Romania - Sadova - Corabia Agricultural Credit Project

Report No. 582a-RO FILE COPY Appraisal of Sadova-Corabia Agricultural Credit Project Romania January 14, 1975 Agricultural Credit and Agroindustries Projects Department Europe, Middle East and North Africa Not for Public Use Document of the International Bank for Reconstruction and Development 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 It may not be published, quoted or cited without Bank Group authorization.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 US$ 1.00 Lei 20.00 Lei 1.00 US$ 0.05 WEIGHTS AND MEASURES 1 sq meter (m2) 2 = 10.8 sq feet 1 sq kilometer (kmn) = 0.386 sq miles 1 hectare (ha) = 2.47 acres 1 meter (m) = 3.28 feet 1 kilometer (km) o 0.62 mile 1 liter (1) = 0.264 US gallons 1 kilogram (kg) = 2.205 pounds 1 metric ton (ton) = 2,205 pounds ABBREVIATIONS BAFI - Bank for Agriculture and Food Industry BRS - Bechet Research Station CAP - Agricultural Production Cooperative Enterprise IAS - State Agricultural Production Enterprise MA - Ministry of Agriculture, Food Industry, and Waters State - Socialist Republic of Romania UNCAP - Union of Agricultural Production Cooperatives BAFI FISCAL YEAR January 1 - December 31  ROMANIA SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS A. MAIN TEXT Page No. SUMMARY AND CONCLUSIONS .i-ii I. INTRODUCTION ........................................ 1 II. THE AGRICULTURAL SECTOR ..... .................... 1 A. Romania ........................................ 1 General ............................. 1 Agriculture in the Economy .............. 1 Agricultural Production ............... 2 Agricultural Production Organizations ........ 3 Agricultural Support Services .............. . 4 Agricultural Planning and Policy ............ . 5 B. The Project Area ............................... 6 III. THE BANK FOR AGRICULTURE AND FOOD INDUSTRY .... ...... 7 A. Powers, Duties, and Responsibilities .... ....... 7 B. Organization and Management .................... 8 C. Fiscal Agency Operations ....................... 8 D. Lending Policies and Procedures ................ 9 E. Lending and Investment Operations ......... ...... 10 F. Sources of Funds ............................... 10 G. Financial Condition ..... ....................... 10 IV. THE PROJECT ......................................... 11 A. Objectives ..................................... 11 B. Project Description ..... ....................... 11 Summary ...... 11 Detailed Features ... ......................... 12 C. Cost Estimates ....... .......................... 15 D. Financing ...................................... 17 E. Procurement .......... ......................... 18 F . Disbursements .*....... .. . . . . . . . . . . .. . .. . . .. . . 1 9 G. Environmental Impact ...... ..................... 19 This appraisal report is based on the findings of a mission which visited Romania in May 1974 and was composed of Messrs. C.E. Eugenio and M. Lenot (IBRD), and M. Faust and F. Susaeta (Consultants).  TABLE OF CONTENTS (Continued) Page No. V. PROJECT IMPLEMENTATION . ..20 A. Organization and Management .20 B. Lending Policies and Procedures . . 20 VI. BENEFITS AND JUSTIFICATION .. .. 22 A. Production, Markets and Marketing . . .22 B. Financial Benefits and Beneficiaries ... 23 C. Economic Evaluation. 23 VII. RECOMMENDATIONS . . .24 B. ANNEXES 1. The Agriculture Sector 2. The Project Area 3. The Bank for Agriculture and Food Industry Appendix 3-1 -- Comparative Statements of Income and Expenses of the BAFI during Fiscal Years 1970 to 1973 Appendix 3-2 -- Comparative Balance Sheets of the BAFI at the end of Fiscal Years 1969 to 1973 Appendix 3-3 -- Projected Statements of Income and Expenses of the BAFI during Fiscal Years 1974 to 1979 Appendix 3-4 -- Projected Balance Sheets of the BAFI at the end of Fiscal Years 1974 to 1979 4. Summary Statement of Estimated Project Cost Appendix 4-1 -- Estimate of Investment Cost for a State-Owned 150-Ha Orchard Appendix 4-2 -- Estimate of Investment Cost for a 100-Ha Cooperative Orchard Appendix 4-3 -- Estimate of Investment Cost for a State-Owned 150-Ha Vineyard Appendix 4-4 -- Estimate of Investment Cost for a 100-Ha Cooperative Vineyard Appendix 4-5 -- Estimate of Investment Cost for a State-Owned Dairy Farm Appendix 4-6 -- Estimate of Investment Cost for a Cooperative Dairy Farm Appendix 4-7 -- Estimate of Investment Cost for a State-Owned Beef Fattening Farm Appendix 4-8 -- Estimate of Investment Cost for a State-Owned Fruit Handling and Storage Complex  Appendix 4-9 -- Estimate of Investment Cost for a State-Owned Fleet of Refrigerated Trucks Appendix 4-10 -- Estimate of Investment Cost for a State-Owned Feed Mill and Silo Appendix 4-11 -- Estimate of Investment Cost for a State-Owned Pre-Mix Feed Mill Appendix 4-12 -- Estimate of Investment Cost for a State-Owned Machinery Pool Appendix 4-13 -- Estimate of Investment Cost for a State-Owned Leaf Analysis Laboratory Appendix 4-14 -- Estimated Cost of Technical Training 5. Estimated List of Goods to be Procured through International Competitive Bidding Under IBRD Guidelines 6. Estimates of Project Receipts and Disbursements Appendix 6-1 -- Estimated Schedule of IBRD Disbursements 7. Marketing and Prices 8. Financial Rates of Return Calculations Appendix 8-1 -- State-Owned 150-Ha Orchard Appendix 8-2 -- 100-Ha Cooperative Orchard Appendix 8-3 -- State-Owned 150-Ha Vineyard Appendix 8-4 -- 100-Ha Cooperative Vineyard Appendix 8-5 -- State-Owned Dairy Farm Appendix 8-6 -- Cooperative Dairy Farm Appendix 8-7 -- State-Owned Beef Fattening Farm Appendix 8-8 -- State-Owned Fruit Handling and Storage Complex Appendix 8-9 -- State-Owned Fleet of Refrigerated Trucks Appendix 8-10 -- State-Owned Feed Mill and Silo Appendix 8-11 -- State-Owned Pre-Mix Feed Mill Appendix 8-12 -- State-Owned Machinery Pool 9. Economic Benefits and Economic Rate of Return Calculations Appendix 9-1 -- Economic Rate of Return Calculations C. MAP Overall Planned Development of the Sadova-Corabia Irrigation System   ROMANIA SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. The Sadova-Corabia region in the southwestern part of the country, originally in sandy dunes, is one of the poorest in Romania. Although some cultivation was started in its inter-dunes after World War II, results were unsatisfactory in spite of high fertilizer use. In the late 1960s, it was decided to level and irrigate the area to improve production and, hence, the economic betterment of its inhabitants. The irrigation works were started in April 1970 and have just been completed. To complement the irrigation system, a farm development and agro-industries program was started in 1971 and will extend until 1981. The general strategy of the overall development plan consists of: (a) intensive cultivation of crops benefitting the most from irrigation that would help meet projected domestic demand or expected exports to attractive outside markets; (b) development of an important livestock sec- tor; and (c) integration of production with existing agro-industrial capaci- ties and creation of new capacities as needed. ii. The proposed Project would be about 40% of the total investments contemplated in the overall development plan in the region of the Sadova- Corabia irrigation system and is part of that intended to be launched during 1975 to 1978. Through credits granted by the State-owned Bank for Agricul- ture and Food Industry (BAFI) it would consist of investments undertaken by State and cooperative enterprises in developing or providing about 2050 ha of orchards, 2000 ha of vineyards, 12 dairy farms, two beef fattening farms, a fruit handling and storage complex, purchase of 15 refrigerated trucks to transport agricultural products (mainly fruits and vegetables) to domestic and foreign markets, a feed mill and silo, a plant to supply feed mills with pre-mix concentrates, and machinery and equipment for farm mechanization serv- ices to cooperatives. Likewise, the Project would provide for a leaf analysis laboratory and technical training and observation for qualified technicians under a program to be approved by IBRD; these would benefit Romanian agricul- ture in general. iii. The estimated cost of the Project is about US$59.5 million, of which almost US$23 million, or 38% of total Project cost, is expected to be in for- eign exchange requirement. Loans (about 91% of total Project cost) would be made by the State-owned Bank for Agriculture and Food Industry (BAFI) to coope- ratives and State enterprises, which would themselves contribute, on average, around 2% and 7%, respectively. All contracts for purchases of materials, machinery, and equipment (a list was agreed during negotiations) the equiva- lent of US$100,000 or more would be awarded through international competitive bidding.  - ii - iv. All the sub-projects are within the State's global agricultural plan and have been or would be approved for financing by the BAFI as required under the law. All sub-projects financed would be technically feasible and finan- cially viable and those involving investments of Lei 10 million (US$500,000) or more would need prior IBRD approval. BAFI will administer the Project and will exercise financial control over sub-project execution; the Directorate for Land Resources, Organization, Standardization, and Remuneration in the Ministry of Agriculture, Food Industry, and Waters (MA) will have overall responsibility for the coordination of the implementation of the Project and for the Project- related activities of the other departments and agencies of Romania. As is the practice in Romania, all participating farms and agro-industries would be headed by qualified university graduates whose tecinical competence is constant- ly being updated through seminars and demonstrations. Additional technical assistance would be provided whenever necessary, by units of the MA. v. The repayment period of sub-loans would take into account cash flow projections of operations. Interest would be at the rates currently charged by BAFI for similar loans (generally 3% to 4,' p.a. depending on the nature of the agricultural activity), but in no case would the interest rate be less than 3% p.a. Due to the near-zero inflation in Romania and to the role of interest rates in a centrally planned economy, these interest rates are positive and appropriate. vi. The financial and economic returns on the investments are satisfac- tory. Also, the Project would improve the linkage between production and processing because of its integrated character, it would serve as demonstra- tion for similar projects in the future, and more importantly, the Project would result in creating significant employment in the Sadova-Corabia region and in raising the income of those workers involved by at least 50%. The proposed Project is, therefore, a suitable basis for an IBRD loan of US$30 million equivalent. It would be made to BAFI which is a well-run, well-staffed credit institution in good financial condition, for 20 years including 5 years of grace. The State, as is the practice in Romania, will assume the foreign exchange risk.  ROMANIA SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 In the spring of 1973, the Socialist Republic of Romania (State) submitted to an IBRD economic mission for possible IBRD financing a list of planned agriculture investments in the region served by the Sadova-Corabia Irrigation System. Subsequently, two missions from EMENA Projects went to Bucharest to assist the Ministry of Agriculture, Food Industry, and Waters (MA) and the Bank for Agriculture and Food Industry (BAFI) in preparing the proposed Project involving on-farm and agro-industry developments which was formally submitted to IBRD in April 1974. 1.02 Romania joined IBRD in December 1972. By August 1974, three proj- ects have been approved involving total loans of US$190 million: the Tecuci Fertilizer Project for US$60 million; the Otelinox Special Steel Project for US$70 million; and the Turceni Thermal Power Project for US$60 million. Another project, the Giurgiu Razmiresti Irrigation Project (for US$70 million) has been negotiated, and, together with this Project, compose the two proposed thus far in the agriculture sector. 1.03 This report is based on the findings of an appraisal mission to Romania in May 1974 consisting of Messrs. C.E. Eugenio and M. Lenot (IBRD) and F. Susaeta and M. Faust (Consultants). II. THE AGRICULTURAL SECTOR A. Romania (Annex 1) General 2.01 Romania, which has a total land area of almost 24 million ha, may be divided. into five regions. Two of these regions are very fertile: Wallachia, in the southern plains of the Danube Valley and where the proposed Sadova- Corabia Project is located, and Banat, the most western part of the country. The other three regions are less fertile: Transylvania, in the center, with forests and mountains; Moldavia, in the east, with poor soils; and Dobrudja, or. the Black Sea, with inadequate rainfall. The country has a predominantly c'ontinental climate. Average temperature ranges from 6