Romania - Tecuci Fertilizer Project

Cj.RCU TIGCOPY Z, 0 TZ 0 , |ULAtI TS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT RETURN TOi Not For Public Use REpORTS DESK WITHIN ONE WEEK Report No. P-1429a- REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK, ROMANIA WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE TECUCI FERTILIZER PROJECT June 17, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1. Official Rate lei 4.97 = US$1.00 lei 1 = US$0.20 2. Tourist Rate lei 14.38 US$1.00 lei 1 = US$0.07 Conversion Rate for Traded Goods lei 20 = US$1.00 lei 1 = US$0.05 Fiscal Year -- January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK, ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE TECUCI FERTILIZER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Investment Bank, Romania, with the guarantee of the Socialist Republic of Romania for the equivalent of US$60.0 million to help finance the foreign exchange cost of a fertilizer project. The loan would have a term of 15 years, including about 4-1/2 years of grace, with interest at 7-1/4 percent per annum. The Tecuci enterprise would be the beneficiary of the Bank loan, and the cost of the loan to the enterprise would be 9 percent per annum including a guar- antee fee of 1-3/4 percent per annum. PART I - THE ECONOMY 2. Romania joined the Bank on December 15, 1972. The first economic mission visited the country in March/April 1973 and its report, entitled "The Economy of Romania" (R73-274), was issued to the Executive Directors on November 30, 1973. An updating mission just returned from Romania and will complete its report later this year. The first basic mission is scheduled for 1976. Social and economic country data are given in Annex I. 3. Since the founding of the People's Republic of Romania in 1948, which in 1965 was reconstituted as the Socialist Republic of Romania, eco- nomic management has been organized along socialist principles which have included state and cooperative ownership of almost all productive resources, and the absence of private enterp:-ise. Economic activity is directed by means of administrative development planning, coordinated by the central authorities. Productive enterprises operate within the framework of the development plan which defines the scope of their activity, the outlines of their production and investment goals and their targets for operating efficiency. The Plan is elaborated within a five-year time frame, each year having a separate Annual Plan. The country is presently in the fourth year of its Five-Year Plan for the period 1971-1975. 4. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a common branch or industry without being directly engaged in production. Sub- ordinate to the Centrals are the productive enterprises whose principal task is meeting production targets. Production enterprises generally are not au- thorized to engage directly in foreign trade. For this purpose they use spe- cial foreign trade enterprises.  - 2 - 5. Economic develo?ment is of paramount concern to the Romanian Govern- ment. Rapid industrialization is a major objective with priority being given to heavy industry including steel, machine tools and chemicals. To achieve their growth objectives the Romanian authorities have made considerable ef- forts to mobilize domestic resources for development and to maintain a high rate of capital formation. In the present Five-Year Plan planned and actual investment rates of around 30 percent of GNP have been the norm. As a con- sequence, consumption has been restrained, and the development of the consumer goods industry has been less strongly emphasized than that of heavy industry. In 1972, heavy industry (led by machine building, chemicals and ferrous metal- lurgy) accounted for about 70 percent of industrial production. 6. As a result of this strategy, a marked change has been achieved in the structure of Romania's economy. Rapid industrial growth, which over the last decade has averaged more than 13 percent per annum, has expanded the share of the labor force employed in industry including power and con- struction to 35 percent in 1972, from about 14 percent in 1950. During the same period, agricultural output almost tripled while the share of the labor force engaged in agriculture declined from 74 percent to around 45 percent. 7. Romania's population growth is around 1.0 percent per annum. Thus, the impact of rapid economic growth on per capita incomes has not been sub- stantially diluted by the population increase. In the last decade, GNP growth has been 9.0 percent per annum on average, implying a growth of about 8.0 per- cent per annum of per capita GNP. The latest World Bank Atlas estimates GNP per capita for 1971 at $740. 8. The organization of production in both the urban sector and in agri- culture is such that all labor is actively employed and there is no open un- employment. There is, however, some labor surplus. Income distribution is also relatively equal. In 1972, average monthly wages were 1,498 lei (about $75 equivalent). Almost 80 percent of all monthly wages were within the range of 900-2000 lei and less than 6 percent were under 900 lei. Minimum wages are guaranteed by the State; they were raised to 1,000 lei per month for full-time workers in September 1972. Prices for essential consumer goods and services suc'i as basic foodstuffs, rents and urban transport are rela- tively low and most social services, notably education and health care, are provided without charge. Continuous efforts are made to increase the standard of living. Romania also pursues a positive regional policy which' has sought to bring a balanced development of both human and natural resources to all parts of the country. 9. The official exchange rate of lei 4.97 per US$1.00 is used only for accounting purposes. The rate used for invisible and capital transactions is lei 14.38 per US$1. Under a new system introduced in January, 1974, the prices of all traded goods are converted at a uniform rate of lei 20 per US$1.00, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domestic lei price is found by addinR to the converted foreign price a tariff rate which varies for different types of goods. The rate of lei 20 per US$1.00  .. 3 - has also been used to convert national incoma statistics from lei to dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Recent Developments 10. Since the National Party Conference of 1967, which set the stage for major qualitative advances in Romania's economic and social development, there have been important new emphases in Romania's economic management. Measures were taken to improve the institutional basis of planning (e.g. by creating the Centrals to assist in plan administration), to increase the ef- ficiency of economic management and to improve upon the quality of production in industry. In agriculture efforts were made to raise productivity and stabilize growth through irrigation, mechanization and the expanded use of chemical fertilizers. To expand upon the growth of foreign trade and technical- economic cooperation the Romanian Government has concluded trade and cooperation agreements with a wide range of countries. In this context also, Romania has made positive efforts to expand its multilateral external relations and to pursue full cooperation with the international agencies, including UN, UNCTAD, UNESCO, FAO, UNIDO and GATT. 11. One result of these efforts is that foreign trade has expanded quite rapidly in recent years both in volume and in regional diversity. There has also been a tendency to move away from trade on a bilateral barter basis to- wards trade involving multilateral payments. During the period 1965-72, total foreign trade grew at about 12 percent per anrnum in current prices. In 1972, imports and exports each totalled about $2.6 billion, about 45 per- cent of which represented trade with non-socialist countries. Overall trade deficits have generally remained small. During 1968-72 the total annual trade deficit averaged about $75 million, i.e. less than 8 percent of average ex- ports. However, the results varied as between different trade regions. Im- ports from East European Socialist countries were slightly lower than Romarnia's exports to that region. In Romania's trade with Western industrialized coun- tries, on the other hand, exports were much less than imports. These deficits have sometfXmes been increased by deficits on the invisibles account with Western countries. 12. The Romanian economy has not escaped the impact of recent world developments affecting the energy sector, even though the country depends only marginally on imported fuels. At present Romania is a net importer of crude oil and a net exporter of petroleum derivatives. In 1973 Romania im- ported about 4.0 million tons of crude oil valued at around $80 million, out of a total crude consumption of around 17 million tons. Valued at 1974 prices, this volume of imports will cost over $200 million which represents a significant increase in required foreign exchange. These imports, however, are used mainly as chemical feedstock. Exports of derivatives in 1973 were about 5.0 million tons valued at about $140 million. To the extent petroleum derivative prices rise in response to recent changes in crude oil prices, there will be gains in export earnings to offsat the rise in the oil import bill. The extent to which this will occur, howNe<r, is still uncertain. Tne  - 4 - Romani.ns have embarked on a stringent program of economy in the use of fuels, which included rationing of gasoline, in order both to minimize the import drain and maximize the supply available for export. External Assistance 13. The expansion of Romania's trade with the non-socialist industrial countries has led to an increased need to obtain convertible currencies to pay for imports from those countries. Romania has met this need both by bor- rowing abroad and by mounting a major effort to expand exports and tourism. Gross inflows of convertible currency capital were US$542 million in 1973, having grown from US$276 million a.n 1967. Romania's access to convertible finance, however, has been almost exclusively confined to financial and sup- pliers' credits with relatively short repayment periods. The net inflow of convertible capital in 1973, therefore, was only US$238 million. 14. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also taken active steps to attract long-term pri- vate capital. A regulation passed in 1972 defines the conditions under which foreign firms can establish joint ventures with domestic enterprises, prefer- ably in foreign exchange earning/saving industries. Romania has also estab- lished two joint banks, one in France and the other in the United Kingdom, in an effort to expand the availability of credit from European countries. Prospects 15. The current Five-Year Plan (1971-75), whose original targets in most sectors appear likely to be exceeded, reflects Romania's continued strategy of rapid growth. The targets contained in the Annual Plan for 1974, for example, include a 16.7 percent growth in industrial production, 14.6 percent growth in national income, an investment rate equal to 35 percent of national income and a 41 percent expansion of foreign trade. The Plan also lays stress on a range of qualitative aspects of development including tech- nical improvements and diversification in industry and foreign trade, improve- ments in capacity utilization, development of the nation's human resource potential and a continued emphasis on regional development. 16. Romania has good potential for further economic growth. Endowed with important natural resources - fuels, some minerals, timber, rich soils and a favorable climate both for agriculture and tourism - and located con- veniently with respect to its major international markets in the East and West, the country has built a broad industrial infrastructure (power, metal- lurgy, chemicals) which will serve as a base for the expansion of secondary manufacturing sectors such as machine building and consumer durables. Above all, Romania has a hard-working and increasingly skilled population devoted to the achievement of the country's development objectives. 17. Economic growth and structural change call for the introduction of new industrial technologies, improvements in the quality of products, more economic use of materials and factor inputs, and reductions in production  costs. The increasing diversity and complexity of Romania's economic struc- ture require continuing improvements in the efficiency of economic planning and coordination and further refinements in industrial management. To keep up with these changes and requirements large programs of education and manpower training have been mounted, and efforts are being made to strengthen technical cooperation with industrialized countries and international organizations. Creditworthiness 18. At the end of 1973 Romania's total medium and long-term external debt amounted to $1,519 million. Most of these debts ($1,404 million) were denominated in convertible currencies, the major creditor countries being Germany, France, UK and Italy. While thie total debt does not appear excessive in relation to the volume and growth of external trade, average maturities are relatively short and convertible debt service payments are estimated to be in the order of $340 million a year during 1974-75. The convertible debt service ratio was approximately 19 percent in 1973, reflecting the unfavorable terms of foreign credits available to the country. 19. The organization of economic activity in Romania and the pursuit of a development strategy involving high investment/saving rates and rapid income growth ensure the availability of domestic resources sufficient to service reasonable amounts of foreign debt. Moreover, the country's major efforts to expand exports (particularly to convertible currency areas), to attract private joint venture capital and to seek other forms of bilateral convertible currency financing are increasing the foreign exchange available for debt service. Convertible earnings rose from $585 million in 1967 to $1,902 million in 1973. The preferential trade status accorded to Romania by the EEC in June 1973 should facilitate the further expansion of such exports as could the granting of most favored nation status by the U.S. Last year, the Government also restricted the use of short-term credit faci- lities from western suppliers in an effort to improve the structure of the country's external debt. Assuming a continuation of present export and debt management policies it can be expected that the debt service ratio will gradually decline during the second half of the 1970's. The country's pre- sent outward-looking posture, the success of both its domestic growth and foreign trade policies, and its potential for continued development, all supp)ort the judgment that Romania is creditworthy for substantial Bank lending. 20o. When Romania joined the Bank, most pre-war foreign debts of the cotuntry had been settled. The only'settlements which were still under dis-- cutssion at that time concerned claims in the United Kingdom and in the United States. Representatives of the creditors and the Romanian authorities have kept the Bank staff informed of progress towards settlement since then. As far as the U.S. claims are concerned, there have been several meetings between both parties. During the most recent meeting between a Romanian delegation led by the Deputy Minister of Finance, and representatives of the US bond- holders which took place on June 10 and 11 in washington, one possible formula for settlement was discussed. The Romanians agree3 to refer this formula to Bucharest and indicated that they would give an early response; they expressed  - 6 - confidence that final settlement would be completed no later than August 1974. The UK claims are somewhat more complicated, but again discussions have been continuing both in Bucharest and in London. In the most recent meeting held in London on June 6, a Romanian delegation led by the Deputy Minister of Foreign Affairs undertook to make specific proposals later this month with a view to reaching prompt final settlement. The Romanian authorities have re- peatedly assured the Bank of thei, intention to settle these old claims. PART II - BANK GROUP OPERATIONS IN ROMANIA 21. The proposed loan would be the first loan to Romania. Two addi- tional operations, for a steel project and a power project, have been appraised. Although some of the distinctive aspects of the Romanian economic system caused some difficulties during project appraisal, no substantial departures from the Bank's usual methiodology and requirements were necessary. 22. It will take time to build up a detailed knowledge of the economy which would allow a sharper focus on the outstanding development problems. At present, foreign exchange, especially in convertible currencies, appears -to be a major constraint. During this early phase in the Bank's relations with Romania, therefore, one of the major objectives of Bank lending will be to help alleviate the country's shortage of foreign exchange by providing long- term external capital and by financing projects which would expand foreign exchange earnings or savings. Bank lending will also aim at supporting the Government's efforts to introduce new industrial technologies, to improve the quality of products, to make more economic use of materials and factor inputs and to reduce production costs. Market aspects and marketing, especially for export goods, will also be emphasized. Special attention is also being given to agriculture where productivity levels are still relatively low. The Gov- ernment is aware of this situation and has stepped up efforts to develop the agricultural sector as evidenced by the rapid expansion of irrigation, the increasing use of fertilizer and the continuing pursuit of institutional im- provements in thls sector. The Bank will assist the Government in implement- ing plans in this field. 23. In furtherance of these objectives of Bank lending, loans for a special steel plant, an irrigation project in the area of Giurgiu-Razmiresti and an agricultural credit operation to develop agricultural production within the recently completed Sadova-Corabia irrigation system are envisaged within the next year. Lending is also planned to finance a thermal power project which will be based on domestic lignite in accordance with the Government's intention to make the most economic use of its natural resources. Also being prepared for Bank consideration is a multi-purpose power and irrigation project oni thie Lower Olt River and a pulp and pal)er project. 24. In addition to significant help) with the preparation of projects, the Bink (throughi the EDI) has supported a project appraisal training course tor 1iomaiiian officials (heldl in Belgrade in October 1973). The preparations for a series of similar courses in Romania are underway.  - 7 - 25. Romania is not yet a member of IFC but preliminary contacts have been made to discuss that possibility. 26. The projects in the pipeline would represent only a small portion of Romania's total need for external financing, and of its total (disbursed) convertible debt. However, they would provide a substantial net addition to the present inflow of convertible currency and hopefully set a pattern for obtaining finance on longer repayment terms. The disbursed debt outstanding to the Bank is not expected to constitute more than 10 percent of Romania's total projected convertible currency debt in FY79; the Bank's share in Romania's debt service payments in FY79 would be less than 4 percent. PART III - THE INDUSTRIAL SECTOR IN ROMANIA industrial Development 27. Romanian development policy during the last 25 years has emphasized industry in general and producer goods in particular. The aim has been to transform a nation that once specialized in the exportation of raw materials into a country with an integrated, self-sufficient and diversified industrial structure. Since the mid-1950's investment in industry has averaged 50 percent of total investment and around 60 percent of this has been in fuel, chemicals, metallurgy, engineering and metal working. The 1971-75 Five-Year Plan calls for a continued emphasis on heavy industry and stresses technical improvement, product diversification and increased capacity utilization. 28. Thus, industry is playing an ever increasing role in Romania's economic growth. Gross industrial output grew at an average annual rate of almost 13 1)ercent between 1960-71 and is scheduled to grow at 11-12 percent per annum during the 1971-75 Five-Year Plan. In 1955 industry, including power and construction, accounted for 45 percent of national income, 17 per- cent of employment and about 20 percent of exports. By 1972, these percent- ages had grown to 66 percent for national income, 35 percent for employment and over 60 percent for exports. 29. In developing various branches of heavy industry, Romania has to some extent already introduced advanced foreign technology and equipment in expanding its heavy industry exports in recent years (the share of machinery and chemicals in total exports having increased from 7.4 percent only a few years ago to 33.1 percent in 1972). Despite these achievements, however, the quality of product and ancillary services offered in these branches is still such that competition remains difficult in the markets supplied by the world's most advanced producers. 30. Among Romania's industries, the clhemical industry was the fastest growing sub-sector between 1966 and 1972 when its annual rate of growth aver- aged 19 percent. Its share in total industrial investment increased from 12.3 percent in 1965 to 17.5 percent in 1972. Chemical products provided 2.2 percent of export earnings in 1960, 6.4 percent in 1965 and 8.2 percent in  - 8 - 1972. Synthetic fibers, petro-chemicals, tires and rubber, soda produtLt C&LLU fertilizer (nitrogen) are the major chemical exports. The impressive increase in the importance of the chemical industry is based on Romania's construction and operating experience in the petroleum and chemical industries, on the availability of mnusually pure natural gas in Romania, and on a policy decision to shift gas use from power to chemicals. Fertilizer Sector 31. Prior to 1960, the fertilizer industry consisted of a few very small plants, producing primarily superphosphate and ammonium nitrate. The first significant capacity expansion occurred during 1964-1973 and comprised essen- tially several new, relatively large, ammonia-based plants to produce urea and ammonium nitrate (AN) as well as sulfur-based triple superphosphate. At present, there are nine fertilizer plants in Romania, six producing only nitrogenous, two only phosphatic and one mixed NP fertilizers. Fertilizer production in Romania grew from 416,000 tons in 1966 to 1.2 million tons in 1972 (fertilizer measures here and below expressed in tons of nitrogen, N, and phosphate, P205, nutrients), and rapid expansion is planned for the rest of the 1970's to achieve a production of 3.4 million tons in 1980. The sub- stantial planned production increase, again more than doubling fertilizer output betVeen 1973 and 1980, is the result of a second large expansion pro- gram, initiated in 1970 and to be achieved through eight new fertilizer plants. With the exception of the proposed project, all plants are either on stream or being implemented; construction is about on schedule and expected to be com- pleted in time to realize the 1980 production target. 32. The large expansion of fertilizer production facilities will more than satisfy domestic market needs and thus allow an increase in exports of nitrogenous fertilizer from about 600,000 tons at present to 1.1 million tons in the late 1970s. As a result, Romania should become one of the world's largest exporters of N fertilizers, in the production of which it has a com- parative advantage based both on natural gas availability and on an establish- ed chemical industry as noted in paragraph 46 below. In the recent past, fer- tilizer consumption in Romania has been limited by domestic production and the priority given to exports. Projected domestic consumption of about 1.4 mil- lion tons of N in 1980 will be more than twice the present level. Substantial efforts in the agricultural sector in Romania will therefore be necessary to achieve the projected growth rates in agricultural output and fertilizer use, but in view of the substantially increased domestic fertilizer production and the renewed emphasis being given to agriculture in Romania it is expected that these goals will be reached. Industrial Organization 33. At present ten industrial ministries are responsible for the Romanian industrial sector. Subordinate to each Ministry are several foreign trade enterprises, research and design institutes and a number of Centrals, which in turn direct the operational activities of a group of related enter- prises. The work on overall design and supervision of projects is delegated by the Ministry to one of its research and design institutes. This is the  - 9 - case with the research and design institute for chemical plants (IPROCHIM) within the Ministry of Chemical Industry. The enterprises, Centrals and design institutes, which have not been authorized to trade abroad, conduct their foreign business indirectly through the foreign trade enterprises which belong to the same Ministry. The Borrower 34. The borrower for the proposed loan would be the Investment Bank, which is the specialized agency under the Ministry of Finance, for investment projects in all sectors of the economy except agriculture (including water resources) and food processing. It has a large technical and economic staff with branch offices in all districts of the country. The Investment Bank's involvement in investment projects commences in the preparation phase; its staff appraises all major investment projects technically and financially and recommends approval or otherwise when their financing is considered by the Council of Ministers. When a particular project and its financial plan have been approved by the Council of Ministers, all major funds (budget allo- cations, depreciation funds, share of planned benefits) are channeled through the Investment Bank in accordance with the approved financial plan. All pay- ments in lei for the execution of a project must be authorized by the Invest- ment Bank which keeps separate accounts for each category in the financial plan for every enterprise. It is the Investment Bank's obligation to ensure that a project is executed according to the financial and technical data in- cluded in the final technical and economic study as approved by the Council of Ministers. Its inspectors check whether the project is proceeding accord- ing to the schedule approved in the Plan. 35. While the Investment Bank's supervision and control function is thus rather strong during the implementation phase of a project, its functions are much more limited during the operation phase of a project. Although it has the right and obligation to verify that the enterprise is meeting the investment targets set in the Plan, it has no legal authority to influence the management of the enterprise or to force the enterprise to take opera- tional actions which it considers necessary. In practice, however, it can request such actions very effectively by reporting through the Ministry of Finance to the Government. In order to reflect this factual situation and yet to ensure that the Tecuci enterprise meets the requirements specified in Article IV of the Loan Agreement concerning the operations phase, the Guarant- or has agreed that it shall cause the enterprise to comply with such require- ments (see Section 2.03 of the Guarantee Agreement). 36. As mentioned above, the Investment Bank is the channel for all sources of major domestic investment financing, but its own funds are still relatively small. Its prime source of funds is the State Budget. The Guarantee Agreement, therefore, includes a provision (Section 2.02) that the Guarantor will have to provide all necessary funds for the implementation and operation of the project. The Guarantor would also provide sufficient funds to the Investment Bank to ensure that it can meet the debt service on the Bank loan (see para. 42 below). In view of the ettus of the Investment Bank  - 10 - within the government system, it is considered sufficient to rely in this respect on the Guarantee Agreement (Section 2.01). PAhRT IV - THE PROJECT Project History 37. 'he proposed project was identified by a Bank mission in April 1973 and a prel:.minary feasibility study was submitted to the Bank in July 1973. Project appraisal began in September 1973 but was completed only in March 1974 after the project scope was modified to better meet domestic and export market requirements. Negotiations for the proposed project were held during May in Washington. The Romanian delegation was headed by Mr. Mihai Diamandopol, President of the Investment Bank. The Project 38. The proposed project consists of the construction of a fertilizer plant with the capacity of 420,000 metric tons per year (TPY) of urea, and 208,000 TPY of DAP with a total nutrient equivalent of 225,000 TPY of N and 100,000 TPY of P205, and includes major intermediate units for production of ammonia, sulfuric acid and phosphoric acid. The project would utilize domestic natural gas from the national pipeline network in the manufacture of urea and DAP, as well as imported phosphate rock and sulphur for the production of DAP; no difficulties are anticipated in supplying raw materials to the project. The plant would be designed in such a way that potash can also be added to produce a range of complex nitrogen, phosphate and potassium (NPK) fertilizers. Project Execution 39. Responsibilities for project execution have been delegated to sevreral different agencies, but the Tecuci Enterprise shall have overall responsibility for the coordination of project execution and of the project related activities of the other agencies involved. IPROCHIM would act as engineering contractor for the Tecuci enterprise utilizing both its own technology and license agreements with reputed international firms; it would be responsible for licensing, detailed engineering (based upon a licensor's process design package) and provision of technical advice to the Tecuci Enterprise in equipment supply, procurement, erection and commissioning of the fertilizer plant. Civil works, erection of the plant and a substantial portion of equipment supply would be undertaken by other Romanian enterprises. Construction is expected to be completed in 1978, and the fertilizer plant is expected to reach full production before 1980. Project Operation 40. Tecuci will be one of the enterprises under the Craiova Fertilizer Central. The organization and functioning of Tecuci will be in accordance with the 1971 law on the organization of state production units. This law  - 11 - provides for a general manager of the enterprise (appointed by the Ministry of Chemical Industry) who, assisted by a management committee, decides on and supervises the daily operations of the enterprise. Under the Romanian system of collective decision-making, the organization of the enterprise also includes an Assembly of Working People, which meets twice yearly to determine matters of broad policy interest, and a Committee of the Working People (formed from the Assembly) which determines operating policies at monthly meetings. All deci- sions of these bodies must be made within the framework of the national Plan. This decision-making process seems to work well in practice. Project Cost and Financing 41. The estimated total cost of the project including interest during construction is just over US$200 million of which the foreign exchange compo- nent is US$87 million (or 43 percent). The proposed US$60 million loan would be sufficient to finance the foreign exchange costs of imported equipment and materials, and interest during construction; not included are some US$8 mil- lion in working capital, US$6.1 million in equipment purchases already made and financed, and US$13 million of steel to be imported for the manufacture of equipment for the project. The Bank loan would cover 30 percent of total project costs, and Romania would finance the balance of foreign exchange (US$27 million) and Lei 2,276 million (US$113.8 million) in local costs from other sources and from the Government budget. Lending Terms 42. The proposed Bank loan to the Investment Bank would be guaranteed by the Government and would be for a term of 15 years including about 4-1/2 years grace at an interest rate of 7.25 percent per annum. The Tecuci enterprise would be the beneficiary of the loan and the cost of the Bank loan to the enterprise including a 1-3/4 percent per annum guarantee fee, would be 9 per- cent annually. The Lei equivalent of the debt service on the Bank loan would be paid by the enterprise as a portion of its annual transfer of funds to the State Budget and Investment Bank (Section 4.01(h) of the Loan Agreement). Audit 43. Romania has a well developed system of internal and external auditing primarily to ensure that the activities of enterprises conform to the state plans. Any deviations are brought to the attention of higher authorities. The Fertilizer Central, the Ministry of Chemical Industry and Ministry of Finance periodically audit financial statements prepared by the enterprise, and the Bank will receive annual audit reports of the Tecuci Enterprise and the borrower carried out by the Ministry of Finance (Section 6.01(e) and (f) of the Loan Agreement). This arrangement would adequately meet the Bank's infonration requirements in this respect. Procurement 44. Procurement of the items financed by the Bank loan would be in accordance with Bank Guidelines. The Tecuci Enterprise would provide general  - 12 - coordination for the procurement; it would be assisted by IPROCHIM, which would be responsible for the technical soundness of procurement, and by ROMCHIM (the procurement agency within the Ministry of Chemical Industry), which would handle commercial aspects of procurement. Suppliers of equipment would be prequalified following advertising and review on the basis of IPROCHIM's and the process licensor's knowledge of potential suppliers. Three or more suppliers would be prequalified for each of about sixty equipment packages. It would be both technically and economically advantageous and in some cases essential for effective execution and operations of the project to procure some proprietary items from process licensors and some other equipment from vendors which have already supplied equipment for other identical plants in Romania. Except for these equipment purchases which are not expected to exceed US$6 million, procurement would follow international competitive bidding. The list of equipment and materials to be financed by the Bank has been prepared after excluding all goods likely to be available locally. It is, therefore, not expected in general that Romanian equipment manufacturers will participate in the bidding for the equipment packages. Disbursement 45. The Bank loan would be G.isbursed against the foreign exchange cost (c.i.f.) of engineering, design and license fees, and of imported equipment, machinery, materials and supplies, or against the ex-factory price of equip- ment, machinery, materials and supplies if any should be procured locally. The loan would become fully effective if the Romanian Council of Ministers approved the main indicatoTs of the technical and economic study for the proj-* ect as a whole. However, to permit early loan disbursements on account of down payments under the contracts for the project, the loan and guarantee a,reements may also become effective if the Romanian Council of Ministers authlorizes the conclusion of foreign contracts in an amount of at least $35 million (Sections 8.01 and 8.02 of the Loan Agreement); but, in this case disbursements under these contracts may not exceed $4 million equivalent, i.e. the estimated amount of down payment, until the Council has approved also the main indicators of the technical and economic study for the project (para 4(b) of Schedule 1 to the Loan Agreement). About $6 million would be disbursed against interest during construction on the Bank loan. Disbursements would take place over three and a half years from late 1974 to 1977. Provision has been made in the loan agreement for up to US$0.5 millioni in retroactive fi- nancing for license and engineering fees incurred after October 1, 1973. A schedule of estimated disbursements is provided in the Loan and Project Sumnmary (Annex III). Market and Marketing 46. The natural market for the proposed project is the Moldavia region surrounding Tecuci, which includes about one-fifth of Romania's agricultural landl and has an agricultural pattern similar to that of the country as a whole. Fertilizer denmancl in that region in 198() is estimated at about 290,000 tons of N aind about 175,000 tons of P205. Thus, the Moldavia market is larger than the capacity output of the proposed project. Though all of the project's  - 13 - output is intended to be marketed in the region surrounding Tecuci, in terms of the country as a whole, the project's nitrogen capacity would add to Romania's export capacity. This is not so, however, for the project's phos- phate capacity since Romania is unlikely to continue to have an exportable surplus of phosphate fertilizer. Distances from other Romanian fertilizer plants to the Moldavia region being relatively small and the country's trans- port system being well developed, it may therefore be economically advantageous to Romania to export a major portion of the project's nitrogen fertilizer out- put and to serve the Moldavia region partly from other plants. (This subject will be reviewed further in the next year or two and will form part of a fertilizer distribution study to be undertaken by the Government as agreed in Section 3.04 of the Loan Agreement). No major problems are foreseen in selling the project's production domestically or abroad given anticipated demand in the Moldavia region and Romania's already well established position as a major fertilizer exporter. Romania's natural gas is the ideal feedstock for N fertil- izer production, and the country has substantial experience in equipment manu- facture and the operation of chemical plants. Romania, therefore, enjoys a comparative advantage in the production of fertilizers which will both help Romanian agriculture and provide some additional and much needed fertilizer in the world market. Environment 47. Measures would be taken as part of the proposed project to control emissions of several potentially harmful waste materials, notably sulfur oxides, fluorides and gypsum (Section 4.01 a of the Loan Agreement and Schedule 2 to the Loan Agreement). The project includes a sulfuric acid plant for which the design is the most efficient available commercially, and actual sulfur emissions are expected to be considerably less than the acceptable levels set by IPROCHIM. The project also includes a fluoride recovery unit which will keep fluoride emissions at an acceptable level. About 500,000 tons of gypsum would be produced annually as a solid waste from phosphoric acid production, and the proposed project includes facilities for processing this material for other productive uses. As a result of this combination of measures, the air, water and solid pollution levels of the project are acceptable; the cosc of pollution control equipment including ancillary facilities for gypsum processing is estimated at about 7 percent of project costs. Labor Force 48. The Tecuci plant is expected to employ a staff of 2400 when it begins operation in 1978, and the project is expected to generate considerable in- direct employment through construction, equipment manufacture, and fertilizer distribution and use. The Tecuci staff will be trained under a program run by the Craiova Fertilizer Central for the staffs of other fertilizer plants al- ready operating or presently under construction. Financial Analysis 49. Enterprises in Romania cannot deternine their general level of profitability because production targets and the broad product mix are set  - 14 - in the Plan and botlh input and output prices are set by the central author- ities. Given the output target and these prices, the enterprise has a planned benefit or profit rate set each year which it may over- or under-fulfill de- pending on the extent to which it meets the productivity goals stipulated in the Plan. Actual benefits are not a guide for future investments which are determined by the State. Moreover, any shortage of funds within a Romanian enterprise must be covered by transfer payments through the Central, budgetary allocation:;, and/or bank credits. In this context and based on the input and output prices which are set by the Government and using the Bank's normal measurements, the project's financial indicators such as debt service coverage, debt/equity ratio and current ratio are acceptable. However, due to in- consistencies in the Romanian pricing system, the financial rate of return of the project is low at 4.5 percent. Romanian prices of inputs in relation to outputs in the fertilizer industry were set in the late 1960's; they have not been changed since and are therefore no longer in line with international costs and prices. 50. The Government is considering a revision of prices. It is not yet known to what extent prices of gas, oil, power and imported fertilizer as well as fertilizer prices themselves will change other than that the general trend will most likely be upward to reflect more closely current or anticipated international prices. However, whatever adjustments may be made, they are not expected to affect adversely the financial viability of the industry, and thus of the project, in view of the Government's policy to provide for reasonable earnings after covering average production costs. The financial risks of the project are therefore essentially limited to its physical success; i.e., successful project construction and operations. Both these risks are Judged to be acceptable. Justification 51. The economic rate of return of the project is a satisfactory 13.2 percent. It is based on a conservative revenue/cost structure, using esti- mated long-term international prices for all tradeable inputs and outputs, specifically US$110 per ton of urea f.o.b. bulk as export and US$180 per ton of DAP c.i.f. bulk as import substitution. Both assumptions are well below presenit international market prices. A rate of Lei 20 to US$1 has been used as the base rate in converting local costs as noted in paragraph 9 above. Sensitivity analysis indicates that even under adverse conditions, the econ- omic return of the project would be at least about 10 percent; and if a con- version rate of Lei 25 to US$1 were used, the base economic return would in- crease to 15 percent. 52:. Romania has succeeded in developing its industry reasonably effi- cienltly with quite broad geograplhic dispersion. This general achievement holds for thc fertilizer subsector as well, and construction of the proposed project at Tecuci would establish a new enterprise in a relatively unindustrialized area. The project would make optimum use of natural gas, which is the ideal fet.Jst.ocl, to produce nitrogeenous fertilizer. The project would also make av;,i}lble sufficient urea and DAP fertilizers for substantially increased  - 15 - consumption for domestic agriculture, while at the same time allowing the ex- port of some additional and much needed nitrogenous fertilizers to the world market. The net foreign exchange benefits of the project to Romania are es- timated at US$36 million annually. PART V - LEGAL INSTRUIENTS AND AUThIORITY 53. The draft Loan Agreement between the Bank and the Investment Bank of Romnania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the draft resolution approving the proposed loan are being distributed to the Executive Directors separately. The special features of the loan documents are described above. 54. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECONNENDATION 55. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 17, 1974   ANNEX I Page 1 of 2 pages OUNT1RY DATA - IU4ANIA POPULATION INSITy DO00 k02 20 253 ilion (dd-l97) Per helof arable land SOCIAL DIICATORS Reference Countries Romania lavia 190 1970 W e7 1-97-0 1Y70 0 PSR CAPITA U84 (AtLAS BASIS) A 330/ 740 /a 650 670 1,760 DEMOGRAPHIC Crude Xrth rate (per thousand) 19 21 18 44 16.8 Crude death rate (per thousand) 9 10 8 9 9.7 Infant mortality rate (per thousand live births) 75 49 56 67 29.2 Life expectancy at birth (yeara) 66 69 65 62 n.1 Grose reproduction rate 2 0.6 /b 0.9 /c 1.3 3.1 0.9 Population growth rate ff 1.) 1.0 1.0 3.5 0.8 Population growth rate - urban 3.8 /d 3.4 /d 3.3 5.0 0.7 / f Age structure (percent) 0-lb 28 /b 26/c 28 46 24.3 15-64 657 66 7c 64 50 64.9 65 and over 77S 87E a 4 10.7 Denendency ratio A 0.5 76 0.7 7 0.8 /I 1.6 /c 1.0 /B Urban population an Percent of total 32 /d La /d 35 59 93 /,f Pamlily planning, No of a.e-ptors cumulative (thos.) No. of users (% of married wonen) Total labor force (thousands) 9,580 9,920 9,600 15,900 19,600 /h Percentage employed in agriculture 66 49 52 47 17 Percentage unemployed 0 0 8 3 INCOME DISTRIBUlION Percent of salaried workers earning loes than 1,100 lei 24.3 13.5 /i.q Percent of salaried workers earning more than 2,500 lei 6.3 13.] , mSTRIBUTION OF LAND 0OWERSHIP S owned by top 10S oF owners % owned by smallent 10% of owners HEALTH AND NUTRITION Population per physician 740 /o 680 /o 1,000 1,850 /a 550 Population per nursing person 300 200 790 /q Population Per hospital bed 140 120 180 550 /q 100 /c Per capita calorie supply as S of requirements I5 110 110 125 /q 108 /q 118 /s Per capita protein supply, total (graes per dcy376 82 82 92 66 7F 88 T. Of which, animal and pulse 21 28 2972i 28 77 42 7s Death rate 1-4 years /7 5/b 3/c 3 97- 1.1 7t BDUCATroN Adjusted /8 primary school enrollment ratio 97 107 91 Ic 71 107 Adjusted LK secondary school enrollment ratio 42 62 45 7- 19 59 Years of schooling provided, first and second level 12 12-14 12 12 13 Vocational enrollment as % of sec. school enrollment 54 /v 56 /onv 59 Ic 23 /p 26 /c Adult literacy rats 5 , - 85- 76 91 7ii,v HDUSINO ve-rage No. of persons per roo= (urban) 1.3 /x 41 h/kl 2 5 1 1 /u k Percent of occupied units without piped water 52 71 63 51 38 7r Access to electricity (as % of total Population) 49 7x, 98 /y , 96 7y Percent of fural population connected to electrioity 27 /i: COliSUION Radio receivers per 1000 Population 109 152 164 276 218 Passenger cars per 1000 population , 35 25 190 Electric power coneumption (kwh p.c.) 120 1,730 1,140 /c 530 /c 2,188 /c Newsprint consumption p.c. kg per year 2.1 2.8 4.3 3.1 5.3 Notees Figures refer either to the latest periods or to account of environmental temiperature, body weights, and the latest yearn. Latest periods refer in principle to diatribution by age and sex of national populations. the yeara 1956-60 or 1966-70; the latest years in prin- /6 Protein standards (requirements) for all countries as estab- ciple to 1960 and 1970. lished by USDA Economic Research Service provide for a minimum /L The Per Capita GNP eetimate in at rket prices for allowance of 60 grams of total protein per day, and 20 gram of yearn other than 1960,calculated by the came conversion aninal and pulse protein, of which 10 grams should be animal technique as the 1972 World Bank Atlas. protein. Theme standards are somewhat lower than those of 75 2 Average number of daughters per women of reproductive grams of total protein and 23 grame of animal protein as an age. average for tha world, proposed by FAO in the Third World Food a Population grovth rates ore for the decades coding in Survey. 1960 and 1970. /7 Sane studies have suggested that crude death rates of children A Ratio of under 15 and 65 and over age brackets to ages 1 through 4 nay be used as a first approximation index of those in labor force bracket of ages 15 through 61. malnutrition. a YAO reference standards represent physiological re- /8 Percentage enrolled of cnr-esponding populatUon of school age quirenents for normal activlty and health, taking as defined for each courtry. la Tn 1971 USS converted at the rate of 20 Lei per US&; /b 1962; /c 1969; /d Cities, towns and 183 other localities having urban sooio-aconomic characteristics; /s 1971 cenaus; /f PopulTion over7,000; /g Fatio of population under 15 and 65 and over to total labor force; /h OverTO years old; /APercentage of national income received by lowest 20 percent Li Percentage of national income received by highest 5 percent; 1k Urban and rural; /1 Data refer to dwellings; /m 1968 households; /n 1969 households; /o Include dentists; 1967 1968; /r 1964-M; /a 1968-69; /t 1964-67;7/u 1961; P opulation ovai 15 years; kv Full-time education only; 1966; 7Y Percentage of total1allings with electrical lighting; /s Percentage of rural dwellings with electric lighting N4 MEY 31. 1974  ANNEX I Page 2 of 2 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (M. constant prices) US$ Mln. % 1961-65 1966-70 1971 GNP at Market Prices 15,213 100 9.0 Lj 7.7 Lj 12.8 Li Gross Fixed Domestic Investment 4,400 29 11.3 11.2 10.5 Exports of Goods 2,102 14 9.0 /2 10.9 /2 13.5 /2 Imports of Goods 2,102 14 10.7 L2 12.7 L2 7.3 L2 LABOR FORCE IN 1972 GOVERNMENT FINANCE Mln. % General Goverrment (lei Bill.) 7. of NNI L Agriculture 4.4 44 1971 1971 1969-71 Industry 3.4 35 Services 2.2 21 Current Receipts 138.6 58.6 65.2 Current Expenditure 100.5 42.5 47.4 Total 10.0 100 Current Surplus 38.1 16.1 17.7 Capital Expenditures 33.7 14.2 16.0 BALANCE OF PAYMENTS (Mln. US $) RETAIL PRICES 1969 1970 1971 1972 1967 1971 1972 1973 (1966 = 100) 100.6 101.0 101.6 101.6 Exports of goods 1,396 2,102 2,592 3,667 MERCbANDISE EXPORTS (AVERAGE 1970-72) Imports of goods 1,546 2,102 2,615 3,424 US $ Mln. % Trade balance -150 0 -23 +243 Capital goods 517 24 Net services -6 -23 -31 -107 Consumer goods 404 18 Foodstuffs 283 13 Balance on goods and services -156 -23 -54 +136 Intermediate goods 232 11 Raw materials 748 34 Net MLT capital 152 5 22 83 Industrial (426) (19) Disbursements 317 350 464 589 Agricultural (322) (15 Amortization -165 -345 -442 -506 Total 2,184 100 Residual balance -4 -18 -32 -219 EXTERNAL DEBT. DECEMBER 31. 1973 RATE OF EXCHANGE US $ Mln. Total l,519 Official rate- Tourist rate: of which convertible currencies l,4