romania's centrally planned economy (CPE), it is considered useful to provide a brief description of economic organization and project management as it existed at the time of formulation of these projects, in order to permit a better understanding of the progress in project implementation. Economic management in Romania (the Socialist Republic of Romania) is organized along socialist principles which involve State and corporate ownership of almost all productive sources organized as individual enterprises and the absence of private enterprise.2/ 5. The major instrument for economic and social development is a national plan which sets out for the economy as a whole, by sector and branch and on a regional basis, specific tasks and activities for economic and social entities. The availability of financial resources to implement each plan is ensured through the concurrent preparation of a financial plan. Other supplementary instruments (e.g. prices, taxes and credit) are used to help achieve the specific economic and social objectives. Five year plans provide medium-term targets and perspectives and these are implemented through annual plans designed to achieve those goals. 6. The process of development planning in Romania has been in a continuous state of evolution as the country has experienced growth and the economy has become more complex. The comprehensiveness of the plans for 1971-75 and 1976-80 and the number of targets increased substantially over previous efforts. Under the more elaborate system which prevailed, plan preparation started at both the enterprise and the national levels, the latter involving the State Planning Commission and other agencies for economic analysis; this was then followed by an extensive reconciliation system at national, ministry and district levels.3/ Once agreement was reached, the Plan was presented to the Council of Ministers for final approval. 7. Investment projects which were included in the Plan were approved by the Council on the basis of detailed techno-economic studies prepared at the enterprise level. The necessary funds were then allocated within the budget and were channelled to the projects through the Investment Bank (IB), a specialized agency of the Ministry of Finance for investments in all sectors of the economy except agriculture (which included water resources) and food processing. The IB played a critical role at the time in project preparation, analysis and approval since it was responsible for presenting to the Council the technical and financial evaluations and its recommendations on all projects within its sectors of competence. After project approval, IB 2/ A detailed review of the Romanian economic system at the time of project approval is presented in the Bank's study entitled Romania: The Industrialization of an Agrarian Economy With Socialist Planning, Report No. 1601-RO, dated March 31, 1978. 3/ The procedures by which overall magnitudes in the plan were determined are described in Appendix 5 of the 1978 report, op. cit. -3- was responsible for monitoring the use of the investment funds provided to the enterprises to ensure that the project was executed according to the techno-economic studies. 8. Each major sector or subsector of the economy had a technical ministry responsible for its planning. Within the ministries, independent units or centrals were organized to assist in economic management and in the planning process. Each central directed the operation of a group of enterprises, elaborated a plan for presentation to its ministry and to the central planning agency which was based on the proposals of the constituent enterprises, and, in turn, disaggregated the final plan targets for implementation at the enterprise level. While all targets, norm, and prices are established by the State central authorities, the centrals were responsible for production, finance and investment planning within those guidelines and for monitoring the fulfillment of the plans. In addition, the centrals provided to their enterprises certain common services including product design and development and management assistance. For large scale industry (-of national interest-)4/ there were 8 ministries with 112 industrial centrals. 9. The Otelinox project was undertaken by a separately established enterprise, directly subordinated to the Ministry of Metallurgical Industries. In addition to a number of other industrial centrals in this subsectoral grouping, the ministry contained design and engineering institutes and foreign trade enterprises, to provide these common services to the constituent centrals and industrial enterprises. Among these specialized agencies, the Institute for Engineering of Rolling Mills (IPROLAM) and the Equipment Import-Export Agency (METAROM) played important roles in implementing the project. 10. In 1978, in the context of what was termed the New Economic and Financial Measures (NEM), major reforms were introduced in order to increase the autonomy of enterprises. The reform program strengthened self-management and self-financing at the enterprise level and is designed to enhance the efficient use of physical and financial resources. One of the instruments used in this context are production incentives for workers. II. PROJECT OBJECTIVES 11. The basic objectives of the project were efficient import substitution and contribution to the transfer of technology required for the production of stainless steel and alloy steel products. The mill for stainless steel products was the first for this type of production in the country, while there was at the time limited and relatively inefficient 4/ Local industries, generally small scale, were subordinated to local district peoples councils, while industrial cooperatives had their own industrial organizational structure, under an umbrella organization, the Central Cooperative Union. production of the mix of small alloy steel products expected from the bar mill. The project was expected to result in considerable import savings; while there was not likely to be major direct exports, the items produced were essential for the engineering industries which were exporting an important share of their output and thus the project would contribute to improving the competitiveness of those industries. 12. The normal institution building features which generally accompany the Bank's industrial projects, particularly as regards financial arrangements, were not prominent in this case, given the very special characteristics of the organizational structure of Romanian industry as described above. Because of the provisions which were made for the financial viability of Romanian enterprises, involving centrally determined product prices based on cost of production as well as the direct budgetary allocation of the major part of investment funds, no financial covenants were included in the loan agreements. III. PROJECT SCOPE 13. The project consisted of two separate plants which would operate independently but under single management. The first comprised a cold rolling mill complex designed to produce about 30,000 tons per year of stainless sheet and strip from hot rolled coils. Since high quality coils were required for stainless steel production, provision was to be made for technical assistance to the enterprise supplying that input to ensure its capabilities in this regard. The second (bar) mill was designed to produce about 110,000 tons of high alloy steel rod and bar products and 10,000 tons of high strength low alloy steel products (high tensile steel) based on billets. 14. The two mills were to be located in the Turgoviste steel complex which was under construction some 80 km northwest of Bucharest and were part of Stage I of its development. This complex, semi-integrated, was to contain the major facilities for the production of special steels for the entire Romanian industry and was also linked to the country's overall regional development strategy. The main Turgoviste steel mill (already in operation) was to supply the billets for the Otelinox bar mill while the coils required for the stainless steel mill were to be provided by the Galati steel complex, about 250 km northeast of Turgoviste. Galati was at the time the country's major integrated steel complex, supplying over 5 million tons of various types of plate and sheet products and would establish necessary facilities to supply the types of hot rolled coils required for stainless steel. 15. The project would also provide necessary support facilities including maintenance shops, laboratories, roll shops and utilities. The concentration of special steel production at this particular complex provided certain economies of scale for some of the support facilities. The location was also considered favorable, being close to the main industrial centers which are the principal consumers of these products. Most of the output of Otelinox was expected to be markeced within a radius of 200 km and most of - 5 - the transportation to consuming industries was expected to be by rail (SAR, para. 3.19). 16. Provision was made for extensive training of staff for the production facilities, both in Romania and abroad.3/ Proper coordination of those activities was to be included in the scope of the technical assistance and know-how to be provided by one or more foreign operating steel companies as part of major equipment supply contracts (SAR, para. 4.09). In addition, studies were to be undertaken on the end use of the products from the two Otelinox mills, on the feasibility of the establishment of intermediate warehouse facilities and steel service centers (to improve distribution), and on the export potential for Romanian special steel products. IV. PROJECT IMPLEMENTATION 17. The Bank loan, as was the case for all industrial projects in Romania, was made to the Investment Bank, with the guarantee of the Govern- ment, and was on-lent to the Otelinox enterprise which had been established to operate the two mills. The enterprise was given overall responsibility for the coordination of project implementation. The specialized institute, IPROLAM, was responsible for basic design and engineering and the technical evaluation of the procurement bids. The foreign trade enterprise, METAROM, undertook the commercial evaluation of bids and handled contacts with foreign suppliers. Locally produced goods and services were directly purchased by the enterprise based on the design drawn up by IPROLAM. 18. During implementation, no major changes in the scope of the project were introduced. Some modifications were made in the product mix of the two mills; in particular, facilities for production of high tensile steel pro- ducts in the bar mill were deleted (PCR, Part I, para. 2.02). Some adjust- ments were also made in building construction and service facilities, partly in an effort to reduce construction costs (PCR, Part II, para. 24.). 19. For the purpose of procurement, the major facilities for the pro- ject, together with engineering know-how and technical assistance, were grouped in two large single responsibility packages, one for the cold mill and the other for the bar mill. Each package was subject to a staged bidding procedure. First, following prequalification, foreign-led consortia sub- mitted preliminary technical offers which were discussed at pre-bid meetings to clarify technical and other related questions. In the second stage, firm technical proposals and separate price bids were submitted; the former were subject to consultation and modification to :chieve reasonable uniformity. The last stage involved the opening of the price bids which were modified as necessary after the technical discussions. This procedure, while differing somewhat from normal Bank procurement practices which t' nded to favor a number of small packages, was consistent with the international competitive bidding guidelines provided for procurement for Bank-financed 5/ See the discussion in para. 49. - 6 - projects. It represented, however, a substantial departure from previous Romanian practice which was to procure by inviting tenders from selected manufacturers and then to negotiate a supply contract (President's Report, para. 47). Cold Rolling Mill 20. The first operating facilities for the cold rolling mill were completed in December 1979, representing a delay of 18 months as compared to the estimate at appraisal; other units were subsequently commissioned one by one, the last unit on line 10 months later (PCR, Part I, para. 1.03). In accordance with the procedure agreed upon, prequalification for firms interested in providing the cold rolling mill facilities had begun in early 1974. The contract, however, was not signed until December 1975, a six months delay as compared to the appraisal estimate (PCR, Part I, para. 1.03). Part of this delay represented the lack of familiarity of the Romanian agencies with the Bank's Procurement Guidelines. In its comments on the Borrower's PCR, the Bank states (PCR, Part II, para. 3) that it believes that some of this delay could have been avoided had the Romanian authorities employed a technical advisor to assist in the process for selection of technology and evaluation of bids; while provision for this assistance was included in the Loan Agreement as an option, the Romanian authorities did not choose to do so mainly because they considered their own technical staff to be fully capable of evaluating the bids (see also para. 34 below). 21. Bank approval of the contract was not given until April 19, 1976, which led to additional delays in procurement. When the contract was signed, the Bank had insisted that the supplier should provide technical assistance and training to ensure that the facilities at the Galati mill, which was to provide the steel coils for stainless steel production, would be adequate to meet quantity requirements and quality standards to permit the proper func- tioning of the Otelinox mill in accordance with performance guarantees of the contractor. An appropriate clause had been included in the original bid specifications approved by the Bank (PCR, Part II, para. 12) but was subse- quently removed by the Romanian authorities (without the Bank's approval) because the technical assistance offered was considered to be too expensive. Following completion of satisfactory alternative arrangements with the con- tractor to meet the Bank's requirements on this issue, approval of the entire contract was given and disbursements commenced (PCR, Part II, para. 42). 22. Further delays in completing the construction of this mill were experienced as result of difficulties with machinery being manufactured for the first time in Romania based on technical documentation from the Japanese suppliers (PCR, Part I, para. 1.03). In some instances the equipment was rejected by the contractor responsible for installing the mill for failure to meet quality standards and this equipment had to be adjusted. Bar Hill 23. The first productive facilities of the bar mill were commissioned in March 1981, some 33 months later than expected at appraisal, with final units coming on line in March 1982. A major factor in this delay was the - 7 - difficulty in negotiating the supplier's contract which was not completed until October 1976, some 15 months later than expected at appraisal as there was only limited interest expressed by foreign-led consortia. The Romanian authorities then suggested that consideration should be given to permitting a local consortium to enter the bidding as the leading firm with technology to be obtained from foreign firms (PCR, Part I, para. 1.03). It should be noted that the possibility of including a local group in this bidding as the lead enterprise had been considered at the time of negotiations (May 1975); the Romanian authorities agreed that, should there be such a group interested in pre-qualification, they would inform the Bank of that fact no later than June 5, 1975. No such communication was received by the Bank by the specified date. When the matter was subsequently raised once more, after the Borrower had found a third consortium willing to participate in the bidding, the Bank did not agree and took the position that the time required for pre-qualifica- tion would only add to the delay being experienced. Moreover, the inclusion at that late date of a local firm might lead to the withdrawal of some foreign firms which were considering tendering offers, thus reducing competi- tion for the bid. After further efforts at contacting major groups with experience in this area, the Romanian authorities were able to obtain addi- tional indications of interest from foreign consortia and the bidding process was completed In accordance with the procedures described above. 24. A further element in the delay arose from the decision of the Romanian authorities to increase the share of locally-made equipment (Romanian firms having experience in equipment manufacturing for this type of rolling mills) so that the Bank's allocation for this component would cover the full foreign exchange cost, instead of the 65% figure foreseen in the Staff Appraisal Report (PCR, Part I para. 1.03). In its comments on the Borrower's report, the Bank has noted (PCR, Part II, para. 6) that the technical discussions with potential bidders, in order to maximize domestic content, probably contributed to the length of time required for that stage of the bidding process. The Borrower seems to attribute some of this delay to the time needed for interchange of technical information required by Romanian manufacturers, as well as the adjustments which had to be made to the local production facilities (PCR, Part I, para. 1.03). 25. As in the case of the locally produced equipment for the cold rolling mill, some supplies from Romanian enterprises producing these items for the first time were rejected by the contractor responsible for erection of the bar mill and had to be adjusted. To deal with this situation, the contractor assigned quality control personnel at those manufacturing firms to reduce the rejection rate (PCR, Part II, para. 7). Project Costs 26. In spite of the lengthy delays, the actual cost of the project was only slightly above that expected at appraisal (PCR, Part I, para. 1.05).6/ 6/ This discussion is based on alternative II of the cost estimates presented in the table in the paragraph indicated, since the method used in this ralculation presents a better measure of the impact of the revalcations of the lei which took place during this period. - 8 - The actual cost of fixed assets (i.e. excluding working capital and interest during construction) was less than originally estimated. However, these data and the comparisons with the appraisals must be interpreted with some caution for a number of reasons. 27. The principal element in the reduction in fixed asset costs was the substantial savings on construction and erection as compared to the appraisal estimates. Examination of these data in other Romanian projects7/ suggest that there was a tendency to over-estimate local construction costs at the preparation/appraisal stage of Romanian projects due to the process for proj- ect evaluation and for approval followed by the Romanian authorities. 28. As indicated in the introductory section, these estimates became part of the technico-economic studies which are the basis for project appro- val in the allocation of investment funds from the state plan (budget). Sub- sequent upward revision of these estimates would require a new submission, which was a laborious and time consuming procedure; thus, there was a ten- dency to be overly conservative in these estimates in order to provide some leeway for the firm. Once the project had been approved, the project imple- mentation agency (the enterprise) negotiated with the relevant construction trusts and other suppliers, generally obtaining contracts at lower costs than originally estimated. In this particular instance it was also the case that some economies were achieved in building, design and construction costs, in part as a result of the instructions which had been issued to all government enterprises to reduce their expenditure at that particular time (PCR, Part II, para. 24).8/ 7/ See footnote 1/. 8/ The Borrower's comments on paragraph, 27 and 28 read as follows: -The techno-economical documentations for the investments projects are drawn up using normatives, norms, prices and tariffs approved by Law for the establishing the majority of expenditures categories. Therefore, the estimations in projects appraisal are very closed to the actual expendi- tures during the project implementation. Even if in establishing the estimations for the investments expenditures by the designing institute a tendency to be overly conservative would appear, it has to be noted that the techno-economical documentations drawn up by the designing institutes, before to be approved, has to be reviewed by many authori- ties the techno-economical councils of the ministries and central authorities (State Planning Committee, Ministry of Finance, Investment Bank, Supply and Fixed Assets Administration Ministry, State Pricing Committee, State General Inspection for Investments and Construction and others) which, among others, supervise the observation of legal norms, normatives, prices, tariffs, as well as the deletion of all overestimat- ed and unjustified expenditures. If during the implementation of works it is required to increase the estimations for several categories of expenditures, these can be covered from the savings of other categories of expenditures so that on the total, the expenditures are framed as a rule within the estimates. Only under circumstances when this comple- tion is not sufficient, with a view of increasing the total value of investment, the approval is required to be released by the same body having approved the initial documentation (respectively by the enter- prise, central, ministry, decree)." - 9 - 29. It must also be noted that once a contract had been signed with the construction trusts, it was subject to rather rigid terms obliging the con- struction trusts to fully execute the physical works as provided for in the contractual documents. If the construction enterprise experienced cost over-runs, those additional costs were not passed on to the project enter- prise but were absorbed by the contractor in his own budget; conversely if there were cost under-runs the contractor would benefit. 30. Similar arrrangements existed for other services or goods purchased by the project enterprise from local suppliers. In this instance, it was noted that an important share of the locally produced equipment for both mills had to be adjusted due to rejection by the external contractors responsible for the development of the two mills; for both mills local supplies represented 30% of actual expenditure in the equipment category as compared to 20% at appraisal, less if the contingency allowances made in the appraisal estimates are included. The additional costs for the adjustment were borne by the local producers of equipment and not by the project enterprise. Thus, the actual costs of local equipment are not known. To the extent that these expenditures represented learning costs for the equipment manufacturing enterprise, they should not be charged to the project. However, from the point of view of calculating the overall costs/benefits of the project, these additional charges should be identified, particularly to permit evaluation of the real costs of the decision to produce the items locally.9/ Ecological Aspects 31. Romanian authorities have given considerable attention to problems of pollution control in all of the industrial projects in which the Bank has participated, generally establishing standards comparable to those prevailing in the more advanced industrial countries. In this particular case, among other measures taken, special equipment was provided to neutralize effluents from the acid pickling process and liquid effluents were to be neutralized prior to release into the nearby river. At the time of completion, all facilities and measures anticipated at appraisal were installed; monitoring practices and physical standards actually achieved were equal to appraisal estimates (PCR, Part I, Annex II, and Part II, para. 21). V. TECHNOLOGY TRANSFER 32. A critical issue for both the Romanian authorities and the Bank was the element of technology transfer underlying the decision of the former to seek Bank financing for this project. In projects which have involved trans- fer of technology, particularly in the industrial sector, the Bank has consi- dered the provision of technical assistance as a key component of project 91 See also the discussion of economic rates of return, para. 41. - 10 - design in order to ensure adequate and sustainable absorption of the techno- logy concerned. In this instance, the introduction of stainless steel pro- duction involved two aspects of technology transfer. The first related to the production process itself while the second dealt with the need to supply to the finishing mill quantities and qualities of hot rolled steel coils which had not been previously produced in Romania. 33. Because of the lack of familiarity of the Romanian steel industry with the technical process for stainless steel production and the preliminary stage of engineering design which had been accomplished at the time of appraisal, the Bank had insisted on the inclusion of a component in its loan (US$50,000) to finance consulting services to assist in the technical evalua- tions of the bids for the cold rolling mill. A side letter covering this component stipulated that the funds would be used for this purpose unless the Bank and the Borrower agreed that the assistance was not needed. 34. An effort was made by the Romanian authorities to employ the ser- vices of an experienced steel operating firm not linked to any of the poten- tial bidders for the main contract for the cold mill or located in any of the countries involved. An offer to provide these services for US$200,000 was received but was rejected as excessively costly. Since by that time, the process of internal evaluation of the preliminary bids by the Romanian authorities was well advanced, these authorites decided not to pursue the matter and subsequently requested that the funds be reallocated. The Bank took the position that it had not agreed that the assistance was not needed and therefore it cancelled the allocation. The Borrower consideres that a reallocation of the funds would have been preferable. As noted above (para. 20), the Bank felt that the long period required for technical evaluation could have been shortened if such assistance had been employed in a timely fashion. 35. To deal with the second aspect relating to the production of quality inputs for the stainless steel mill, the Bank had recommended that the contract with the foreign firm supplying the technology for the cold rolling mill should include provision of know-how and full technical assis- tance for the production of these coils at the Galati steel mills. Although included in the bid specifications approved by the Bank, this component was later removed by the Romanian authorities. As indicated, the Bank did not approve the cold mill contract until it received a formal commitment that appropriate arrangements for this assistance would be provided. 36. In the event, no formal contract appears to have been signed with the contractor but the latter supplied the assistance and covered the related costs, in part because of the bearing of the issue on its performance guaran- tee. Foreign engineers visited the Galati steel-making facilities and made recommendations with regard to improvements in operating practices and methods and Romanian operators were sent to Japan for training in the neces- sary technical skills. 37. In January 1980, a test batch of hot-rolled coils produced at Galati were sent to Japan for testing and the majority of the coils were rejected. The Borrower noted that, at the time of preparing the completion - 11 - report (early 1982), Galati was capable of providing 10 of the 19 types of coil appropriate for stainless steel production (PCR, Part I, para 2.01). The Bank noted that necessary improvements at the Galati mills to permit it to supply adequate inputs were not expected until later in 1982 but that at the end of that year these facilities were still not operating at full pro- duction levels due to shortages of critical imported materials (PCR, Part II, para. 13). VI. OPERATING PERFORMANCE Cold Rolling Mill 38. The cold rolling stainless steel mill produced about 4 thousand tons during 1980 and some 8.6 thousand tons in 1981, representing 13% and 29% respectively of capacity; the mill was expected to produce 22,000 tons in 1982 or 73% of capacity. Given the longer than expected learning curve, it was anticipated that full capacity would not be reached until 1985 (PCR, Part I, para. 2.03). The Bank has noted that, apart from the longer learning curve, the extended period required for reaching full capacity utilization reflects the fact that the domestic market has not developed in accordance with earlier expectations. In these circumstances, it was expected that demand and consequently output would be limited to 16,000 tons in 1982 (PCR, Part II, para. 18). Given the estimated slow rate of growth of domestic con- sumption, achievement of full capacity in later years will be dependent on the ability to export considerable proportion of output. Bar Mill 39. As regards the bar mill, during its first year of operation (1981), production reached 39,000 tons or about 1/3 of capacity. Full capacity utilization is also expected by 1985 (PCR, Part I, para. 2.02). Market con- straints appear to be less important in this case as domestic consumption of the products produced at this mill is almost three times its capacity; any decline in demand ill most likely be absorbed by other less efficient pro- ducers (PCR, Part II, para. 18). VII. FINANCIAL AND ECONOMIC VIABILITY 40. The re-estimated financial rate of return (FRR) for the two mills is 17.6% as compared to 13% estimated at time of appraisal. The higher rate, in spite of the longer learning curve and the delays in implementation, refler.ts mainly the favorable adjustments in sales prices for the final pro- ducts, particularly for the bar mill. In addition, investment costs for the enterprise were only marginally higher than expected (PCR, Part II, paras. 29 and 30). Because Romanian practice assures the enterprises that their final - 12 - product prices will be adequate to cover production costs, the FRR is not constdered an appropriate measure of project benefits.10/ 41. The economic rate of return (ERR) is a more meaningful measure of benefits but its calculation in this case is extremely difficult because of the extensive product mix and the difficulties in estimating border prices, as well as the need to adjust input prices. The Bank has recalculated the ERR under certain assumptions as to input prices and has estimated border prices for a sample of items in the product mix. The re-estimated ERR is 13%, only marginally lower than at appraisal, 14.6Z, reflecting mainly the depressed level of world prices (PCR, Part II, para. 32). These results are extremely sensitive to product prices; an upward adjustment in investment costs to allow for the probably higher real costs would not change the ERR significantly. 42. Finally, the project has achieved the objective of foreign exchange savings, reducing the need to import a substantial tonnage of special steels, even if the project has been working at less than full capacity. At full capacity utilization, the net estimated saving would be US$160 million (PCR, Part II, para. 33). However, these results depend upon the ability of Galati to meet the full input requirements of the stainless steel mill, avoiding the need to import any of the special types of hot-rolled coils. As noted above, while at the time of completion Galati could only supply part of the input needs, it was expected that during 1984 the mill would be able to provide a full range of hot coils for the stainless steel operations at Otelinox. VIII. CONCLUSIONS AND OVERALL ASSESSMENT Success of the Project 43. The project has generally proven to be a successful one with an acceptable economic rate of return. The ability of the country to capture the full benefits of the project in the future will depend upon the develop- ment of the local market where demand has lagged behind earlier expecta- tions. Nevertheless, significant import savings are now being achieved and these will continue in spite of the fact that full capacity utilization is not likely to be reached in the next two to three years. Even at the some- what lower utilization rates, the domestic resource costs of the exchange savings do not appear to be excessive. Technology Transfer 44. As regards the objective of technology transfer, major benefits appear to have been obtained; the main cost has been the loss of production and thus import savings during the period of the delay in implementation. 10/ The Borrower considers that the financial rate of return can be taken into account when judging the results of the projects. See Attachment para. 16. - 13 - Some of this delay in reality represents the learning curve for the domestic enterprises engaged in manufacturing equipment for the first time in Romania. A substantial part of the delay, however, represents the slow recognition by some of the Romanian agencies involved in implementation of the depth of the technological complexities affecting the project. The Romanian steel industry had gone through a period of rapid development large- ly managed by its own resources. The specialized design institute for the industry had, moreover, developed and successfully adapted modern technology for basic steel production; it apparently felt that moving into special steels posed no major new problems. The experiences with both testing of the coils from Galati and the need to import coils to test the Otelinox stainless steel productive facilities demonstrate that the difficulties in high tech- nology transfer cannot be underestimated. Evaluation and Accounting Practices 45. A major effort was made by the Bank during all stages of project preparation, appraisal and implementation to acquaint Romanian authorities with the appraisal and evaluation techniques used by the Bank in its project work with emphasis on economic criteria. Similarly, during supervision, the Bank put emphasis on the need to revise accounting procedures so that the real cost of the project would be identifiable; among other elements, this would involve proper charges to the enterprise for the actual cost of locally purchased goods and services. A number of these elements emphasized by the Bank appear to be included in the NEM measures currently adopted. Impact of Project-financed Studies 46. Among the weaknesses in project preparation which the Bank encoun- tered was the lack of -adequate market data on which to base the product mix for the two specia' plants. As a consequence, the Romanian authorities agreed to undertake the necessary detailed demand studies and these led to an adjustment in the original product mix (PCR, Part II, para. 16). Lessons to be learned 47. As indicated above, the main lessons to be learned relate to the need for more realistic implementation schedules and more careful review of the trade-offs involved when projects are designed to include as an objective the development of local capability for manufacture of some of the specializ- ed equipment involved. There is considerable interest among the semi-indus- trialized countries in using large investment projects to promote the deve- lopment of local capital goods industries, a practice which has also been favored and used effectively in most advanced countries. There is need to appreciate at the very outset and to evaluate carefully the complexities of the nature of the technology transfer involved, so as to be prepared to take the required measures to minimize the costs and the delays. Finally, exter- nal technical assistance plays a significant role in avoiding delays in implementation and in ensuring sustainable absorption of new technologies. Attachmant BANCA DZ INVESTITII 14 Buch April M,r985 Foreign Polations e Unnam servhm Department A - -wpen MW a .. No. colourS FROM THE BORROVER Mr. Yukinori Watanabe Director Operations Evaluation Department Re: Project Completion Report OTELINOI Special Steel Project (Loan 1027-HO) We thank you for the remittance of a copy of the first draft of the project performance audit report for the above mentioned project. In order to accurately reflect some events which took place during the project !mplementation, we take the per- mission to drew out the following comments which we would kindly ask you to be taken into consideration in formulating your final report. 1. In chapter I "Introduction"pag 4titem 8, please replace "While the State planning authority set all targets and norma (including prices) . . . " by "While'all targets, norms and prices are established by the State central authorities . . . ", since tke main State central authority involved in setting the prices, for example, is State Pricing Committee and not State Planning Committee. 2. In chapter I "Introductionw,page 5. lines 1 to 3, please replace " . . . . a separately established enterprise which was part of the Steel Central within the ministry of Metallurgical Industries." by " . . . a separately established enterprise, direct subordinated to the Ministry of Metallurgical Industry.", since OTELMROX-Tirgovigte Enterprise is direct subordinated to the ministry. L P. .1atu ofc2ar u .e waMwon..m - 15 - Attachment Page 2 3. In chapter I "Introduction".page 5,item lo, please reword it as follows: " In 1978, in the context of what was termed the New SconoMic and Pinancial MeasureS (NM), major reforms were. introduced in order t6 raise the autonomy of each enterprise, the extending its competences and stributions in decisions making process in the framework of the unitary management of the entire economical and social life. This program providing for the strengthening of selfeanagement, economical selfadminis- tration and selffinancing, has had the purpose of raising the use efficiency of physical and financial resources of the enterprise. One of the instruments is the increased role of the incentives for workers in the production process. 4. In chapter IV "Project Implementation, page 9, item 17 the last line, please replace R . . . with the guidace of IPROLANO by I. . . based on the design drawn up by IPROLA." 5. In chapter IT "Project Inlementation". Page 1g, item 2o and in chapter V "Technology Transfer". page 17,item 34 the parts referring to the use of consulting services to assist in the technical evaluation of the bids for Cold Mill. We would like to make the following comment: During the Loan negotiation,it was agreed that an amount of US 3 50,000 to -be -provided for consulting services to assist IPROLAK (Design Institute) in the evaluation of tie technical bids, as a possibility and not as an obligation, the Bank and the Borrower having the right to agree to renounce to such assistance if it is not needed, as it was provided in the Supplemental letter no.2 to the Loan Agreement regarding the assistance in procurement far this project. The International Competitive Bidding for Cold 4ill was awarded based cn the Bids Evaluation Study drawn up by IPROLA; and reviewed by the Bank's representatives favourable considere. both technical analysis and technical discussions held by IROLAII with the consortia participated in ICB. This practically proved the Design Institute's capability to evaluate the tech- nical bids submitted by consortia without the foreign consulting a /. S16 Attachment Page 3 services to be needed.- Without to contest the utility of the foreign consulting services,it was not considered to be needed and it was practicall, proved that it was not needed to engage a foreign consulting company to assist IPROLAM in technical bids evaluation. We point out the Bank's assistance in reviewing the technical bids by US Steel, the respective comments being of real use to IPHOLAi durinL their technical Uiscussions with the consortia. Although it was considered that it was not needed, the efforts were however made to find a company submitting a resonable effer. We consider that we were very right in qualifying the offer of US S 200,000 in addition to US 5 200 per day each specialist and transportation expenditures and daily allowance, to be exag- gerated and unacceptable. Having in view the above mentioned, we consider that a re- allocation of Loan amount would be more justified than cancella- tion by the Bank of the amount of US S 50,000. 6. In chapter IV "Project ImDlementation", page 11, item 21 and chapter V "Technology Transfer", page 18, item 35 and 36 the parts referring to the import of know-how and technical assistance for hot rolled coils production in Galati Steel Plant. We would kindly ask you to delete the affirmation that: " This issue became the subject of considerable friction between the Bank and the Romanian agencies;" on page 35, and items 21 and 36 to be reworded based on the following consideration: Having in view the accumulated experience in our country in hot rolling process of the stainless steel and the fact that the amount required by the foreign supplier was excessively costly (over US 8 1 million), it was decided to take it out from the main contract for the Cold Mill. However, it was agreed with the foreign supplier an agreement, as a part of the main contract, by which there were provided not only the Buyer's obligation to review the facilities in Gala,i -.teel Plant and to draw up the technical documentation for the modification and completion of the facilities in Galati Steel Plant, and, as an assurance, the possibility to have the acess to the foreign supplier's know-how, .1/. - 17 Attachment Page 4 in the case of unsuitable quality of local manufactured hot rolled coils. Furthermore, it was agreed and a lot of hot rolled coils manufactured in Galati Steel Plant was sent to Japan for testing. At this tests held in Japan, in May 1978, in the presence of the Romanian specialists, the results were suitable for lo coils out of 27 coils sent t. Japan. 7. In chapter IV "Project Implementation",page 11, item 22, please to add the following to the first phrase: ". . . with machinery being manufactured for the first time in Romania, based on the technical documentation from the Japanese suppliers." 8. In chapter IV "Project Inplementation", page 11. item 22 and page 11, item 25, please replace ". . , had to be re-manu- factured" by ". . . had to be adjusted." 9. In chapter IV "Project Implementation". page 11, item 23, please add the followings: "When the matter was subsequen- tly raised once more, due to Romeania's efforts to find a third consortium to participate in ICB, the Bank did not agree. . 10. In chapter IV "Project Implementation" page 12. item 24. please add the followings: r A further element in the delay arose from the decision of the Romanian authorities to increase the share of locally made equipment, Romania having experience in equipment manufacturing for this type of rolling mills (Bar Mill do that. . . n. 11. In chapter IV "Project Laplementation", items 27 and 28 to be reworded having in view the following considerations: The techno- economical documentations for the investments projects are drawn up using normatives,norms,prices and tariffs approved by Law for the establishing the majorit. of expenditures categories. Therefore, the estimations in projects appraisal are very closed to the actual expenditures during the project imple- mentation. Even -f in establishing the estimations for the invest- ments expenditures by the designing institute a tendency to be overly conservative would appear, it has to be noted that the techno-economical documentations drawn up by the designing insti- tutes, before to be approved, has to be reviewed by many authotim .1/. Attactment -18- Page 5 the techno- economical councils of the ministries and central authorities(State Planning Committee, Linistry of Finance, Investment Bank, Supply and Pixed Assets Administration ianistry, State Pricing Comaittee, State General Inspection for Investmenzs and Construction and others) which, among others, supervise the observation of/noam, normatives, prices,tariffs, as well as the deletion of all overestimated and unjustified expenditures. If during the implementation of works it is required to increase the estimations for several categories of expenditures, these can be covered from the savings of other categories of expenditurea so that on the total, the expenditures are framed as a rule within the estimates. Only under circumstances when this coapensation is not sufficient, with a view to increasing the total value of the investment, the approval is required to be released by the same body having approved the initial documentation (respectively by the enterprise, central, ministry, decree). 12. In Chapter IV "Project Implementation" item 29 - the first phrase should be continued with the following text :"to the end that the construction organization is obliged to observe the contractual provisions concerning the physical volume of the works performed within the provisions from the documentation approved 9 As concerns the aspects introduced in the second phrase, we consider as normal that the increases in costs, experienced by the cor:truction enterprises (and the savings as well), would affect the financial and economical results of the executing enterprise since these do not depend on the way of organizing managing and carrying out the activity of the respective enterprises. We would kindly ask you accordingly to delete both the last -phrase from the item 29 and the third phrase from item 4o, Chapter VII " Economical and Pinancial Viability". 13. In Chapter IV "Project Implementation", page 15, item 3o, to replace :"... that an important share of the locally produced equipment for both mills had to be remanufactured "... by "... that share of the locally produced equipuent for both mills had to be adjusted.. ." 14. In Chapter V " Transfer of Techonology". page 1,9 Attachment -19- Page 6 item 37 and Comments to Project Completion Report, page 3, item V.10 to delete the second phrase from item 37, beginning with "Testing of the facilities..." for the following reasons : an important .share of the steel types required for the cold processing in the Tirgoviote mill could have been produced beginning 1978, at the steel plant no.2 and strips hot rolling mill existing in Galati Steel Plant. The AOD equipment in the Steel Plant of Galati was, indeed, comissioned later, in 1982, but this fact did not strictly conditioned the supply of raw materials for Otelinox. For the technological tests, the Japanese supplier prefered to use the own raw material, the fact for which 3,ooo tons have been imported. This does not mean that the raw materials have been imported because it could not have been produced in our country. 15. In Cheater VI "Performances in operation", item 38 and in Chapter VIII "Conclusions and general comments" - to delete : because the recession which persist in Romania " and respectively "the demand being at present reduced by a severe recession", because it cannot be said that in Romania there is recession, when all the achieved development growth rates were maintained at a high level. In 1984, the achieved national income was 7.7% higher than that achieved in 1983, the industrial production higher with 8.4%, the gross agricultural production higher with 13.3% , the volume of investments higher with 6.1%. The average growth rates are to be maintained also in the period 1986-199o, as for example : the national income will increase with an average growth rate of 7.6-8.3% the industrial goods production of 6.o-6.5%, the net industrial production of lo.o-lo.6%, the gross agricultural production of 5.4-5.8%, the volume of investments of 1.8-2.5%. Even if there was a cerr4t -temporization of some development rates, these have been caused by the economic and energy crisis recorded in the world economies which has influenced the economy of our country as well as by some temporary financial difficulties which we had to face. 16. In Chapter VII "The economic and financial feasability' item 4o - we consider that the financial rate of return can be taken into account into judging the results of the project, because even in establishing the prices of the products it is considered to cover the production expenditures and getting a profit, in the production process can occur situations in which the production costs are higher and the respective enterprises do not achte.ve the planned .1/. - 20 - Attachment Page 7 level of benefits, but even have losses. 17. In Chapter VIII "Conclusions and general comments": the delete the itects 45-52 which refer to matters of other Projectst implementation and for which comments were made at the time. Je look forward to receive the final report which will be distributed to the Executive Directors. With thanks, Yours sincerely, Alexandru Olteanu /Director - 21 - PART I PROJECT CCHPLETION REPORT OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-10) May 3, 1982 -22 - I. PR* T* DESCRIPIaf AD T3 7D2 A. PROJECT OBJECTIVS AD IlS 'RIMUON 1.01. Th project,as a part of overall progrem of Ronanisa for development ad diversifying of the steel inuastry production, has as main objectives, the substituing of the stainless steel shets and stripe imports ad the Increasing of rods and bars production to cover the increased internal o*- n*-tion. Oe project includes two rolling aills,operating separa- tely and including the related finishing equipment and support facilities: a Cold MEll to produce 3o,ooo tons per year of staln- less steel sheet and strip, and a Bar Mill to produce 12o,ooo tons per year of rod and mall bar products. OTZLZIMX is not an integrated steel plant and therefore it receives-the semifinished products from Galati Steel Plant (hot rolled coils for Cold 1ill) and Tirgovi9te Special Steel Plant (billets for Bar 1111). Cold Bill includes fasces,hot rolled coils pickling and Gmesling lines,aatralisation station, hot rolled coils preparation line, Sandalmir mill, cois1 polishng line, cold rolled strip pickling and annealing lines, longitulinal and tranaveresal shnering line. Bar MR11 includes furnaces, the rolling line itself , bar adjusting line and rod adjusting line and finishing facilities. Details regarding the production facilities for Cold ill and Bar ME11 are abown in M . B. PHOJECT SUDARY ULTA 1.02. e following tables compare major project parameters at appraisal with actual results an the project completion: KEY PROJECT DATA Item - Apraisal Actual Bstimate Azernave Unmare I II Total Project Cost (USS =nl21on)a) 185.3 176.8 187.9 Underrun or overrun (%) loo.o 95.41 lol.4 Pized Assets (US$ million) 166.2 146.1 156.8 Working Capital (US$ mi114on) 8.o 12.8 13.5 imcl4in =t at during construction - 23 - I-eu Appraisal EzBtimate Actual Loan Amount (US$ million) 7o.o 69.95 Disbursed - 69.95 Cancelled - o.o5 Repaid (including March 1,1982) - 16.o4 outstanding - 53.91 Date Physical Components Completed Cold Kil June 1978 December 1979 to October 1980 Bar Will June 1978 March 1981 to March 1982 fconomic Fate of Betarn (M) 14.6 Pinancial Rate of Return (W) 12.9 16.3 OTHER PDJECT DATA Item Original Revision Actual Plan Board Approval - - July 5,1974 Loan Agreement Date - - July lo,1974 Effectiveness Date Feb.28,1975 April 3o,1975 April 3,1975 Closing Date Dec.31,1979 - December 31,1979 Borrower Investment Investment Bank Bank Executing Agency OTELIKOX - OTELIOX Pincal year of Borrower Calendar year 000-K- EXCHANGB RATBS lame of Currency Lei Year Project Appraisal (1974) Exchange rate: US$ 1.oo = Lei 2o March 6,1978 to January 1,1981 US$ 1.oo = Lei 18 Project Completion (1981 -1982) US$ l.oo = Lei 15 - 24 - C. PROJECT I **hN! ATION AND COMPLETIDN 1.03. 2he two mills completion wa estimated, at the tim of appraisal, to take place in June 1978 and to reach the full production during 1980. The actual commissioning of the main production facilities for Cold Mill had taken place in December 1979,when the hot rolled coils pickling and annealing line, the neutralization station, the coils preparation line and Sendzimir mill started to operate. The other production facili- ties had been put into commissioning one by one, the last being put into commissioning in October 1980. Bar Mill had been put into commissioning in January 1981, when it started to process the first carbon steel billet during the technological tests. The actual implementation schedule compared with appraisal estimates is given in Annex 2. Under these circumstances, the production capacities were achieved graedually, with delays compared with appraisal estimates (July 1978 for both mills) and the terms guaranted by the contracts with the foreif suppliere1Dec.1978 for Cold Mill and Sept.1979 for Bar Mill). Achieved Actual con- Delays Delays production capacities missioning compared with compmadstb date appraisal tk amEnbd estimates term by the costracts sm fameIgm sup- Pliers Cold Mill - 4,5oo t/y December 1979 18 months 12 months - 11,5oo t/y Pebrtary 1980 2o 14 - 8,ooo t/y March 1980 21 15 - 6,ooo t/y October 1980 28 22 Bar Mill - 4o,ooo t/y March 1981 33 18 - 3o,ooo t/y August 1981 38 23 - lo,ooo t/y November 1981 41 26 - 4o,ooo t/y March 1982 45 3o There are prospects to achieve -full production in 1985 for Cold Mill and Bar Mill. - 25 - A maor factor which contributed to delaying completion of the project was the much longer period of time than that projected at the time of appraisal for the preliminary and final technical discussions with the suppliers in consortia participating on ICBa. Thus, on the time of project appraisal it was envisaged to commence discussions with bidders on August 1974 and to complete them in March 1975, when fInal technical bids and price bids were to be received, so that to conclude contracts on July 1975. In fact, Cold ill contre act was concluded on December 30, 1975 and Bar Mill contract on October 11,1976. Due to the fact that at a certain moment only two German coansortia competed in ICB and the Bank had recommended,aaA IB agreed, to extend the competition, the Bar Mill contract was much delayed. Although the 1omanian authorities suggested to ferm a consortin of the Romanian companies, having in view the ezperience of the Amanian enterprises in manufacturing metallurgical equipment for bar mils, the Bank did not agree with this alternative. Under these circum- stances Metalurgical Industry Ministry insisted in increasing the competition and finally, but with much delays, we suoceded to he. a third consortium, a Japanese one led by Marubeni, decided to participate to ICB. The delays under the procurement procedures, by concluding the contracts for Cold Mill with 6 months and for Bar Mill with 15 months later compared to what was projected on appraisal, cotr:1 bated to delaying the commissioning terms from June 1978, fore- casted on appraisal, to December* 1978 for Cold Mill and September 1979 for Bar Mill, which were the ters guaranted by the consortia through the respective concluded contracts. Another factor which led to delaying completion of the project, especially of Bar Mill, was due to the fact that on granting the loan the Bank forecasted to cover under the loan only 65 % out of the foreign currency expenditures for Bar Mill. Por this reason, it war agreed with the winning bidder ( consortium Marabeni - Japan ) that a large amount of the compo- nent parts to be locally manufactured,based on the technical documentation received from the foreign suppliers, traying to cover all the foreign ourrengy expenditures for both mills out of - 26 - the proceeds of the loan. This re sulted in an elaber te cirouit and interferense of the technical doomentation between foreign suppliers and reeponsable agencies from Reauis (IPDLAR, OTELIEI and various mnafacturing enterprises) requiring longer period of time. Under theme cironastances, it was required also a more complex coordination than it was forecast initially. The third factor which contributed to delaying comple- tion of the project, which is in fact a consequence of the second factor, there were some delays in the manufacturing of the local equipment. The technical documntation reeived from the foreign suppliers had to be adjusted to the technical posibili- ties of the manafacturing enterprises within the oentry, ezchan- ge of views and clarifications took also place with the foreign suppliers, all these determIning delays in starting of the manufacturing of the local equipment than initially expected, and after their completion, the foreign suppliers imposed some remedies to be done. 1.04. Despite the ineonvenients created on the project implementation, which required a more complex coordonation, OTELINOI Tirgovigte Enterprise beeked up by the inis try of Metalurgical Industry and Investmeat Bank, succeeded to fulfil its responsabilities in general coordination of the project, supervising at the local manufacturing enterprises the mantefo- turing of the equipment. The organis tional set-up of Tirgevigte 0230.IO Raterprise has- recently been improved,in order to ensure a better coordination of the ecomemic and fiAancial matters, which become more complex after the comissioning, by appointing an economic director who is in charge of economical and financial activity of the enterprise. A technical director has been also appointed. D. PROJRCT SCOPE AID COST 1.05. Total financing required for the project amounted to US$ 176.8 million compared to US$ 185.3 million estimated at the time of appraisal. The total capital cost is detailed on the two mills in Amex 3, and the following table compares the estimates made at the time of appraisal with the final capital cost as a total per 0BLINOX project. - 27 - Capial Costs as Appraiet ad Actual (rS* millma} ioreign Iacal - m AlL - Ate-Ale I II I II . 1.EqupmentIIZ 57.8 18.6 76.4 l.~pEfit) 5.867.2a) 16 26 .5a) 9.49 7* 93.IP 96.68) 2.Spres 4.6 0.5 5.1 3.E"rnnsering, ohno 1 - 5.1 16.7 6.1 2.5 2.8 11.2 19.2 19.5 aetanoe 4.Contructlon & InatallatIon - - 45.3 34.4 38.2 45.3 34.4 38.2 5.Superrition & Start-up - - 1.7 2.2 2.4 1.7 2.2 2.4 6.Prø-opørating Ezpensam o.2 -- o.7 1.. 1.1 0.9 1.o 1.1 Sub-total 67.7 83.9 72.9 66.6 73.9 14o.6 15o.5 157.8 7. Contig=iø s Phy.ical 7.4 - 6.9 - - 14.3. - - Price (lo%) _1;-.__-3_- - _11,}3 Total P±=d 86.4 83.9 79.8 66.6 73.9 166.2 150.5 157.8 Capital 8.Vorkig Capital 0.2 - 7.8 12.8 16.6 8.. 12.8 16.6 Roqurmt --..-... - - . .- .. .- Total .ojeot 86.6 83.9 87.6 79.4 90.5 174.2 163.3 174.4 coat 9.lIterest Aring constr~tion 9.2 13.5 1.9 - - 11.1 13.5 13.5 Total Finno 95.8 97.4 89.5 79.4 90.5 185.3 176.8 187.9 ZMa projaet esxeted fro all dut"u and taxm o~rtød iltes. r) inolding sparen ALTMATIV I: Actual equivalent in UB* for tha foreign expeniitures at mi*for the o.upijkeoa wlth the e th equivalent la Uf t looal. ex~piture a vas oaloalated based on the sm banse - th exhang re-e of Tei 2o o US 1$. ALTMATIME II:Åotual Oquivalent in UB$ for both foreiga expenditeres a looal expeaditwres at tho date of eah payent,baed on th~ differext ezo~mug raten ef lS 2*,L&9 18 er Lel 15 n US 18. .1/. -28- 1.06. On ompletion of the both mIlls,total cost saying is about V8t 9 million. this saving is particulary due to meek mlele anomt of fensign exchange expenditares for 3ar mL1, obtaiaed on concluding the contract by ICB. fhe saying is also particulary due to some Improvements of the coastruction sola- tions comparlag with those had in view in 1974, by using more economical solutions ( reducing of the shop high, deletion of the cables tunels and location of cables on walls,etc. ). . PIARCING PLAA 1.07. As it was estimated during appraisal of the project, its financing had been ensured out of the proceeds of IBED loan for covering the major part of the expenditures in foreign exchange and out of the State ftnds by way of State Badget allo- estions for covering the other expenditures of the project (including foreign emahange amount anovered by the IBD loan - US* 13.9 million), working capital requirenents as and when necessary and credits granted by IB for interest and comittmnt fee an IBRD loan during the implementation of the project. The actual financing plan compared with the one estimated at the time of project appraisal is as follows: Pinancing Plan (Lei million) Local Porei= Total Appraisal Actual Appraisal Actual Appraisal Actual Loan Punds - - 1,4oo.o 1,345.5 1,4oo.o 1,345.5 State Funds For: -Investment 1,595.5 1,331.5 328.5 245.5 1,924.o 1,577.o -Working axptO 156.3 257.2 3.7 - 16o.o 257.2 -Interest during conatuction 38.5 - 183.4 27o.o 221.9 27o.o (by IB credits) Total 1,79o.3 1,588.7 1,915.6 l,861.o 3,7o5.9 3,449.7 1.08 During appresal it was estisated that 35% of foreign exchange cost for Bar ML to be financed out of local resources (about US$ 16 million), the Dank loan being forecasted to fully finance the foreign exchange cost for Gold Mill (US$ 4o million) - 29 - and only 65% of the foreign eZhange cost for 3ar M1 (5S$ 3. million). Although on the time of eoluding the two sentracts, it was considered that the Bank loan would be sufficient for financing the foreign exchange costs of both mIlls, on effecting the payments due to reevaluation of the contracts euaecles (Japanese Yens and Deutebe Narks) as against S, only 83.4% of the foreign exchange cost had been covered (85.8% for Cold Xill and 8o% for 3ar Mill), the difference being finnced out of local resourceS. - US$ million equivalent - According According Actual to appral- to conclu- DLoan Local sal report dad con-. Z T tracts aa (asgning date) COLD MIL. 39.8 44.1 42.8 7.1 49.9 BAR MILL 3o.2 25.9 27.2 6.8 34.o TOTAL 7.o 7o.o 7o.o 13.9 83.9 1.09. Bank's resources have been fully utilized within the closing date of the loan, although its utilization started later due to delays in proctrement, as shown above. Out of the total amount of the loan US$7 T 114on, were used US$ 69.95 million. In spite of the shortage of the Bank a loan, an amount of US$ 5o,ooo had been canoeled, amount forecast in Amaz 1 of the Loan Agreement to be used for consultant services. Out of the loan amount only amall amount of US$ 1.9 million was utilized for the pmyment of a iomanian sub-supplier for Bar 11, avder the consortium led by Marabeni, the difference of S% 68.1 million was utilized for imports. In Annez 4v it is shown the disbursements schedule of Bank's loan compared to that had in view on project appraisal. P. Allocation of Bank Loan and Procurement 11o. Two international biddings were held, one for Cold M1 and one for Bar Rill. Each bidding consortium were asked to supply a complete equipment package together with detailed eanginseriag, know-how and technical assistance, supervision during equipment manufacturdng and exection and providing performance guarantees 01 - 30 - for at least on year after oomissonng of the tee mills. The ICB have been won by two ~nrtia led by Japanm. oompanies, yISSD IWAI for Cold MilM and MnaRUMI for BEar ill, omposed mainly of Japanem omaies, e»epting NmET sonor- tim werm the mb-suppliere had been Eler & Meumann ah -PG and UZin.portimport -S.R.of Rmani, beaidea the Japanee sub-cuppliers. Souroes of Euipnt Packaxe Paojet Country Total val~s in Covered uner IBRD loan s % of Component Souoes ocntract foreigan foreign , IERD exohangs exchangs * quivalent La 1. ColD NISSM UILL A 3 12,69o,251,296 i 19o21,642,796 42,765,963.54 61.14 Japan 2. BAR XLAEEI E 5,543,650,0oo V 4,153,377,oo4 19,289,178.54 27.58 MTL Japan DK 18,945,304 DE 15,414.254 7,894,857.92 11.28 TMTA * 18,233,99l,296 ¥15,17 5o,o l8o DE 18,945,304 DN 1s414,25469,95o.ooo.o loo.oo .AB it is ahown in the above table, of the loma of US$ 69.95 millian equivalent, 61.14 % was utilied for Cold M11 and 38.86 % for Bar Mi. 1.11. Bank loman alocation provided in the Loan Ageent o~mpared with actual allocation i ag fellowa: Alloömted Amount of the Loan (U$eqaivalcnt) Category loan Agement Realloosted Actual I.COLD IL 3o000,8ooo.oo 47,5oo,00ooo.oo 42,765,963.54 II.BAR ILL 2o,ooo,ooo.oo 2o,o0,000.00 27.184,036.46 III.Consultant 5ooo00 se,, 0,oooco-e IV.Unulloated 19,95o,ooo.oo 2,45o,ooo.oo - TOTAL 7o,ooo,ooo.oo 69,95o,ooo.oo 69,950,000.00 ..j . - 31 - As regards the canceled amount of US$ 5o,ooo.oo it is. to be mentioned that this amount was provided in the Loan Agre- ement on Bank's request,since during appraisal it was estimated that due to the fact that Cold Mill is the first of this kind in Romania, foreign consultants would be necessary to be employed in order to assist the responsable institutions on procurement to chose the best responsive technical offer. The responsable institutions in Romania for procurement suoceded to do themselves a good survey in comparing the bidda submitted to ICB and to chose the most advantageous bid, being not necessary to employ foreign consultants. Under these circumstances, a decision regarding the reallocation of US$ 5o,ooo.oo for other project expenses in foreign currency - which could not be fully covered under the loan - was more justified. II. PROJECT OPERATION A. Commissioning, Production and Sales 2.ol. As a result of the different factors which led to delays in project start-up, especially the delays in procurement, as it was shown in section 1.03, the actual comeisesioning is as follows: Project Component Production Capacity Actual Commiseaks 1. COLD KILL 4,5oo to/y December 1979 11,5oo to/y February 1980 8,ooo to/y March 1980 6,ooo to/y October 1980 Total 3o,ooo to/y 2. BAR MILL 4o,ooo to/y March 1981 3o,ooo to/y August 1981 lo,ooo to/y November 1981 4o,ooo to/y March 1982 Total 12o,ooo to/y - 32 - As regards the raw material for Bar Mill, there are no difficulties in supplying the required quantity and quality of billets from Tirgoviqte Special Steel Plant. Por Cold Mill there were some difficulties in producing the hot rolled coils at Galati Steel Plant, being necessary some modernization and improvements of the existing facilities, Galati Steel Plant is now producing and delivering to OTELINOX lo out of 19 types of the hot rolled coils appropriated to the production require- ments of Cold Mill. For supplying the hot rolled coils had been taken measures at Galati Steel Plant to produce without difficulties the hot rolled coils with minimum foreiga technical assistance. Thus, a technical documentatior including the proposals for modernization and improvements in existing facilities in Gala i had been drawn up, on which was requested the point of view of the Japanese supplier and in January 1978 a lot of hot rolled coils was sent to lissho Steel Japan, for testing. Based on the Japanese recommendations, the improvements in existing facilities were made, so that Galati Steel Plant is now producing and delivering to OTELINOX the hot rolled coils of good quality for some types of steel. 2.02. The total volume of the sales at the full capacity for Cold Mill and Bar Mill is the same with that estimated during appraisal, i.e. 3o,ooo to/year of stainless steel strips and sheets and 12o,ooo to/year of rod and small bar products. The product mix at full capacity of the two mills compared with that estimated on the project appraisal, is as follows: - 33 - Cold Mil1, incuding actual prodution in 1980 and 1981 PRODUCT XIX - COLD ILL current estmmates at Product mix Appraisal Actual full capacity - 1985 tonQA1M3 -191 t ons tons 7b zonw Austenitic V 4541 (AISI31 12,ooo 4o.o 1,257 31.6 278 3.2 8,2oo 27.3 W 43o6 (AlMs3o4L) - - - - - - 76o 2.5 W 43ol (AISI3bQ 2,4oo 8.o 578 14.6 282 3.3 2,4oo 8.o W 4311 (AIS13m")- - - - - - 76o 2.6 W 4571 (AISI316EW2,4oo 8.o 225 5.7 1 0.0 2,4oo 8.o W 43oo (AISI3o2) 1,75o 5.8 307 7.7 158 1.8 1,75o 5.8 W 4828 (AISI3o9S)1,75o 5.8 153 3.9 - - 1,75o 5.9 W 4841 (AIS3oV 1,8oo 6.o 151 3.8 3 o.o 1,8oo 6.o W 4401 (AISl316) 1, 9oo 6.4 - - - - 76o 2.5 W 4429 - - - - - - 76o 2.6 w 4436 (AS1316) - - - - - - 1,9oo 6.3 W 4435 (AlS1316) - - - - - - 76o 2.5 W 4335 - - 138 3.5 - - - - W 4878 - - 39 o.9 - - - - W 443o - - - - 8 .1 - - W 4716 - - - - 81 1. - - Sab-total 24,ooo So.o 2,848 71.7 811 ;.4 24,ooo 8o.o Fettic W 412o (AISI416) 45o 1.5 - - - - 45o 1.5 W 4o16 (AISl43o) 3,15o lo,5 897 22.6 6.3o9 73.o 1,31o 4.4 W 4713 45o 1.5 - - - - 1,84o 6.1 1 4762 - - - - - - 45o 1.5 W 4742 45o 1.5 - - - - 45o 1.5 Sub-total 4,5oo 15.o 897 22.6 6,309 73.o 4,5oo 15.o Irtensitic * 4001 75o 2.5 - - - - 76o 2.5 * 4oo6 (AISI41o) 750 2.5 228 5.7 1, 517 17.6 74o 2.5 Sub-total 1,50o 5.o 228 5.7 1.517 17.6 1,5oo 5.o TOTAL 3o,ooo loo.o 3,973 loo 8,637 2.o 3o,ooo loo.o Carbon Steel - - - - 500 9,137 - 34 - Bar Kill, including actual production in 1981: PRODUCT MI - BAR MILT Actual Current esti- Product mix Appraisal In 181 mates at full prices ons $/to Aclio Bueldon 48,34o 40.3 6,914 17.7 46,3oo 38.6 9Qo -Ball-Bearing Steel 26,3oo 22.o 927 2.4 27,3oo 22.7 65o -Spring St*el 23,3oo 19.4 - - 23,3oo 19.4 56o -Toole Carbon Steel - - - - 7,7oo 6.4 1,1oo -Alloy Tool Steel 8,3oo 6.9 - - 1,4oo 1.2 2,3oo -Stainless and Beat Resatant 1,21o 1.o - - 3,55o 3.o 2,7oo -High-Speed Steel 2,55o 2.1 - - 4,150- 3.5 6,8oo -Quality Carbon Steel - - 31,3oo 79.9 6,3oo 5.2 3oo -High Tensile Steel 10,000 8.3 - - - - 95o TOTAL 12o,ooo loo.o 39,141 loo.o 12o,ooo looa The current estimations of the product mix dt the full capacitie s are those guaranteed by the foreign suppliers through the concluded contracts and it fulfills the requirements of the consuming industrie s. Using the same prices (shown In the table), known by us as prevaling prices on the international market in 1981, for each type of product, both for the product mix had in view on project's appraisal and currently estimated, it is resulting an favourable effect of the changes in product mix, i.e. an additional production value of US$ 1.2 million (US$ 119.2 million for the current product mix minus USS 118.o .2illion for the product mix on project's apprai- sal). The quantitative charges of the product mix for Bar Mill which appeared after the project2a appraisal, were imposed by the changes in requirements by groups of steel, and the need to spe- cialise the existing rolling rills in producing the various easortments of steel on an economical basis. The major change consists of giving up to produce lo,ooo to/y of high tensile steel at Bar ill of OTILIKOX, quantity to be produced by CIMpin Tursil Metalurgical Plant,the endowmut thereof enabling the efficient - 35 - production of this type of stee1, in an integrated flow. 2.03. During the first three years of operation after the coa"missioning of the two production capacities, the sales volume to be achieved by OTELIfOI Enterprise represents 54.3 % for Cold Mill and 69.5 % for Bar ill out of the estimated volume at the time of appraisal. This was mainly the result of the fact that the commissioning of the production capacities had taken place gradually, as it was shown in pare. 2.01, as well as some delays in implementation of the modifications and improvements at the existing facilities in Gala;i Steel Plant enseuring the raw material for Cold Mill. OTELIfOX: Achieved and Estimated Sales Iq COLD MILL Year I Year 2 Year 3 Appndael AcIhrd Apprisal AbeIW d Appzimnl BMfuf1s (1978) (1980) (1979) (1981) (1980) (1982) Domestic sales - tons 6,7oo 3,973 27,ooo 8,637 3orooo 22,ooo - as % of capacity 22 13.2 90 28.8 87 73.3 - carbon steel - - - 5oo - 1,ooo Export sales - tons - - - - 7,ooo - - as % of capacity - - - - 13 - II. BAR MILL Year 1 Year 2 Year 3 APMM 1MGRO' Appraisal Bdtkuft Appaisal r1 (1~978) (1981) (1979) -(1982) (1980) (1983) Domestic sales -tons 54,ooo 39,141 112,5oo 7o,ooo 12o,ooo 90,000 -as c o 45 32.6 94 58.3 loo 75 - -36 - Although there are sm differences in comparison with the schedule to fulfill the parameters at the tims of project appraisal,it is expected that.begiimng with 1985 for Bar Mill and Cold 1ill, the sales of the two mills products to be at the level of those estimated at the time of appraisal. B. PRICZ AND PRODUCTION COSTS 2.04. The margin between average price and average direct cost per ton of finished products is almost the same with the anticipated level. The table below shows the comparison between prices and costs: OTELINO: Price and Cost Relationship at Pull Capacity Average sellif Average Direct Gross Profit price per ton Cost per ton/2 Margin (1) -(2) Appraisal Actual Appraisal Actual Appraisal Actua TOTAL OTELIOX 14,8o3 24,22o 11,146 18,55o o.33 o.31 A.Cold Mill Products Domestic Consumption Austenitc 45,197 8o,467 Penitic 29,o83 5o,572 Nortensitic 25,394 47,983 Export Auatenitic 45,197 8o,467 41,79o 74,358 3a,763 53,864 o.36 o.38 B. Bar Mill Products Domestic Consumption Rods 6,923 13,653 Bars 9,645 8,212 8,o57 11,686 6,242 9,722 0.29 o.2o NOTE: The average selling prices were calculated based on the selling prices resettbd in 1981. Gross profit margin is expected rather to increase than to decrease in the next years,given the fact that prices resettlement are*forecat on shorter periods of time,as a rule yearly, than in the previous periods of time. - 37 - 2.05. The significant increase in actual avrauge prices is due in the first place to prices resmttlemst,both for inputs and outputs, the last took place in 1981, which led to a saubstan- tial increase of selling prices of OTLINOx products, as well as a different product mix. C. PRODUCTION COSTS 2.06. It is now estimated that direct production costs, at full capacity, will be 66.4 % higher than those expected at the time of appraisal (see table below). 1his increase is due partly to the real price increase of major raw materials (especially billets and hot rolled oils). Direct Production Costs per Tonx / Pull Capacity Cold Mill Bar Mill sal Current btmte Agraisal Current wstea /to Lel/% L Leito I main raw 25,263 82.1 45,171 83.9 5,353 85.8 8,795 9o.5 materials A"Iary 2,28o 7.4 2,494 4.6 141 2.2 lo7 1.1 materials Labor 723 2.4 972 1.8 198 3.2 19o 1.9 Utilities 767 2.5 977 1.8 17o 2.7 117 1.2 Maintenafze 1,73o 5.6 4,250 7.9 38o 6.1 513 5.3 Total 3o,763 3oo.o 53,864 loo.o 6,242 looo 9,722 loo.o Total OTBLINOX (Weighted Average) Appraisal Current Estimates Lei/to Lei/to % 9,335 83.8 16,o7o 86.6 569 5.1 584 3.1 289 2.6 346 1.9 3o3 2.7 289 1.6 65o 5.8 1,261 6.8 Total 11.146 loo.o 18,55o loo.o Product mix estimated during appraisal and presently forecast. Excludes depreciation, general expenses and financial charges. - 38 - The table aelow compares the appraisal estimates with the current direct prodnction costs. Direct Production Costs (Leifto) Poll Capacity Prodaote Appraisal Current NEtimates % Inazease Hot Rolled Colls 19,5oo 34,464 + 76.7 % Billeto 5,435 7,95o + 46.3 % Production costs are shown in detail,by the two mills, in Annezes 5 and 6. D. PIMANCIAL ESULTS AID BTUM 01 JRVSTMT 2.06. fhe overall financial performeance of 02RLIEO is better than anticipated at the time of appraisal. The prospects for the coming years are also forecasted to be better than anticipated. The accounting statements are in Annexes 7, 8 and 9. The major performance indicators are shown below: Financial Performance Indicators Ap1al, Actual Apsibal Aakul p2018ala WIN. An sal attinse (1978) (198o)- 1979 09M1) -(198o) (92 91 18 tone Product:ion Co2d M 6,7oo 3,973 27,o 8,637 3o,.oo 23,aoo 30,oo 3o,.ooo Bar RM1 54,oo - 112,5oo 39,141 12,ow 7o,awo 22a%ooo 9o,ooo 6o,7oo 3,973 139,50o 47,778 25o,*** 93,oo 15,ooo 12o,ooo m- nIllon lei1 Net Revannes 631 169.7 2,o3o 635.6 2,2a 2.3674 22a 3,121.3 Coat .of Sold Goods 73o 166.o 1.773 583.4 197L 3,9o.6 1,871 2,493.9 Net Profit Before Sz -99 3.7 257 52.2 35o 426.8 35o 627.4 Net Profit Before Teams as %of -35.7 2.2 12.7 8.2 158 18.o 258 2o.1 Net Flevenes 2.07. For the purpose of making a new estimate of the financial rate of return of OTLIOX project, the following major assumptions hare been made (i) the 1981 steel products - 39 - prices were assupped to be unchanged during all coming years, both for inputs and outputs, (ii) the production will reach the figures presented in the table in pare 2.03. and 2.06, reaching full capacity utilization of 15o,ooo tons In 1985. 2.08. Under these assumptions, the internal financial rate of return amounts to 16.32 % compared to 12.85 % estimated at the time of appraisal (Annez lo). This difference is due to the capital cost underrun and the general improvement in the relationship between prices and production costs. In the alter- native of the overrun capital coat, the financial rate of return is less, but however higher than that estimated at the time of appraisal. II. OTELINOX PRODUCTS KARRT 3.01. The internal consumption of thin stainless strips and sheets increased slightly betwean 1977 - 1981, being satised during this period mostly from imports. Prices increase for these products on the international market imposed keeping up the level of annual imports under those appraised in 1973, 8-14 % under th" domestic demand respectively. Data regarding domestic consumption and production of stainless strips and sheets and the development of stainless strips and sheets in the period 1977 - 1985 compared with those estimated in 1973 having in view the actual 16IMs of commissloning of Cold Mill within OTELING Enterprise are shn in graph no.1 and the table annezed thereto, as well as,in a separate table, it is shown the consumption of stainless sheets and strips in main consuming sub-sectors. 3.02. For rods and bars produced by OMEL2O1, price increase led to annual imports restriction for this type of products, being necessary to increase their production on the rolling lines, to the prejudice of carbon steel bars, which required more reduced currency funds. The development of consumption and production as well as their annual levels are shown in graph no.2 and in the table annexed thereto. 0 / 0 - -- - Iøpr.uIø 49,73 3600 Prdete " ctu./al ib /91/$ ~27O00 2400 0a-o contsumpfiOn ,. .D Ø 000 96000 W00 8 499 190 48f 182 183 984 98¥ I-r BALANOD etainlean shets ani=rp@ with thicknen of 0.3 to 3 - tons - Acual wstiastigns 1977 1978 1979 1980 1981 3942 198. 1984 1985 1. SOTAL D3MAND 16832 3.813o 392'9.'3 '14.IC, 19142 22000 . 29oco 3cooo 1.Lo0al consumption 16832 1810 192'73 2o416 19142 22opo g3lja 2oo 24eoo of wh.toh: a) Austenitio 10397 1a982 116C5 12004 1,33 345oo 1655o 175oo 8oeo0 b) erritio .575 6205 6622 ?964 6842 6ooo ooo 45o «ço o Marteneitio 86o 943 98 i4 156? 150. 15o £5oo 1oo 2. xport - - - - ·o 4ooo 465 3. aserves refund - ·· - 17oco 3,5o ,315 II. TOTAL RMSOURMS 16U2- 10136 19275 2o16 I%W. 2..>u 28ooo 290eo0 3oo 1. Loosl produotion. 3946 529 4162 591. 1050 2nsm 000 290ou 3ooo 0f whlca a ) Austenato 3946 3729 4162 116 ). 14y w*oo 250ovO 240o0, b perritio - ·7 639 - oo 4 4500 1 o Martennitio - - · 2 1517 15eo o o I5eo 2.10TELIN0X Produotion - - 3973 8637 22.D %tooo 29ooo 3oooo of whiohl 1,. Austenitio 1 - 4i¼ ai' ik5Vo .Ifoo 2 304o 24to b ritio - ...t, 69 63 6m0u 5boo Il-o 45oo o) Mrten.itio - - ggg 151/? 19oo J.5L,4 £5, 15. 1.2. Qula "LAeino de tablI' dsprise ß6 )?* 4163 38 1871x/ - -å-e- 2. Iport. 1C41 11128 71O 827L -620 -gl 3. .hqnoo and oooperation with 2ß45 Z973 S$1 0.29 23 ··· · GORGO ountrleo., 4. Out ofRa es . ·· 24I0 1.565 - - x/ It will be retd/red from operation. ROMANIA i 093LI0X STBL PROMICT Consumption of stainless sheets and srips in main consuming sub-seotorA - tons - Actual IstImallone 1977 19/8 1979 198o 1931 198" 1.9)e3 3 19!85 TOTAL LOCAL CONSUMPTION 16832 1813o 19273 20416 19142 22ooo 23ooo 235oo 211ooo of whichs - steel industry (welded tubes) - - 9G3 14do 2122 25oo 25oo 25oo 25oo - machine building (technological 5578 31'.5 i3o3l 7351 <97o Sooo 3ooo Joco 0ooo sahupment for chesical i .eto.) - ohmaical industry (techn.equip.) 2816 305 567 334o 26'. 16oo 2loo 21oo 2Loo - consumer goods IS8 1603 1655 1951 1289 2ooo 2ooo 2ooo tooo - machine tooleseleotroteohnio 1459 1871 1307 1872 480q- 9Qo 19o 19o 196o and electronio equipment - agrioulture ad equipment for 163 145. 1462 GyI 1477 3oco 33oo 3foo 4ooo food industry -others 779 23 177 C9 878' 3000 R2oo 32oo 3Sbo0 35-o C-IsumIfehism 325 41d011 map 9 - W *l ti 22S- 100. ct4ua/ _________ 298 .26 7 v 7 so ej 82 S 81 er 0NUMPIuN AND PRODUCTION 01 BARS AND RODB IN BAR MILL OTBLIMOX PRODUOT MIx P ROMANAt OTELIHOX STEEL PROJECT Coneumption and Production of Bars and Rode in Bar Mill OTEUINOX kroduct Mix -- Aatual n8tioatlons 0 1977 1978 1979 1980 1981 1982 1983 1984 1985 190 A. PRODUCTIUN Thougand tons 1. Regoia Stea.e Plant 22 22 2:- 25 2f 29 25 25 25 oo 2. Olmpia Turaii metalurgiaal Plant 33 36 35 38 38 3S 4o 34 40 10 #2. 3. Brälla "Laminorul"Enterprise 21 21 2.ä 0 o 20 o 20 to 20 loo 4. Tirgovigte Bpecial Steel Plant 150 159 173 193 195 290 200 22o CCs 121,7 5. Otelul Rogu Enterprise 3s 34 0f 35 0 3Y I 3So 6. Tirgoviete OTELINOX-Bar Mill - 39 TUTAL Production 259 271 287 31 5r2 3"9 4.1o 43Q 47 152,7 B. MORT g 39 75 72 42 27 0. LOGAL 00NSUMP210N 21 31. 562 38Y 394 4 I- 4o 43o 475 124 - 45 - ENT1 :<MEM: :ASPECTS OTELINOX Project includes several pollution abatement facilities to protect ground, subsoil, biosphere,atmosphere. These facilities are now operational and they are satisfactory cleaming all pollution materials before their return in the natural circulation, namely: industrial water, acid water, alchaline water, water with oil, acid steam, wastes, dust from the facilities, steam from the emulsion and oil cooling instals- tions. During the construction of the two mills, an amount of about Lei 39.6 million was spent on water and air pollution abatement facilities, compared with Lei 25 million estimated at the time of appraisal. Basic pollution abatement facilities installed durIng the implementation of OTELIMOX Profact are given in Annex .1. Pollution standards are same as those antici- pated, the same Pollution Monitory Law, as on the appraisal time, being still valid. STAFF TRAINING Due to the fact that the Project is representing modern and new technologies for Homania, especially for Cold Mill, a particular attention was given to the setff training and this would be a major factor in enabling OTELIBOX to rapidly achieve high production levels. The training program was de signed for the specialization of 2ugineers and technicians in the new technologies and to familiarize them with the Japanese equipment and also to operate an the two mills. A statement showing the evolution of the staff specializa- tion and training program, both in Japan and Bomania, by number, period of time and major activities is shown in Annex 12. - 46 - RAUIL: OTE.GM 19IAL SIS= EL PROECT PRUECT COMPLEP3DN EMPOT PMODUCTIMN PACLITIBS I. COLD MILL - batoh annaling - hot rolled utrip heat treatment,anneling a pioklinmg lines - ooil prepartion line - grinding linm - seaizid~r mill - cold rolled trip anneling a pickling lines - col8 grining linø - trnvrs~l uhearing ine - temper mill - longitnainal shearing line - dhet ~hae - poliahing line II. BAR MILL - rolling line: -rods: roller hearthfzaroe, rolling line, rels,ro~s transportor; -bare: bare lnpl~, lineoaing bed, bar* sontrl m pakiging raoilitie; - bare f'4hn l*ine:-black bare: heat treatment fern os, ostrling equipm~nt, atraitghning mah , pekiging equipmnt; -White bare: etratghø m,.aehn, barking - ,controling equipment,griading hi~e - rod finishing line: -heat tretment faeeo,barkig maGhine otraitghening machie. ·！誰一 口1口緬l•I：吃闈瀾t響名N口肖騙ld州 么。I『0細dl自由瀘，潤0N.1奮10奮INj麒l目 叨“衫“。―& 才切jC，。》一 GOID MILI IBAR MILL TOTAI OMINOX Appreleal ~ mo1341992 ÄpprGIMI A~ M!3ý3~ .2186.4r61 MU9 a 0.13419W incmi &~ihua ~ &~kal ~ &gj= wm IgM gom &M xmaj &SM g" 843& .6 0,2 15 85147? 348,8 37 ¥33.5 Iffi. 162.4 484* 616-4ý 18o.3 768.o 968J 21V 63.11 1269.1.2 IAM 2: Bparce 3,0 40,0 10 0 2*o 50,0p 94 2*o 39 n**91m9 k~XOW-kow fieå 79*3 7TJS 157.1 15.4 199,6 2o6& 42*9 25,o 67*9 35*8 118c21%.0122.2 W.S 22%o 5L2 3c8.B 36m teobeggolget, 4#Coutruotlon 4483 - 448.3 359.8 - 399-8 457.4 - 457.4 3154 315.4 905.7 - 99%7 67%2 - 675.2 azactalletion 5!Ekpervlelom 25.9 - 25.9 22.3 - 22.3 7.6 - 796 21*3 211 2*5 - 33.5 43.6 - 43,6 stårt-fap PM-opentiff U -1 4o 15#1 17.9 - 27,9 3.o ~ M 1.7 4 7 IU 44 18.1 39.6 - 19.6 4,1 axp*=*6 Go 7*ooati~noleg 79.1 »oo %**t 6,6 - 64 68,3 1%2 252.5 6.2 - 6. 2 13M 3142 SM6 12.8 - IZ8 Total Pixed OmpZIE Coo-l 795.8 1595.9 602,3 97M 1^.9 795.4 932,719729.1 729.2 612.4 IM 10M VM 1^5 19~ 8.wörkl;; 2~ 10.7 .2 395.9 1561 - .156.3 52.6 1.5 54.1 Moig - ko# lOj 3,7 257c2 - 25%2 9 a å20t, 90.8 7~ 17*1.8 75&6 915.6 4737.2 80.o 93b2 A752,2 830.1612.4 1697% 0 39DU 4^7 4Mo -49 - omLIn=0 BPmIA STEL PJi2T DTSBrSEh T aCEEDUl (U $ 000) originl Appraisal Esti te mm 1974 Aotual Dabursents Year Quarter kmbur t Åibara .= in guate 2&Uati.v la Qwrtr cmative Cola. *M ]r MM Per~ total 1974 'M 0 0 0 0 0 0 ly 0 0 0 0 0 0 1975 I 218. 21. 0 0 0 0 n 349. 567. 0 0 0 0 III 349o 916o 0 0 0 0 Iv 349o 1265o 0 0 0 0 1976 I 349o 16140 0 0 0 0 X1 3490 1963o 2731 0 2731 2731 III 349o 23120 0 -0 0 2731 I 547. 28590 1415 0 1415 4146 1977 I 698. 35570 0 1299 1299 5445 II 12915 48485 762 547 1309 6754 III 756o 56045 19177 561 19738 26492 IV 0 56.45 15235 0 15235 41727 1978 I 396 6ooa5 854 635 1489 43216 11 6975 6698o 177 5419 5596 48812 III 3020 7oo 236 11461 -11697 605.9 1v 0 0 249 3088 3337 63846 1979 0 0 436 889 1325 65171 II 0 0 279 131. 1589 6676. Im 0 0 258 95o 1208 67968 xr 0 0 759 614 1373 69341 198. I 198 411 6.9 6995. 42766 27184 6995o -50- ~EANIA - OTELIIOX STEEL PaJECT PRDJUCT 00MP12T30K R10R? PRODUICTIOJ COST ESTINLTES Cold Aflt at 111 Capsoity Prodwtia (9ooo tons) tartiug with 1985 En. Item VIK Mqu~rtnU 3 Total ProduotionCost of TOM us i. 14± = 161 '000 1. Rew MaterIals: -Hot rolled ooil tons 1.35 4o,5o5 34,464 1,395,788 -Mooveris o.32 9,6oo 4,236 4,666 Bb-total 1,355,122 80.32 2. A=1219X7 Materialo -Se~crio aeid t 0.o4 12o 740 89 -3ydroflouii gei t o.oo6 18o 24,6oo 4,428 -erioholorethylene 1 .o16 480 5,48o 2,631 -1b118 t o.oo16 48 13o,813 6,279 -Other. 61,4o Sub-total 74,827 4.43 3. Utilities -=~tural gag 10313 o.358 lo.74o 250 2,685 -eletriity lo3w 1.oo 30,000 34 -lo,2.o water 103 D3 o.216 6,48. 6.7 3,933 -stam ooreassed GIr,olo. 1,e Sub-total 29,318 1.74 4. waps and Selgrues 29,157 1.73 -Seial tax (4,519) 5. måp 0 ~ga 180,46. 1o.7o -Depreiation (52,955) 6. Genral Pactory overhead 18,140 1.08 Total Cost of Prodotion 1,687,24 leo.oo Not: aer* were bad in view the 'prioes valid in 1981. - 51.- -NZ EONAIA: OTELBI N2BE. PEOJECT PMJEC COM2LWII IBO! PWDJCT220 CoST zSTIK&? Bar ]Lll at N11 CapCity Prouotionj 12o,ooo ton.) t.....ng with 1985 No. Ite P1 mente Prioft tota M Cost of ~=t guf ai t000 1. Eaw Matrials - bilict tcaR 1.120 134,4eo 7,95o 1,68,48o 2. Isoveries - soWMp t .038 4,56o 1,70o 7,752 -soap t 0.025 3,000 28 84 - lat t o.o296 3,552 1,260 4,476 SUb-tel 1905,412 86.95 3. A=lIcry enteriael - rfrictoriem t o.005 6a. 2.55o 93 - rolla i o.oolo34 324.8 35,110 4,356 -itt1^ 1.Mooo667 ac&94 28,*o 2,241 pro' REon gag loN .364 43,68o 7. 3,058 = tools and other 3,124 Sb-total 12,872 1.06 4. VtiItlem - wtåama gas 1031.3 0.10485 12.582 250 3,146 -Clcotrloty 103&&k o.138 16,56. 340 5,63. - tam tom o.0.5 6.o lol 61 - ompressme air 103M3 o.o7o 8,400 64 538 - =tai w.ter 93m3 .o638 7,656 6o7 4,647 - asygen 1N3M3 O.MoM15 18 2,30o 41 Sb-total 14,063 1.16 5. Tam 22,748 1.87 - social tax (3.526) 6. § Ove~d 96,785 7.97 - deproitioa (35,279) 7. Gen=rel Imetor Overhad 12,*e *.99 Ittal Cost at Pro tln 1,213,88o loo.00 Note: Thre war* bad la vlow the prioen vall In 198.. -52- A_-7 RDAJI: OTZLIOI SPRCIAL STL PMJECT PROJECT COPLETIM RPORT RETEimB POREAST Avg.Pric0 Total Raveme Producte Per Ton -Lei Vil on- -Lei- 179 3980 1981 1982 1983 1984 1985 A.Cold mill Pro8ules Domstic Auten~tie 80,467 - 134.4 59.1 ,1668 1,327.7 1,408.2 1,448.4 rerritic 5o,572 - 28.6 264.o 393.4 252.9 227.6 227.6 ertnaitic 47,983 - 6.7 61.2 72.o 12.o 72.o 72.o Carbon 7,236 - - 3.6 7.2 14.5 7.2 - Sab-total 2. - 1,715.o3 - 69.7 387.9 1.549.4 3,6. ,1 .,748.o Exports A5gtenitia 8~67 - - - - 402.3 442.6 482.8 Total od - 169.7 387.9 1,549.4 2,069.4 2,157.6 2,23r.8 B.Bar Mi Produels Domestie la Cols 13,653 - - 244,9 61o.3 785.o 871.1 1,o 46.o la ~a 8,212 2- 277 266.9 297._ 355.9 Total ]kr mml - - 2477 818A 3.051.9 1,168.4 1,4a1.9 Total 02ELOI - 169.7 635.6 2,367.4 3e121.3 3,326.0 3,632.7 ROMANIA i OTALINOX SPRCIAL STEL PROJECT PROJECT COMPLETION REPORT HISTORICAL BALANO IW8TS - Li Thousan - 1975 1976 1977 1978 1979 1980 1981 ASSRS 1. ized Asset. LU 1217 5,22li 24al 461.275 1.174.524 1,772.53o -Grose Fixed Assets 152 1,351 6,155 25,719 468,428 1,27,638 19853,4o4 Depreci lated 45 134 363 1,324 3,153 33,114 8o,874 -Net Fixed Assets lo7 1,217 5,792 24,395 465,275 1,174,524 1,772*53o 2. Current Assets - 3g6 5,281 372996 11227o 257,149 -COab - - - - 11 12o 17o L -Receivables - - - - 63 314 2,42 -Inventory - 43 138 4441 37,823 151,836 24597o -Other Current Assets - 17 168 84o 99 - 8,6o7 3. 29un and Expendituree ror Investments APM5 157476 1.195.o62 2.o26.811W .3o5.2o2 25 2.o75579 4 Prot i n - - 3 - -54H291 TOTAL ASSETS 16,912 158,753 1,2ol,16o 2,o56,487 2,8o8,473 3,554,828 4,159,655 0 1975 1976 1977 1978 1979 1980 1981 LIABILITI8 1. fixed Assets ntad 1217 2,14 24,39 65,215 1.174.524 1,772,53o 2. Current Liabilities - 6g6 5281 37.a 1 4 25 -Short Ter Loans- - - - 663 79,o6o 187,243 -Suppliers ea Payables - - 3o6 5g281 37,333 21,463 8,679 -Working Capital Fund - - - - - So,ooo 61,oe3 -Other Current LiabLUtm - - - - - 1,821 2,426 3. Sources for IavestmentalIg357 *I Jjgg2 2.o26.811 2.o5,2o2 2.224.225 2 *75.M7[ -IBRD Loan - 82915 816,494 1,23,614 1,2o3,772 1,122948e 852,375 -ID Loan - 27,383 66,476 178,779 254,9o6 328,276 440,647 -Pands from Miatstry and State Budget 16005 47,178 X73,5o3 491,4ol 678,452 758,51o 781,649 -Contractore and Suppliers - - 138,57 - - 14,$ , 908 Other Sources - - - 153,o17 168,o72 - - 4* Lwasi - - - - - 3,735 52,195 TOTAL LIABILITINS L4,912 158,753 1.2146e 2,o56,487 2,8o8,47 3,554,828 4,159,655 0 ROMAMIA # O-BLINX 8f1L PROJE0D IN0OE STATEMBNT ( In Lei Million ) AOTUAL 88lMlATED 1978 1979 1980 1981 1982 1983 1984 1985 gro duatJon Gol1dTi - in % of oapaoity - - 13.24 3o.46 76.67 too oo loo - In TPY - - 3973 913 2000 3oooo 3o00 30000 Bar Mill - in % of oapaoity - - - . 32,69 ,.3 7.00 3.33 too - in TPY - - - 3914 7oooo oooo looooo 12oooo Net Balea Domeailos Cold Mill Produats - - 169.7 387.9 1549.4 1667.1 1715.0 1748.0 Bar Mill froduote - - - 247.7 818.O 1o51*9 1168.4 L14o1.9 Exports C Gold Mill Produata - - - - 4o2.3 442.6 482.8 Total - 169.7 635.6 2367.4 3121.3. 3326.o 3632.7 Colt of Goods Sold ireot Rw materials - - 98.2 400.4 1612.5 2o88.6 2168.6 2410o.5 Azxiliary Materials - - 1.8 13.7 61.8 8o.o 83.1 87.7 I Utilities - - 1.5 1o.2 29.9 38.3 40. 43o4 Labour - - 25.2 3o.9 4o.9 48.7 51.9 51.9" Gross Yrofit - - i4. 18o.4 622.3 865*7 982.1 3o)9.2 operating xpenses Genera Faotory vverhead - - 1*6 16.6 18.3 21.6 3a.i1 30.1 maintenanoe and Repair - - 7*8 64.6 lo4.8 128.4 189.0 189.0 DepreoLation - - 29.9 47.o 72.4 88.3 88.3 88.3 Benefits - - 3*7 52.2 426*8 627*4 674*7 7MO*S Intreat on iBRD Loan - - 72.0 66.3 60*2 5.6 46.5 38.9 Benefits After Interest Charges - - -68.3 - 14.1 36b6 573*8 628*2 692.9 ROKNI :OTLINOXSTEL PROJECT In Eal Million 17-1976 W1~ UL 1979 80 1981 1982 1282 1915 8 2poo COLD MILL Revenues - - - - - 169.7 387.9 1549.4 2o69.4 2157.6 223o.8 223o.8 Coats Capital Coats 1.3 112.6 807.1 204.2 281.6 215.5 114.9 - - - - - Raw Materials - - - - - 98.2 239.7 1031.3 1317.8 1311.6 1355.1 1355.1 Operating Expenses - - - - - 37.9 80.9 189.4 222.0 275.8 278.9 278.9 Not Benefits (1.3) (112.6)o7.1)o4,2)k81.6)(181,9) (47.6) 328.7 529.6 57o.2 596.8 596.8 Financial Rate of Return 1 19.99 BAR MILL Revenues - - - - - - 247.7 818.o lo51.9 1168.4 14o1.9 1401.9 Coste CaPiT tal Costs 5.2 6.5 83.3 445.9 3o2.3 39o.1 2o2.5 6.7 - - - - Raw Materials - - - 16o*7 581.2 77o.8 857.o lo55.4 lo5.4 Operating Expenses - - - - - - 55.1 66.3 95.o 118.6 123.2 123.2 Net Benefit. (5.2) (6.5) (83.3)(445.9)(3o2.3(39o.V (17o.6) 163.8 1861. 192.8 223.3 223.3 Financial Rate of Return i 11.o9 OTELINOX (Cold Mill and Bar Mill combined) Revenues - - - - - 169.7 635.6 2367.4 3121.3 3326.o 3632.7 3632.7 Costs Capital Costs 6.5 119.1 890.4 65o.1 583.9 6o5.6 317.4 6.7 - - - - Haw Materials - - - - - 98.2 4oo.4 1612.5 288.6 2168.6 241o.5 241.5 Operating Expenses - - - - - 37.9 136.o 255.7 317.o 394.4 4o2.1 402.1 Net Benefits (6.5) (119.l4)9o*4)(65o.1)(583.9)(572.o) (218..2) 492.5 715.7 763.o 82o.1 82o.1 Financial Rate of Return a 16.32 - 57 - ANNEX 11 ROMNIA: OTELI.3X0 SPECIAL STEEL PIDI0JECT FROJECT O~PLETION REPORT Basic PollfitIon Abatement Pacilities Installed During Project Iplemonts tion - in 3u Milon v Appreied Actual coat oat A. Aeid Treatmnt Neutrelizig pleant for waste water from pLeklng and 2o,ooo 24,75o clea~ig: of which: - hemiil work 131,50 14,70o - construton work 5,22o 7,2oo - electric supply ad electric drive. 65. 1,400 - ventilation 350 1,30> - 28o 15. 3. Settling a Skimin Ecuiment Mill saleg and solids,sed ma- tation, nd oil neparstion 1,000 73o C. Pinig and General Conduits,pipes,eto.- 4,oo 3,50 p= ~mum Ohaust (for soid steam tretaent) - 1o,600 Total 25,9o 39,58. -58- AN 2 Page 1 of 2 z. SAPP Ma3surG ABNAD (JAPAnX) The training of the staff abroad took place within the periods and in the zpamber ahoun below,by five lots: Lot lumber of participants Days 1riod 1 lo (Cold ML11) 45 War.1977 - Jan.1978 2 2o (Cold ill) 12o-15o July 1978 - Dec. 1978 3 6 (3ar 3L11) 6o Peb.1979 - April 1979 4 22 (Bar 3M11) 9o Oct.1979 - Jan. 198o 5 15 (Bar Will) 45 Aug.198o - Sept. 198o II. STAPP TRAING I MH COUNTRY 1. Otelinox nterprise trained its staff in high-schools and vocational schools based on concluded contracts. YEAR STAPP 1975 11) 1976 164( graduated high-schools 1977 115) 1978 67 1979 6o 198o 18 2. Out of them,those who graduated had been employed under probation as follows a Year Probation veriod, 10clas + 12 c tasses + lo olassee + probatlon probaton vostional sohool 1s98 14 electrician 3 lockamithe 3 rollers 1979 3 electrician 24 electricians 1 locksmith 24 locksmiths 8 rollers 3 elearicians 30 rollers -59 -AJM12 page 2 of 2 proba tion period Year lo classes + 12 classes + 1 classes + probation probation vocationl school 198o 3 electricians lo electricians 32 plumbers 4 lockamiths 5 locksmiths 34 lockamithe 4 rollers 4 rollers 34 rollers 1983. 4 under 11 under trainin 32 plumbers trainins 35 lockamiths 1 33 rollers 3. IriAIg ORUrses within OTELIIOI InterPrise UR STAP 1978 33 electricians 44 lockmitb 25 rollers 28 traveliag craMe mechaMiCs 38 laboratory assistaste 1979 29 rollers 38 rollers 198o 27 rollers ( remaine lo) 1981 13 rollers 4. Foremen treining YzAR 1O02VW8 1978-198o 6 - 2 rollers 4 mechanics 1979-1981 6 rollers 198o-1982 12-3 4 mollers 5 electromechanics AMA 5. Pbst gradusted trainiag 1975-1977 3* rollers ( of which in 1978 remal2nA 28) 16 electricians 1976-1978 35 rollers 14 23. slectramchaies -.60 - PART II Comments on PROJECT COMPLETION REPORT PREPARED BY BORROER ROMANIA: OTELINOX SPECIAL STEEL PROJECT (LOAN 1027-RO) Industry Department Division III September, 1982 - 61 - ADDITIONAL DATA ROMANIA OTELINOX SPECIAL STEEL PROJECT PROJECT COMPLETION REPORT Mission Data Sent Month No. of No. of Date of Item by Year Weeks Persons Manweeks Report Identification IND Mar. '73 Preparation Aug. '73 1.5 3 4.5 09/07/73 Appraisal Nov. '73 3.0 4 12 12/05/73 Sub-Total 16.5 Supervision I " Jan. '74 0.7 1 0.7 01/27/74 2 IND/EMENA Legal Feb. '74 .0.7 3 2.1 03/18/74 3 IND Dec. '74 0.7 1 0.7 12/09/74 4 " Feb. '75 0.9 2 1.8 03/19/75 5 " Apr. '75 0.6 2 1.2 05/23/75 6 - May '75 1.5 2 3.0 06/23/75 7 - Oct. '75 0.6 2 1.2 11/07/75 8 " May '76 0.5 2 1.0 05/28/76 9 - June '77 0.7 2 1.4 06/25/77 10 " Feb. '78 0.6 1 0.6 03/07/78 11 - Sept.'78 0.6 1 0.6 10/19/78 12 - May '79 0.7 1 0.7 06/25/79 13 - Jan. '80 0.5 1 0.5 32/11/80 14 " Oct. '80 0.7 1 0.7 10/23/80 15 - Mar. '81 0.9 2 1.8 04/24/81 Completion 1 - Nov. '81 0.7 1 0.7 12/24/81 " 2 Mar. '82 1.7 2 3.4 03/16/82 Sub-Total 22.1 38.6 Total * Industry Department Division I'T. September 1982 -62 - OTELINOX SPECIAL STEEL PROJECT Comments on- PCR I. Closing Date (Page 2, PCR) 1. The "actual" closing date is stated as December 31, 1979. However, the last payment was -actually made on March 13, 1980. II. Project Implementation A. Bar Mill (Page 2, PCR) 2. Although the Romanian PCR ("Part I-) shows the "date physical components completed" as March, 1982 for the Bar Mill, it could be noted that on March 5th the following items were not physically completed: 1. Beat treatment furnace for bars. Z. Bar cooling bed. 3. Turning equipment, finishing. All of these minor remaining facilities are expected to be completed no later than the third quarter of 1982. (This is not reflected in the Bar Chart, Annex 2, PCR.) B. Cold Mill 3. The implementation of the cold mill was extended by long technical discussions followed by an extensive period to negotiate a final contract. This was due in part to the cold mill being the first project of its type in Romania and was also related to other factors. It could be noted that technical discussions for the cold mill took about 8 months and evaluation of priced bids took about 6 months. Given the large price differences between the lowest priced offer (Japan) and the next 2 lowest priced offers (Italy and Germany, higher by 38% an4.70% respectively) it was felt in the Bank that the evaluation period could have been shortened by several months, resulting in appreciable savings to Romania. Also see page 3, IV: Technical Assistance. 4. (Page 2, PCR) In regard to completion date for the Cold Mill, we could add that a full acceptance protocol was signed in April, 1980, but that omission of minor items (i.e., certain annealing equipment) prevented manufacture of the full product ix. The full plant was completed in October, 1980. 5. (Para 2, Page 4, PCR) At the time, Investment Bank representatives and the Ministry of Industry, agreed with the Bank that additional competition was needed; that led to additional effort to obtain a third consortium - (Marubeni). It is recognized that such efforts to increase the level of competition did contribute to some added project delay. - 63 - C. The Bank Loan Amount, and its lapact on the Amount of Domesti Equipment included in the project and delays in completion of project 6. (Page 4, PCR, "Another factor") This is a significant point, and deserves further clarification. One factor, which ms not realized as much as it might have been at the time of appraisal, was that the Bank loan amount itselfl/ would detet aine to a large extent bow much of the project equipment would eventually be manufactured in Romania. The Bank was not fully aware of this aspect at the time of appraisal, and Romanian authorities made little effort to communicate with the Bank in this regard - either at appraisal or during loan negotiations. It is nov clear that immedLately after the loan amount was fixed (at USS70 million) the Romanian authorities were determined to limit the foreign exchange cost of the project to the Bank loan amount, (by exerting very strong pressure on the project design, and foreign equipment suppliers, to increase the amount of local supply) with relatively little attention given to the economic analysis of the effect of this decision (for example, the savings In foreign exchange costs versus the domestic currency costs, and of more importance - the economic cost of additional delays in project implementation associated with a high Proportion of Romanian made equipment and components) as explained in Section 1.03, PCR. This factor was an important influence on the timing of overall development of the project.2/. Sensitivity analysis had Indicated that the project as sensitive to implementation delays and cost increases. III. Capital Costs Local Currency Expenditure (Page 6, PCR) 7. (Table & Para 1.06, PC") At Bank request, local crancy expenditures - in equivalent US dollar t- have been recalculated using the "Bank methodology", i.e., the app.. Late exchange rate actually prevailing at the time of each respective expenditure of local currency. This is indicated as Alternative II on Page 6, PCI. Results of that calculation are given below. PCR Estimate PCR Estimate Appraisal Estimate Romanian Methodology Bank Methodology Foreign Local Total Foreign Local Total Foreign Local Total Total Fixed Capital 86.4 79.8 166.2 83.9 66.6 150.5 83.9 73.9 157.8 Working Capital 0.2 7.8 8.0 0 12.8 12.8 0 16.6 16.6 Total Project Cost W =8. 6 TW 0 i9 T I83 .9 T1M Int. during Coast. 9.2 1.9 11.1 13.5 0. 13.5 13.5 0 13.5 Total Financing Req. 95.8 89.5 185.3 97.4 79.4 176.8 97.4 90.5 187.9 I And not so much Romanian domestic manufacturing capability, or economic considerations. 2/ The Importance of this factor still does not seem to be given due attention in the planning and implementation of other Romanian projects. Foreign exchange restrictions still force utilization of a large portion of domestically produced components - resulting in additional delay in completing other projects. - 64 - 8. When expressed in terms of US$ using the rate of exchange applicable at the time of disbursement - the total financing required for the project is about 1.4% more than appraisal estimates, instead of 4.6% less as given in the PCR. IV. Technical Assistance (Page 10, PCR) 9. Technical assistance for procurement, and technical assistance for production of hot rolled coils were both subjects of extensive discussions with the Bank. The Bank felt that technical assistance for cold mill procurement would be highly beneficial for meaningful technical/economic evaluation of various alternatives proposed in the technical offers of potential suplliers versus the cost differences between respective offers: As mentioned on Page 1, Para 3, technical discussion and bid analysis for the cold mill took about 14 months. In the Bank's opinion, appropriate use of technical assistance could have resulted in shortening of the procurement period by accelerating the technical aspects of bid comparison and evaluation. In the end, the amount of US$50,000 allocated to technical assistance for procurement was not utilized for the purpose intended, and the Bank cancelled that amount of the loan. The important subject of technical assistance for production of hut rolled coils is covered below (Para 10). V. Raw Materials (Hot Rolled Coils): (Page 11, PCR) 10. This is a major point which is not covered adequately in the Romanian PCR. The last sentence in first para, page 11, now explains some facets of the problem (that only 10 out of 19 required steel grades can now be provided from Galati plant), but the significance of that should be clarified. The original bidding specifications, - as requested and approved by the Bank - included the provision of know-how and full technical assistance (by cold mill supplier) to cover production of adequate quality raw materials at-the Galati steel plant (a separate large integrated steelworks). This was intended to assure that the OTELINOX project would be supplied at or near the time of plant startup with adequate quality and quantity of raw materials from Romanian sources to permit f7.1 utilization of the OTELINOX plant. After the bidding documents had been distributed to the potential suppliers, the Romanian parties unilaterally removed this item (technical assistance for production of hot rolled coils) from the scope of supply to be provided by the cold mill contractor. This resulted In lengthy and vigorous discussions between Romanian authorities and the Bank in regard to exactly how and when the needed technical assistance would be supplied (the long lead time required to re-engineer Galati facilities and carry out required modifications, and learn to operate the modified facilities efficiently, was of particular concern to the Bank). Late information indicated that the required full line of hot rolled coils was expected to be produced at Galati steel plant only upon completion of Galati's new argon oxygen decarbonization (AOD) facilities for stainless steel,-(then scheduled for startup May 1982). The significance of this is that if OTELINOX had been completed on schedule (about 2 years earlier), the plant would not have been supplied with - 65 - adequate raw materials from Romanian sources to permit it to operate normally. In fact, the testing of OTELINOX cold mill facilities had to be conducted with hot rolled coils imported from Japan, because in 1980 the hot rolled coils manufactured in Romania were not of adequate quality to permit meaningful performance tests of the cold mill plant. This factor would have been of major importance, and would have resulted in a substantial cost penalty to Romania, if the cold mill had been completed on schedule in 1978. As it actually turned out, there were (and still are - as of the last mission3/) substantial restrictions due to lack of hot rolled coils resulting in both restricted volume and produkt-mix, with associated substantial cost penalties, and slower than normal growth of production at the OTELINX cold rolling mill. VI. Market Demand and Product Mix A. Cold Mill Products (Starting on Page 11, PCR) 11. One of the more important problems concerning the project at this time (during the startup period) is an indicated reduction in domestic consumption of OTELINMX cold rolled finished products: i) At the time of appraisal, estimated projected market demand was: 27,000 ton per year (tpy). ii) Present data indicate consumption of (based on the latest 5-year actual domestic consumption - which has experienced restrictions due to severe limitations on the availability of foreign exchange): 20,000 tpy (1980), and 19,500 tpy for 1981. The latest estimates of domestic consumption are given in Graph No. 1, page 19, PCR. 12. The above data indicate that if present trends and constraints on consumption continue, the Company will probably be required to export a moderate portion of its total production under existing adverse world market conditions. Without long-term experience in marketing of these products on world markets, there is a moderate risk that it may be - confronted with low volume and/or low.product selling prices. Further, if indicated exports cannot be realized, the Ompany may operate its plant at lower levels of capacity utilization than expeezed at appraisal, incurring higher unit costs for its products than originally anticipated. 13. The projected rate of growth of domestic consumption is relatively flat - approximately only about 2% a year. Such a low rate of growth, if extended over the next several years, may result In under-utilization of presently installed capacity for several years. 14. (It could be mentioned that -the Government did not provide full market data for the projPct or for the Romanian steel sector. In particular, the specific link between market product mix data, as compared to end use by the the consumer, appeared to be uneconomic, and at variance with such relationships In other countries. Such discrepancies could not be cross-checked In a meaningful way with steel-using idustries. However, a covenant was included in the Loan Agreement which resulted in certain product mix studies being completed by Romanian authorities.) 3/ At the time of the last mission (March 1982) the new ADD facility was expected to startup in May 1982, but Calati's ability to manufacture the full product-mix still requires additional clarification. - 66 - B. Bar Mill Products (Page 13, PCR) 15. The market situation for the bar mill is more favorable than for the cold mill, as indicated below: Total Romanian OTELINOX Share of Domestic Market Total Domestic Market Appraisal Estimate (1974) 425,000 tons 120,000 tons Present Estimate (1982) 400,000 tons 120,000 tons Other Romanian plants make up almost all of the balance of required supply to the domestic market. The market share of OTELINOX is determined by many factors, including its relative suitability (technical capabilities, quality, cost, etc.) for production of given individual end products, versus alternative producers in Romania. Since OTELINOX is a relatively new plant, compares to most alternative facilities available in Romania, (most of which are over 20 years old) it is likely to be fully utilized and the less efficient (alternate) facilities are likely to be utilized to a reduced extea, during periods of reduced demand. C. Lower Levels of Operation - Startup Period (Page 14, PCR) 16. The sales volume projected to be achieved by the OTELINOX enterprise has been decreased In line with realistic estimates of domestic market demand and realistic estimates for growth of production with the new facilities at OTELINOX; for example, the Romanlan report indicates a level of 22,000 tons projected for the cold mill in 1982 which has been revised downward to 16,000 tons for the Bank's calculation of financial and economic rate of return. Similarly, the projected output for 1983 through 1985 (for Bank financial/economic calculations) is now based on new estimated judged to be realistic by the Bank. (See Annex 1) D. Production and Sales (Buildup of Production) (Page 18, PCR) 17. Production costs have been recalculated,. to show the effect of slower production buildup during the initial years. (See Annex 1) VII. Project Scope (Annex 1, PCR) 18. The basic scope of the project (in terms of physical facilities included under the project, end products, specific production capacities, etc.) is essentially identical to that plA. N- at appraisal. Minor variations in the quantity and type of fina . cshing facilities for end products at the bar mill were anticipated at . wpraisal, since a precise definition of finishing facilities was left flexible to accommodate the specific requirements of the domestic market and economic considerations of finishing the end products either at the producing company or at the consumer's shops. Thus, overall project scope is essentially as appraised; there have been no significant changes In project scope since the time of project appraisal. - 67 - VIII. Ecology (Page 24) 19. Essentially all facilities and measures anticipated at appraisal for the prevention of pollution from liquid effluents were installed under the project. Monitoring practices and physical standards actually achieved are essentially equal to appraisal estimates. IX. Additional Financial and Economic Analysis A. Capital Costs - Analysis of Variances 20. Total financing required for the project amounted to US$187.9 million compared to US$185.3 million estimated at the time of appraisal (Table, para 6). 21. Despite the delay of 28 months in the cold 111 and 46 months In the bar mill, the official capital costs (para 21) indicate only a very slight overrun versus the original estimate. There were, however, changes in the allocation of costs as shown below: Appraisal Actual Variance Z (US$ million) (USS million). (US$ million) Equipment and Spares 96.4 96.6 + 0.2 0.2 Construction and Installation 53.5 38.2 -15.3 -28.6 Engineering, Know-how and - 'eIchnical Assistance 13.2 19.5 + 6.3 447.7 a/ Supervision and Startup - 2.0 2.4 + 0.4 +20.0 Pre-Operating Expenses 1.1 1.1 - - Working Capital 8.0 16.6 + 8.6 +108 Total Project Cost 174.2 174.4 + 0.2 + 0.1 Int. during Construction 11.1 13.5 2.4 + 22 Total Financing Required 185.3 - 187.9 + 2.6 + 1.4 a/ A significant part of this increase was associated with the need for additional drawings and technical data to make it possible to ranufacture components in Romania. 22. The Borrower cited the following reasons for the absence of any (substantial) cost overrun, despite the project's 4 year implementation delay: (1) In 1976, the Government issued a mandate to reduce capital costs In all projects ongoing at that time. As a result the country's technological institutes were instructed to modify and improve design, construction techniques, technology, etc., all aimed at reducing investment costs. The Borrowers estimated that this action, vis-a-vis OTELINOX, served to offset the costs increases which occurred in 1977. - 68 - (ii) Between 1978 and 1981, during the bulk of the implementation period, there were no domestic price increases. (iii) Changes in the protocol with the Japanese supplier resulted in savings4/ of Lei 75.0 million (about US$4.5 million). 23. While the above explanat ions have indeed contributed to reduce costs, it is the opinion of the mission that the real cost of the project is not fully known. Due to the country-s centrally planned economic environment, investment costs approved by the highest authorities become a ceiling that under normal circumstances is not to be exceeded. Furthermore, the official budgeted amount cannot be changed unless supplementary financing is obtained beforehand and this requires a lengthy approval procedure from the State Council. In the case of OTELINOX, no supplementary financing was ever approved, except to cover the Impact of devaluation of the US dollar. Since some amount of domestically supplied equipment had to be remanufactured, it appears likely that those resultant costs were absorbed by the domestic suppliers, the Ministry of Metallurgy, the State Trade enterprise, or are Imbedded in the penalty between the various entities under the "Law of Contracts". Thus, real total costs are probably not reflected as accurately as would be desired in the PCR. S. Prices and Production Costs 24. Due to the low level of capacity utilization achieved to date by the OTELINOX plant, production cost data at full capacity are based on budget estimates rather than on actual performance. The Table below provides a comparison of prices and costs expressed in 1974 Lei. OTELINOX - Price/Cost Relationship (Constant 1974 Lei) Average Sales Price Average Direct Cost Gross Profit Margin Per Ton Per Ton (a-b)/a (a) (b) Appraisal Actual Appraisal Actual Appraisal Actual Cold Mill 41,803 60,906 30,763 44,115 .26 .28 Bar Mill 8,025 12,299 6,242 7,962 .24 .35 On a per ton basis, OTELINOX's gross profit margin at fall production is forecast to improve slightly over the 1974 estimate which is mostly the result of (i) substantial sales price increase to offset increased raw material costs and; (ii) an apparently more profitable product mix for the bar mil15/. 4/ Such "savings" result - at least in part - from minor changes in design, layout, space, other features which usually involve some tradeoffs in other areas, such as cperating and maintenance costs. 5/ It should be noted that the cost data described above (especially "actual - average direct cost/ton") are based on projections of future operations, and not on historical costs - since the OTELINOX plant has not yet achieved normal operations. Thus, the costs are subject to some price distor+ions Inherent in the Romanian system, and the use of such data should be consistent with the limited degree of accuracy/significance implied.- - 69 - C. Financial Results and Rate of Return 1. Financial Results 25. Under the Romarian system, targets are set in the Plan for the performance of OTELINOX with respect to annual production volume to meet market demands. Projected production costs and revenues are, therefore, calculated on these bases rather than with strict adherence to technical considerations such as learning curve, raw material availability, etc., or to market forecasts which in themselves, also, are targets. On the basis of technical discussions held during the PCR mission it does not seem likely that production targets in the period 1982-85 will be achieved and, therefore, sales revenues and production costs have been adjusted downwards accordingly. Full production in both the cold mill and the bar mill are expected in 1985. 26. The income statement projection provided in the PCR, has been modified to reflect the longer learning curve (Annex 1). Since a projected Balance Sheet Statement was not provided in the PCR., it is not possible to measure the company's future performance based on the Bank's standard ratio measurement. However, since availability of funds to meet OTELINOX's obligations at any time are guaranteed by the State, there is no risk of financial difficulties. 2. Financial Rate of Return 27. For the purpose of making a new estimate of the project's rate of return, the following major assumpt.ons have been made: (i) capital costs in foreign currencies (which are expressed in US dollar equivalent) were converted into Lei at the prevailing rate of exchange on the date of disbursement; (ii) 1982 steel prices and production costs were used and were assumed to remain unchanged in future years; however, production unit costs were assumed to be higher during the period of the initial three year learning curve; (iii) the plant was assumed to reach operations at a steady state in 1985, which would be equivalent to a learning curve two years longer than indicated in the PCR. The net cash flow stream as a result of the above was deflated to 1974 terms. 28. Under the above assumptions,-as shown in Annex 2, the financial rate of return amounts to 17.6% compared to 13% estimated at the time of appraisal. The increased return is mainly due to: (i) the absence of any significant cost overruns desp!te the delay in project implementation, and (ii) the improvement in the sales price/cost relationship, particularly for the bar mill products. It should be noted, however, that a 1-2 year delay in reaching full production, or a decrease of 5-10Z in revenues, would drop the return below the appraisal estimate. - 70 - . D. Economic Benefits 29. The economics of the Romanian steel industry have been extensively covered in the country's subsector review report published in late 1979. The study concluded that, while Romania might enjoy some advantage in . production costs per ton of raw steel in view of low labor costs, the comparison at face value with production costs in market economi a is distorted for the following reasons: (1) artificially low capital costs; (ii) there are no capital charges for state budget funds and (iii) raw material prices for inputs are heavily subsidized and do not represent economic costs, particularly for imported raw materials. 30. In view of the project's complex product mix, which makes it difficult to obtain accurate international prices for the various qualities, grades, finishes and dimensions of the special steels and the fact that semi-finished hot rolled coils and billets are not normally traded internationally, a number of assumptions had to be made to establish the level of "under-pricing" in both inputs and outputs. Previous estimates prepared in 1979 on the economic production costs per ton in Romania indicated that these were between 27 and 47% lower than Western producers. The 1979 estimates had been obtained by adjusting the operating costs in financial terms to reflect, (i) the estimated delivered price for imported raw materials, (ii) depreciation in accordance with the approximate economic cost of a greenfield plant, and (iii) fuel and power prices after eliminating subsidies. To account for the recent attempts to price inputs closer to international standards and on the basis of some spot comparison of selected cost of major raw materials it has been estimated the present level of under-pricing to be about 30%. On the basis of estimated CIF (Romanian border) prices of a few available special steel products, it has been assumed, for the EROR calculation, that these are about 20% above the domestic prices. a this basis, the internal rate of return (Annex 3) of the project in real terms is estimated at 13%, compared with 14.6 at the time of appraisal. While the revised return should be ecasidered in the light of the broad assumptions that have been made, it does reflect the following facts: (i) the longer Implementation period of the project; (ii) the longer learning curve and capacity buildup; (iii) the deteriotation, in economic terms, between selling prices and production costs owing to a depressed international steek market. If the world supply/demand situation were to become more balanced in the next few years, as expected by many authorities, thus yielding to higher prices, the ERDR could improve dramatically. In fact, sensitivity tests showed that a 5-10% increase in revenues could increase the return to the 16-19% range. Conversely, if, as a result of having to export under unfavorable market conditions, revenues were to decrease by 2%61 then the ERCM would drop to around 12%. 31. Expressed in 1981 US dollars, and at the present rate of exchange of lei 15/USS, the net savings in foreign exchange per year at full capacity are anticipated to amount to about US$160 million against the appraisal estimate of USS100 million. Oing to the lower learning curve now expected, the project is expected to recover its foreign exchange investments in a little over the two years estimated at appraisal. 6/ The assumption being that OTELINOX would export about one fifth of its annual cold-rolled production (i.e., 6,000 tons) on which, under soft market condi tions, selling prices could be about 15% below domestic prices. This would result in an overall revenue decrease of less than 2%. - 71 - X. Role of the Bank 32. Since OTELINOX was the first industrial project appraised in Romania, 7/ substantial effort was devoted by the Bank to familiarize itself with Zoncepts and procedures used in the Romanian centrally planned system and to facilitate understanding by the Romanians of IBRD concepts, procedures, methodology, procurement procedures, and supervision techniques. 33. Much time was spent in developing new methods and procedures for implementing the project in a manner that wan mutually acceptable to both parties, especially procurement matters, bid evaluation and technical assistance. 34. Another role of the Bank involved utilization of new technology in the steel industry, wherein the Bank's consultants familiarized Romanian authorities with certain new technology being developed and utilized for production of stainless steel - the A0D process (argon-oxygen decarburization, utilized for efficient production of stainless steels). The AOD process was eventually incorporated in the chain of production fazilities (at Galati) used to produce raw materials for OTELINDV operations. 35. Although the Romanian authorities were initially unfamiliar with the Bank-s International Competitive Bidding procedures (and tended to favor negotiations throughout the process) the Borrower was still generally well satisfied with the end result of (the Bank-s) ICB procedures, as mentioned in para 1.06 of the Completion Report. 36. As one of a series of projects in Industry, OTELINDK played a part in facilitating an increased awareness, for Romanian authorities, of industrial/economic practices elsewhere in the world, and a meaningful dialogue with the Bank. The dialogue appears to have helped to promote in establishing some very gradual. but fundamental, modifications in Romanian practices toward industry, including increased autonomy of enterprises, increased recognition of the value of invested capital, and other improvements leading toward core effective incentives for efficient management of industrial enterprises. XI. Lessons to be Learned A. Origin and Supply of Equipment 37. Due in part to our initial lack of understanding of the degree of rigidity8/ imposed on project sponsors by the Romanian planning/approval, and control systems, it would have been very advantageous to have formulated a clearer picture of the likely origin of equipment (foreign versus domestic) - at the time of appraisal, instead of leaving this question partially open for resolution during project implementation. It was only after the loan amount was fixed that it became more apparent that strong efforts would be made by authorities to reduce foreign exchange 7/ Essentially in parallel with the Bacan project. 8/ This rigidity also made it more difficult to make running modifications in project design, during the evolution of the project (such as modifications for energy saving measures, additional computer applications, etc.). - 72 - costs, and if possible, complete the project within the amount of foreign exchange provided by the Bank. Romanian authorities made little or no effort to inform the Bank of that decision. B. Accuracy of Cost Data 38. During evolution of the project, it became clear that the Barrower-s ability to monitor accurately project costs during the implementation period proved to be inadequate. This problem is not unique to the OTELINOX project but has also been experienced with other industrial projects in Romania. The Bank has pointed out needed improvements in monitoring of project costs to Romanian authorities, and it is expected that improvements in the system will be developed for future industrial projects. C. Performance Guarantees 39. Validity of the plant performance guarantees for the Cold Strip 1ill were weakened to some degree since performance tests (for purposes of plant acceptance) could not be run with Romanian raw materials. Eventually, such tests were run by utilizing selected imported Japanese hot rolled coils. 40. Proof that the plant could produce the tonnage, quality, finishes, tolerances, etc., required (using Romanian raw materials, which were the basis of this project - since the Bank had considered raw material supply an Integral part of the project) was not established with the high degree of confidence originally anticipated at Eppraisal. This problem could have been avoided (through more effective and timely use of technical assistance) if Romanian authorities had agreed with the Bank's strong recommendations throughout project appraisal and implementation, in regard to the need for increased utilization of technical assistance. However, strong efforts by the Bank to influence Romanian authorities in this regard were largely rebuffed. Only after the Bank refused to accept the terms of the cold mill contract were actions taken which resulted in a moderate increase in technical assistance. D. Impact of Increased Local Supply of Equipment 41. Looking back, we see that attempts to increase the local supply substantially in this project led to significant problems in the degree of coordination required to match technical characteristics of the local and imported equipment, and additional delay associated with such difficult coordination. The Ministry of Metallurgy is now developing procedures to avoid excessively complicated coordination, and associated delays, resulting from this situation, for its future projects. - 73 - ANNEX I ROMANIA OTELINOX SPECIAL STEEL PROJECT PROJECT COMPLETION REPORT Income Statement (in Lei Million) Actual Projected 1980 1981 1982 1983 1984 1985 Cold Mill - tpy 3973 9137 16000 23000 30000 30000 Z of Capacity 13 31 53 77 100 100 Bar Mill - tpy - 39141 70000 90000 108000 120000 Z of Capacity - 33 58 75 90 100 Sales Revenue Cold Mill 170 388 1124 1689 2231 2231 Bar Mill - 248 737 1107 1328 1475 Total Revenues 170 636 1861 -2797 3559 3706 Cost of Goods Sd1d Direct Raw Materials 98 400 1289 1831 2305 2410 Auxiliary Materials 2 14 47 67 87 88 Utilities 2 10 24 34 42 43 Labor 25 31 24 40 49 52 Total 127 455 1384 1972 2483 2593 Gross Profit 43 181 477 825 1076 1113 Operating Expenses Overhead 2 17 18 2: 30 30 Maintenance 8 65 105 128 189 189 Depreciation 30 47 72 88 88 88 Interest 72 66 60 54 47 39 Net Income .(69) (14) 222 533 722 767 Industry Department Division III September 1982 - 74 - ANNEX 2 ROMANIA OTELINOX SPECIAL STEEL PROJECT PROJECT COMP0ETION. REPORT Financial Rate of Return (in 1974 Lei) Fixed Working Operating Assets Capital Costs Revenues 1975 6.5 - - - 1976 118.2 - - - 1977 878.1 - 1978 630.6 - 1979 507.3 47.5 - - 1980 484.3 77.5 209.7 259.2 1981 176.0 112.8 800.5 898.0 1982 5.5 - 1271.2:Z.. 1678.8 1983 - - 1804.8 - 2521.8 1984 - 2276.3 3211.2 1985-99 a/ - - 2375.8 3342.9 2000 - (237.8) b/ 2375.8 3342.9 Financial Rate of Return - 37.6%. a/ Plant life is assumed at 16 years after project reaches full capacity. This is similar to the appraisal assumption. b/ Working capital is recovered at the end of the assumed life of the project. c/ Cold mill is estimated to reach full production in 1984 and Bar mill in 1985. Industry Department Division III September 1982 - 75 - ANNEX 3 ROMANIA OTELINOX SPECIAL STEEL POJECT PROJECT COMPLETION REPORT Economic Rate of Return (in 1982 Lai) Fixed Working Operating Assets Capital Costs Revenues 1975 7.5 -- 1976 142.5 -- 1977 981.0 -- 1978 738.0 -- 1979 559.5 50.0 - - 1980 508.5 83.5 319 204 1981 208.5 123.7 1217 763 1982 7.5 - 1933 - 2840 1983 - - 2744 3745 1984 - - 3458 3991 1985-99 - - 3610 4358 2000 - (257.2) 3610 4358 Economic Rate of Return - 13.1%. Assumptions for the economic rate of return calculation are the same as those for the financial rate of return (annex 2), with*the following exceptions: a) Capital costs in lei were converted into US$ equivalent at the prevailing rate of exchange on the date of disbursement and Inflated to 1982 term on the tons of an average International inflation for the period 1975-82 of 8% per annum, the resulting annual Investments were then converted back to lei at the 1982 rate of exchange of Lai 15/USS. b) Operating costs have been increased by 30% on the main raw materials and 15% on the auxiliary materials from the equivalent ecess in the financial rate of return. c) Revenues are based on US special steel export prices (CiF Ranantan border) for a few selected items of the product mix. Industry Department Division III September 1982
Groupe de la Banque mondiale · Project Performance Assessment Report
Romania - Otelinox Special Steel Project
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Project Performance Assessment Report
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Banque mondiale