Romania - Roman Seamless Pipe Project

Document of FILE COPY The World Bank F FOR OFFCIAL USE ONLY Report No. P-2438-RO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK OF ROMANIA WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A ROMAN SEAMLESS PIPE PROJECT December 21, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Leu (plural Lei) 1. Official Rate Lei 4.47 = US$1.00 Leu 1.00 = US$0.22 2. Tourist Rate Lei 12.00 = US$1.00 Leu 1.00 3 US$0.08 3. Conversion Rate for Traded Goods Lei 18.00 - US$1.00 Leu 1.00 = us$o.o6 The official exchange rate of lei 4.47 per US$1 is used only for accounting purposes. The rate used for tourist transactions is lei 12 per US$1, having been revalued from a rate of lei 14.38 per US$1 in October 1974. Beginning in March 1978, a trading rate of lei 18 per US$1 has been used to convert the prices of all traded goods; this rate is considered representative of the average cost of convertible foreign exchange. The rate of lei 18 per US$1 is being used by the Government to convert national income statistics from lei to dollars. Consequently, this rate has been used as the base rate for cal- culation in the appraisal. Fiscal Year January 1 to December 31 GLOSSARY OF ABBREVIATIONS CIPM _ Industrial Central of Metallurgical Processing. IPROLAM - Institute for Engineering of Rolling Mills in the Ministry of Metallurgical Industries. METALIMPORTEXPORT - Export Sales Organization for Pipe Products in the Ministry of Metallurgical Industries. METAROM - Romanian Metallurgical Industries Trading Enterprise.  FOR OFFICIAL USE ONLY ROMANIA - ROMAN SEAMLESS PIPE PROJECT LOAN AND PROJECT SUMMARY Borrower: Investment Bank of Romania. Guarantor: Socialist Republic of Romania. Beneficiary: Roman Enterprise. Loan Amount: $40 million equivalent. Terms: Repayable in 15 years, including a 3 year grace period, through semi-annual installments, with interest at 7.35 percent per annum. Project Description: The project would consist of a "tPilger" mill with a capacity of about 130,000 tpy of large diameter seamless wall pipe. It would produce about 100 different types of large diameter pipes to meet increasing domestic and international demand for these products, and to save and earn foreign exchange. Pipes produced under the project would find a wide range of applications across Romanian industry including oil and gas exploration, production and transportation, chemicals, boiler, machine tool and earth moving equipment manufacture, ship building, and marine platform manufacture. The transfer of the Pilger mill technology will be a benefit to the Romanian pipe indus- try. About 900 new jobs will be created, and net foreign exchange benefits are estimated at $74 million annually at full production. The market and commercial risks arising from uncertainty of export market and export prices for the project products are not considered major since COMECON countries and China could absorb project output if the expected market opportunities were not fully realized. The technical risk that steel ingots of required quality would temporarily not be produced in Romania would be minimized by training, arrangements for ingot testing, and provision of technical assistance if the tests show that the ingots are not of the quality required. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Cost Estimate: Foreign US$ Millions as % Item Local Foreign Total of Total Civil Works and Buildings 20.8 8.7 29.5 29 Equipment and Spares 20.1 42.0 62.1 68 Other 7.3 2.9 10.2 28 Base Cost Estimate (BCE) 48.2 53.6 101.8 53 Physical Contingencies (10% of BCE) 4.8 5.4 10.2 Price Escalation (7-7.5% on imported items and 1% on local items) 0.9 9.6 10.5 Sub-total 53.9 68.6 122.5 Working Capital 9.8 - 9.8 Total Project Cost 63.7 68.6 132.3 Interest During Construction 1.3 5.8 7.1 Total Financing Required 65.0 74.4 139.4 Financing Plan: US$ Millions Local Foreign Total State Budget 65.0 14.4 79.4 IBRD _ 40.0 40.0 Cofinancing - 20.0 20.0 TOTAL 65.0 74.4 139.4 Estimated Disbursements: US$ Millions Bank FY 1979 1980 1981 1982 Annual 0.5 10.5 22.0 7.0 Cumulative 0.5 11.0 33.0 40.0 Internal Economic Return: 12 percent. Staff Appraisal Report: No. 2090-RO; December 15, 1978 Industrial Projects Department  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK OF ROMANIA FOR A ROMAN SEAMLESS PIPE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Investment Bank of Romania, with the guarantee of the Socialist Republic of Romania, for the equivalent of $40 million to help finance a project for the production of seamless pipe. The loan would have a term of 15 years, including 3 years of grace, with interest at 7.35 percent per annum. Co-financing of $20 million equivalent either as suppliers'-or financial credits or a mixture of both is being sought. PART I - THE ECONOMY 1/ 2. The first basic report on Romania (Report no. 1601-RO, "The Indus- trialization of an Agrarian Economy under Socialist Planning") was circulated to the Executive Directors on April 20, 1978. An economic mission visited Romania in mid-May to collect information on economic performance in 1977 and to discuss the 1978 Annual Plan and the new economic measures announced in February 1978. This part incorporates its findings. Country social and economic data are given in Annex I. 3. Over the past 25 years the Romanian economy has undergone a radical transformaltion and has sustained one of the highest growth rates in the world. The average growth rate of national income during the period has been 9.7 percent per annum. The level and diversification of industrial production has increased rapidly, providing the basis for the modernization and expansion of other economic sectors and a general increase in labor productivity and national income. With the transfer of labor from agriculture to industry, the population has become increasingly urbanized. Standards of living have increased Substantially, not only because of the growth of personal incomes but also because of the provision through the state budget of expanded and improved education, medical services, housing and social expenditures of other kinds. Furthermore, Romanian participation in the world economy has changed significantly as the level of trade has risen and its composition altered. 4. The changes in the level and structure of economic activities be- tween 1950 and 1975 represent the outcome of a development strategy designed to accelerate the rate of growth and to catch up, as quickly as possible, with the level and structure of development in the developed countries. The main features of the strategy can be summarized as: high and increasing rates of saving and investment; the creation of a broad industrial base; the devel- opment of local natural resources; the reorganization and modernization of agriculture; the balanced regional distribution of production and income; the expansion of foreign trade and international economic relations; and the development of human resources. 1/ This part is identical to the description of the economy included in the President's Report for A Second Turceni Thermal Power Project, to be considered by the Executive Directors on the same date as the proposed project.  -2- 5. The main instrument for carrying out the strategy has been the system of comprehensive central planning and management. Economic management is organized along socialist principles which include state and cooperative ownership of almost all productive resources. Economic activity is directed by means of obligatory development planning coordinated by the central party and government authorities. The national plan, drawn up on a five-year time frame and elaborated each year in an Annual Plan, sets out for the economy as a whole, by sector and branch and on a regional basis, specific tasks for economic and social units. The plan is drawn up through a combination of central directives and aggregation of individual enterprise plans, any dif- ferences being reconciled through discussions between the entities involved. During the late 1960s and throughout the present decade, Romania has under- taken measures to improve the planning and management system, to increase the responsibility of enterprises in preparing and implementing the plan and to orient the economy to a more efficient use of resources (see para 20 for the latest changes). 6. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a common branch or industry without being directly engaged in production. Enter- prises subordinate to the Centrals are responsible for production which is controlled through a system of financial and physical production targets. In agriculture, large State farms and cooperatives are the predominant units of production. 7. To achieve the objectives of rapid growth and structural change, the Romanian authorities have made great efforts to mobilize domestic resources for development and to maintain a high rate of capital formation. Over the past 25 years, investment has grown at 13 percent per annum, and by the 1971- 75 Five-Year Plan, the proportion of national income utilized for accumulation had risen to 34.1 percent (equivalent to 27-28 percent of GNP). The sectoral allocation of investment throughout the period reflected the priority of industrialization and the creation of a broad industrial base oriented towards self-sufficiency; approximately 50 percent of investment has been allocated to industry and, of this, by far the largest part has been directed to the producer goods sector. This has resulted in rapid growth of the industrial sector, over 13 percent per annum during the last decade, with the producer goods sector growing more rapidly than consumer goods. In 1976 industry was the leading sector of the economy, accounting for almost 60 percent of national income, and employing approximately 32 percent of the labor force (and almost 33 percent in 1977) compared with 14 percent in 1950. Heavy industry, led by chemicals, ferrous metallurgy, engineering and machine building, comprised 62 percent of gross industrial production. 8. This industrialization strategy has greatly increased the demand for raw materials and energy. Romania has concentrated on exploiting local resources of fuels, metals and minerals to be as self-sufficient as possible in these items. However, in spite of the rapid growth in production of the wide range of raw materials found in Romania and recent efforts to conserve and economize in the use of raw materials and energy, Romania has become a net  - 3 - importer of many important items, particularly coal, iron ore and oil. The rapid growth of energy consumption, 8.6 percent per annum since 1950, has outpaced the growth of domestic production. Romania started to import oil in 1968 and became a net importer of energy in 1972. 9. Notwithstanding the emphasis on industrialization, agriculture remains a key sector of the economy, still employing 34 percent of the labor force in 1977 (compared with 74 percent in 1950). Apart from supplying foods and other agricultural products as inputs for agro-industries, the sector also supplies about 30 percent of the nation's convertible foreign exchange earn- ings. Though agricultural output almost tripled in the last 25 years, the faster growth of non-agricultural sectors has reduced the share of agriculture in nationaL income to about 18 percent by 1976. Over the past decade, agricul- tural performance has improved with the increased emphasis on agricultural development and the increased investment funds made available. However, the level and growth of production have remained below the sector's potential. 10. Romania's population growth is about 1 percent per annum. The rapid growth of industrial employment has therefore drawn labor from the rural areas. The average GNP growth of 9 percent per annum implies a percentage growth in output per head of about 8 percent per annum, up to an estimated GNP per capita of US$1,580 in 1977, based upon official national income information using the World Bank Atlas methodology. 11. The organization of the economy is such that all labor is employed (indeed, required to work). There is, however, some seasonal labor surplus in agriculture. Income distribution is also relatively equal, through govern- ment policy controls over the level, growth and structure of wages. By law the maximum wage is limited to five and a half to six times the minimum. Monthly wages were increased by 8.3 percent in 1976 to an average of 1,964 lei. The Government also promotes its income distribution policies through regional allocation of industrial investment. 12. The Government aims to give the population a basic needs package, partly by providing services such as education, health and housing. From this basic level, the Government has planned annual increases in living standards. Real incomes have risen at an annual rate of 6.6 percent since 1950, with the growth rate accelerating particularly in the last decade as more benefits of a rapidly expanding national income were channelled to consumption. Prices of essential consumer goods and services such as foodstuffs, rents and urban transport remain low and most social services, notably education and health care, are provided free of charge. 13. The value of Romania's trade grew at an average annual rate of 13 percent in the past 25 years, with a gradual acceleration in the last decade, reflecting not only the effects of international inflation but also an increase in the importance of trade, particularly industrial imports, to the economy. The level of imports rose in response to the need for capital goods and raw materials, reaching US$7.02 billion in 1977. Exports also grew rapidly, reaching a level of US$6.88 billion in 1977, and the share of manufactured  - 4 - goods increased to 50 percent, reflecting the progress of Romania's indus- trialization. Trade with LDCs and developed market economies has also been increasing rapidly in response to policies of diversifying sources of raw material supply and as a consequence of exports of more manufactured goods. In recent years, there has also been a tendency to move away from trade on a bilateral basis towards trade involving multilateral payments, within the framework of the general trade cooperation agreements signed with almost all of the country's trading partners. These agreements also covered cooperation in production, technical assistance and economic relations. In 1977, the convertible balance of payments deteriorated, reversing the trend of the previous three years. After a surplus of US$76 million in 1976, the trade balance had a deficit of US$81 million in 1977, as a result of additional imports made necessary by the earthquake, the diversion of export goods to the domestic economy for reconstruction and continued weak demand in the developed countries for some Romanian exports. With an increased deficit on the invisibles account (US$192 million compared with US$137 million in 1976), there was a current account deficit in 1977 of US$273 million compared with the 1976 deficit of US$61 million. 14. In spite of these developments, the structure of Romania's trade with the developed market economies is still characterized by exports of natural resources and imports of capital goods. Because of the present low level of reserves, any instability in export earnings, as frequently arises from shortfalls in agricultural output or softening in prices tends to place the import program, largely sophisticated machinery and components, in imme- diate jeopardy. Recent Economic Developments 15. The Five-Year Plan under implementation covers the period 1976-80. The high growth rates experienced during 1971-75 are planned to continue. The pattern of growth planned for this period suggests that the present decade has been viewed as a decisive period in the achievement of long-term objectives, during which Romania will overcome the major constraints on its transformation from a developing country into a developed and technologically advanced coun- try. There have been substantial and comprehensive revisions to the Five-Year Plan targets during 1977 to help accomplish this. In July, increased targets for standards of living were announced and in December, following the Eleventh Conference of the Romanian Communist Party (RCP), revised targets for all other areas of the Plan were announced. Also, in January 1978 important decisions were taken to increase work incentives substantially by allowing workers to participate in sharing the profits of enterprises (see.para 20). 16. According to the revised plan, national income is to grow at 11 percent per annum between 1976-80, practically the same rate as was achieved between 1971 and 1975. Gross industrial production will increase at 11.5 percent, compared with the original target of 10.2-11.2 percent, while gross agricultural production is expected to grow at a rate of 6.9-9.0 percent per annum, which would require a significant improvement over previous results in that sector. In addition, investment is to increase by 12.7 percent per annum, approximately the same rate of growth as in the original plan. However,  - 5 - the revised plan contains a larger number of investment projects, as new projects were added following a reexamination of existing projects which led to a reduction in investment costs of about 10 percent on average. This reexamination, which took place in 1976 and 1977 was part of the general campaign to increase utilization of existing capacity and to economize on the consumption of raw materials and intermediate goods. The volume of foreign trade is to increase by 109.1 percent in real terms over the five years, a much faster rate of growth than in 1971-75 when trade merely doubled in current prices. Furthermore, the Government plans to encourage the growth of exports so that it exceeds that of imports, so as to pursue its long-term objective of reducing external debt and allowing for the accumulation of reserves. While the rate of growth of consumption will remain below that of production, it will nevertheless be increased under the revised plan. Real wages are now to increase by 32.3 percent over the five years compared with the previous target of 22 percent. As a result, targets for socialist retail trade and services for the population have been increased. 17. The economy was dealt a severe blow on March 4, 1977 when a violent earthquake occurred in the east of the country, causing severe damage in the vicinity of Bucharest. The Government estimated that 1,570 people were killed, 11,300 in'jured and that it caused damage valued at US$2 billion. US$1.4 billion of the tot:al damage was to buildings and associated utilities, of which US$1 billion wals in housing. Of the remaining 30 percent of damage, almost all was in inventories and production. The earthquake also had a substantial detri- mental effect on the country's balance of payments' prospects; the net balance of payment:s cost is estimated to be approximately US$630 million during 1977 and 1978. 18. The Government organized immediately an intensive reconstruction effort with the stated aim of avoiding any impact upon the implementation of five-year plan targets. This required additional efforts from the population in the form of labor, e.g. work on one Sunday per month, and money. While these efforts enabled the economy to continue its growth, 1977 plan targets were only partially fulfilled. National income increased by 8.6 percent com- pared to a plan target of 11.3 percent and an increase in the previous year of 10.5 percent. Industrial production increased substantially more than the plan target (12.5 versus 10.5 percent). In net production or value added terms, however, growth was significantly lower, since reductions in production costs were less than planned and because of the need to make repairs after the earthquake. For reasons other than the earthquake, chiefly climatic and management problems, gross agricultural production fell 1.3 percent short of the 1976 level, and was far below the plan target of 2-4 percent growth. The gross output of the construction sector rose rapidly; much of the addi- tional output constituted repairs and the sector provided a relatively large share of growth in national income. The impact of the earthquake showed up clearly in the growth rates of investment and trade. The volume of investment increased by 11.5 percent rather than the 16.7 percent planned, reflecting the diversion of construction resources and manpower to repair work. The volume of trade increased in current prices close to that planned (14.8 versus 15.5 percent) but with imports increasing more rapidly and exports less rapidly than planned.  19. The 1978 Annual Plan indicated growth rates similar to those planned in 1977. National income was planned to increase by 11-11.5 percent, gross industrial production by 10.6 percent and gross agricultural production by between 6.9 and 16.1 percent, with the respective net production growth rates being somewhat higher as a result of planned decreases in material expenditures per unit of final product. Investment was planned to increase by 16.8 percent and foreign trade by 19.1 percent. Real incomes of the population were projected to increase by 7.9 percent. Mid-year reports suggested that the growth of production during 1978 was likely to approxi- mate targets, although there have been indications of delays in carrying out investments. The recently published Annual Plan for 1979 signals no significant deviation from the previous path, although the target for national income (8.8 percent) does suggest a slight deceleration in growth. Net indus- trial production is planned to grow at 11.5 percent (in keeping with the new economic measures, the 1979 Plan specifies industrial growth in net rather than gross terms), with particularly high rates of growth planned for such indus- trial branches as machine tools, engineering and electrical goods. Gross agricultural production is planned to increase at 5.1-5.6 percent, foreign trade at 16.6 percent and investment at 9.1 percent, substantially below the 1978 target. Real incomes of the population are expected to increase by 7.5 percent. 20. In February, 1978 the Government announced changes in economic and financial mechanisms designed to improve the planning and management of the economy, to stimulate improvements in labor productivity, in cost reduc- tion and efficiency of production and also to make existing provisions for enterprise self-management more effective. The major change announced was the introduction of net production as a major plan target, both for inducing enterprises to fulfill plan objectives, particularly in the areas of increased efficiency and reduction of costs and as the basis upon which worker's wages and bonuses are paid. In future enterprises are also to retain a higher pro- portion of profits, have increased responsibility for socio-cultural expendi- tures, be more concerned in the final stages of the annual plan preparation, be permitted to enter into longer term contracts to ensure a closer correla- tion between the plan and actual contract provisions and will have more direct responsibilities for the achievement of foreign trade targets. These measures are now under detailed discussion within Romania and are expected to become law in 1979. It is too early to make a definite judgment, but it does appear that they are designed to make the existing management and planning system operate more efficiently rather than to cause radical changes. However, they are a step in the direction that the basic economic report suggested was desirable if the economy was to meet its objectives. Furthermore, they will set up new pressures between the various levels of the economy which may lead to more substantial changes in the future. External Assistance 21. 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  - 7 - borrowing abroad and by mounting a major effort to expand exports and tourism earnings. In 1977, new commitments of convertible medium and long-term loans totalled US$843 million and consisted mainly of supplier and financial credits with relatively short repayment periods. The gross inflow of conver- tible medium and long-term loans during the year was US$890 million (not counting US$38 million from the IMF). This represented a net inflow of US$329 million after accounting for the country's repayment obligations. There was also a net inflow of US$156 million on short-term during 1977; this was the result of the Government's temporary reversal, because of additional financing needs generated by the earthquake, of its policy to reduce reliance on short- term credilts. 22. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also taken active steps to attract long-term private capital. A regulation passed in 1972 defines the conditions under which foreign firms can establish joint ventures with domestic enterprises, preferably in foreign exchange earning or saving industries. As of November 1978, eight joint venture agreements had been signed and a number of others announced. In contrast with the earlier ventures, which involved total direct foreign investments of only US$10-15 million, the seventh and eighth involve far larger sums. The seventh agreement, signed in early 1977 with Citroen, involves a contract of FF 2.5 billion (about US$500 million) and will lead to a total capital inflow of aproximately US$250 million. Even larger inflows, appproximately US$500 million, are expected as a result of the eighth agree- ment, with Kuwait, for the construction of a petrochemical complex costing US$1.25 billion. In the past twelve months, several more ventures have been announced; a joint shipping company in cooperation with Libya, a joint produc- tion company with British Aircraft, a joint production enterprise with Data Products Corporation of USA and a joint venture for passenger aircraft with VFW-Fokker. Many other joint venture proposals are at various stages of negotiations. 23. Romania also receives medium-term trade credits from the U.S. Exim- bank and trades under Government guaranteed supplier credit schemes, ECGD, COFACE, and HERMES with the United Kingdom, France and the Federal Republic of Germany, respectively. During 1977, Romania became the first East European recipient of a Japanese Eximbank loan, receiving US$80 million for the expan- sion of the port of Constanta. In 1975 Romania succeeded in securing a US$100 million, eight-year loan from Kuwait as part of a general cooperation agree- ment and also a US$420 million loan from Iran on concessionary terms. How- ever, it is in its Eurocurrency borrowings that the Government has made most progress in improving its access to capital markets and in raising substantial sums at good and improving terms. During 1977, it negotiated two Euro- dollar loans totalling US$125 million. In January 1978, Romania negotiated a further US$100 million on the Eurocurrency market, and it was recently announced that the Government has negotiated a new Eurocurrency borrowing of US$200-300 million. The terms for this eight-year loan, with four years grace are 0.625 percent above LIBOR for the first three years and 0.750 percent for the remaining years. As part of its strategy to secure long-term energy supplies, Romania has concluded a long-term contract with Occidental Petroleum for the purchase of coal from the U.S.; a banking consortium raised a US$53 million loan in April 1978 to finance Romanian participation in the Island  Creek Coal Mine in West Virginia. In addition, Romania has access to non- convertible currency investment credits from the International Investment Bank, Moscow. 24. Nonetheless, Romania's access to long-term finance in convertible currencies is still very restricted. The IBRD is the major source of long- term development finance, though, as shown above, Romania is making efforts to improve its access to financial markets. The Bank's presence on a signi- ficant scale, and its effort to associate Bank financed projects with co- financing through supplier or financial credits, has a positive influence in this regard and serves to build outside confidence in the country, thereby enhancing in the long-term Romania's independent access to the world's financial markets. Prospects 25. Romania has good potential for further economic growth. Endowed with important natural resources (fuels, some minerals, timber, rich soils and sources of irrigation water for agriculture, and a favorable climate for agriculture and tourism) and located conveniently with respect to its major international markets in the East and West, the country has built a broad industrial infrastructure (power, metallurgy, chemicals) which will serve as a base for the expansion of secondary manufacturing sectors such as machine building and consumer durables. Above all, Romania has a hard-working and increasingly skilled population. To attain its growth objectives, however, Romania will have to rely on a major expansion of exports of manufactured goods in order to finance modern foreign technology and an increasing depen- dence on imported raw materials and fuel. 26. Economic growth and structural change call for the introduction of new technologies, improvements in the quality of products, more efficient use of materials and factor inputs and reductions in production costs. The achievement of export targets requires improvements in the quality of products and responsiveness to customer demands, areas in which the economy appears to have lagged in past years. To keep up with these changes and requirements, large programs of education and manpower training have been mounted, invest- ments in scientific and technological research have been emphasized, and efforts are being made to strengthen technical cooperation with industrialized countries and international organizations. The increasing diversity and com- plexity of Romania's economic structure also require continuing improvements in the efficiency of economic planning and coordination and further refine- ments in economic management. 27. The growth rate is expected to remain quite high by international standards and if its present momentum is maintained, Romania will be among the more developed of the high-income, developing countries in the 1980s. The Government plans to achieve this high growth rate by emphasizing, first, the utilization of the country's own resources and a large local investment effort, and second, more effective use of human, capital and natural resources. However, in order for Romania to attain its growth targets and its long term  - 9 - plans for creating a competitive industrial economy, it will have to attract foreign resources and technology and secure loans to support its development efforts. Creditworthiness 28. As of December 1977, Romania's total medium and long-term external debt amounted to US$3,491 million. Most of these debts (US$3,402 million) were denominated in convertible currencies, the major creditor countries being the Federal Republic of Germany, France, the United Kingdom (UK) and Italy. While the total debt does not appear excessive in relation to the volume and growth of external trade, average maturities are relatively short and con- vertible debt service payments are estimated to be in the order of US$900 million a year in 1978 and 1979. The convertible debt service ratio was 19 percent i.n 1977 and is expected to be 18 percent in 1978. 29. The organization of economic activity in Romania, the pursuit of a development strategy involving high investment and saving rates, and rapid income growth ensure the effective use of foreign credits. Moreover, the country s major efforts to expand exports (particularly to convertible cur- rency areas) are increasing the foreign exchange available for debt service. Convertible export earnings rose from US$830 million in 1971 to US$3,403 million (not counting US$580 million in non-factor services) in 1977. The preferential trade status accorded to Romania by the European Community in June 197:3 is facilitating the expansion of such exports as is the granting of most favored nation status by the U.S. Since the early 1970s, the Government has restricted the use of short-term credit from Western suppliers in an effort to improve the structure of the country's external debt. In view of the earthquake's impact upon the balance of payments, the Government indicated that there would be a temporary reversal of this trend and short-term debt increased again in 1977. Assuming a continuation of present export and debt managemenat policies, we estimate that the debt service ratio will be about 20 percent at the end of the 1976-80 plan period, after which it will remain fairly stable. The country's present outward-looking posture, the success of both its domestic growth and foreign trade policies, and its potential for continued development, all support the judgment that Romania is creditworthy for substantial Bank lending. 30. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. Settlements which were still under discussion at that time concerned claims in the U.K. and in the U.S. With regard to the settlement of these claims, the final payments of U.S. claims began in September 1975 and were completed in October 1976 based upon agreements reached in May 1975. Settlement of the U.K. claims proved more difficult, but a final agreement was signed in January 1976. The Bank was also informed in late 1976 of certain Swedish claims concerning public loans from the pre-war period, nationalized Swedish property and other interests, such as concessions granted to Swedish companies before the Second World War. The eleventh meeting to discuss settlement of these claims was held in Bucharest in October 1976 and further discussions were planned at a date to be established through  - 10 - diplomatic channels. The Bank has been unable to obtain a consistent picture from the two Governments of the present status of this matter and has, there- fore, urged the Romanian and Swedish authorities to clarify their respective positions directly with each other. PART II - BANK GROUP OPERATIONS IN ROMANIA 31. The proposed loan and the proposed loan for the Second Turceni Thermal Power project ($70 million) would bring total Bank commitments to Romania to $1032.8 million for twenty loans in agriculture, industry and power. Disbursements under the Bank's initial loans were slow during 1975, but this situation improved considerably during 1976 and 1977. Annex II contains a summary statement of Bank loans to Romania and notes on the execu- tion of ongoing projects as of November 30, 1978. 32. Foreign exchange, especially in convertible currencies, continues to be a major constraint and one of the major objectives of Bank lending con- tinues to be to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which will expand foreign exchange earnings or savings. The Bank is assisting the Gov- ernment by helping to mobilize cofinancing for appropriate projects. Bank lending also aims at supporting the Government's efforts to introduce new industrial technologies, to improve the quality of products and production efficiency, to reduce production costs and to provide for necessary electric power development. Market aspects and marketing, especially for export goods, are also emphasized. Special attention is given to agriculture which is heavily dependent upon favorable weather and where productivity levels are still comparatively low. 33. A number of further loans are under consideration. Projects for irrigation and drainage, poultry production, pig production, horticulture, power, and a number of industrial projects, have been proposed. The Govern- ment has also requested that the Bank consider lending for a major navigation canal linking the Danube and Black Sea. 34. In addition to lending, the Bank (through EDI) has assisted Romania by conducting industrial and transportation project appraisal training courses for 163 Romanian officials in Belgrade in 1973 and in Bucharest in 1975, 1976, and 1977. Additional courses, including one in agricultural project appraisal, are planned. The methodology taught in these courses is becoming more widely known in Romania and is expected to begin to supplement the methodology normally used by the Romanian planning authorities. 35. The projects, for which assistance has been committed or is being considered, represent only a small portion of Romania's total need for external financing and of its total disbursed convertible debt. However, they will provide a substantial net addition to the inflow of convertible currency finance, and may set a pattern for obtaining longer-term convertible finance from other sources. The disbursed debt outstanding to the Bank  - 11 - is expected to constitute about 13 percent of Romania's total projected con- vertible currency debt in 1980; the Bank's share in Romania's debt service payments in 1980 would be about 4.5 percent. PART III - THE INDUSTRIAL SECTOR IN ROMANIA Industria:l Development 36. The performance of Romania's industrial sector during the last 25 years has been impressive, and great efforts have been made to transform a nation that once specialized in the exportation of raw materials into a coun- try with a strong and broad based industrial sector. Gross investment in the economy, at annual rates in the order of 30 percent of GNP has been concen- trated on basic and heavy industry, particularly on fuel, electric power, metallurgy, machine building and chemicals and have resulted in a rapid expansion and diversification of industrial output. During the last Five Year Plan, gross industrial output increased by about 85 percent surpaEsing significantly plan targets. Growth in the chemical, engineering and metal working, and ferrous metallurgy sectors has been the fastest with production about doubling. 37. In the process of this impressive development, the industrial sector of Romania has assimilated in a relatively short period of time vast amounts of technology and know-how, and it is assuming a sophistication with which it is increasingly capable of solving complex technical problems and producing products that require a high degree of technological achievement. One of the comparative advantages of Romanian industry is its relatively low- cost, skilled and unskilled manpower, supported by well organized training programs. 38. Industrialization will remain the first priority of development both in the remaining years of the 1976-80 Five Year Plan and in the longer run, with output expected to grow seven fold in the period 1970-1990 (or roughly 10 percent per annum). While previous growth was often achieved at sacrifice of quality, efforts for quality and productivity improvement are more evident now. Internally, the areas of major emphasis will be manpower planning and development, growth in technological capabilities, industrial modernization, and central efficiency auditing. With such improvement, sub- stantially more value will be incorporated per ton of product. The thrust of the sector's development will continue to be the growth of the chemical, engineering, metal working and ferrous metallurgy sectors. Industrial Organization 39. At present nine industrial ministries are responsible for the indus- trial sector in Romania. Subordinate to each Ministry are several foreign trade enterprises, research and design institutes and a number of Centrals, which in turn direct the activities of a group of related enterprises. The enterprises, Centrals and Design Institutes, which have not been authorized  - 12 - to trade abroad, conduct their foreign business through the foreign trade enterprise which normally belongs to the same Ministry. However, as a result of new economic measures announced in March 1978, some changes may occur (see para. 20). The Steel Industry 40. Crude steel production grew at an annual rate of nearly 14 percent in the 1960's, and at a somewhat slower rate of about 9 percent per annum since 1970. Production increased from 1.8 million tons in 1960 to 6.5 million tons in 1970, and 12.0 million tons in 1977. Except for special and high quality steel, Romania is now almost self-sufficient in steel products. How- ever, the industry is relying increasingly on imported raw materials, with imported iron ore now accounting for 80 percent of requirements and coking coal 55 percent. Under the current 1976-80 Five Year Plan, crude steel pro- duction is planned to increase to 17 million tons in 1980. Several factors may call for a slower pace of expansion than that planned. In particular, steel consumption per capita in Romania would have to reach 650 kg in 1980 as compared to the present range of 450 to 700 kg in industrial countries. Also, on the supply side, new steel plants may take longer than now planned to come on stream. The Steel Pipe Industry 41. Based on its petroleum and gas extraction industry, Romania's first pipe rolling mill was built in 1933. By 1960 total pipe production (seamless and welded) reached 300,000 tpy. Since then production has increased at an annual average rate of 8 percent and reached 1.3 million tons in 1977. During this period, production of welded pipes grew faster than that of seamless pipes, in line with world-wide trends due to improved welding techniques and reduced fabrication costs, and pipe production in Romania is now equally split between these two types of pipe. 42. Although Romania has been a traditional supplier of pipe products to the COMECON countries, the industry has been developed primarily to meet domestic requirements. Imports have remained low and in 1977 they totalled 91,000 tons, equivalent to 9 percent of domestic requirements. Although exports doubled in volume, from 150,000 tons in 1960 to 372,000 tons in 1977, their share of production declined from 45 to 27 percent. Yet Romania remains an important pipe exporter, primarily to the COMECON countries. 43. Romania has been well placed to develop a cotupetitive pipe industry. It has a large and varied domestic market, an established steel industry to provide the basic input (steel billets), a highly trained and productive work- force, and fabrication facilities sufficiently developed for Romania to manu- facture a large portion of pipe production equipment. Romania can continue to enjoy these comparative advantages provided future investments are based on realistic assessments of domestic and international market requirements. 44. The steel pipe industry in Romania comes under the Ministry of Metallurgical Industries, which is responsible for the steel industry as a  - 13 - whole. The organization of the pipe industry is similar to that of all other industries. The Industrial Central of Metallurgical Processing (CIPM) with its head office in Bucharest, is responsible for the production and domestic marketing of steel pipe and wiredrawn products. Steel pipes are produced in three enterprises located in Bucharest, Iasi and Roman (site of the proposed project) in the northeast. The plants run at full capacity and appear to be efficiently managed. Although they do not yet produce the large seamless pipes to be produced by the proposed project, they already produce a wide and comprehensive range of pipe products of good quality. In addition to the proposed project, further expansion will be undertaken both at the Roman and Bucharest enterprises and two new plants will be constructed. Three later expansion projects are still in the early planning stages only. Together, were they to go forward, they would almost double production capacity for seamless pipes, and increase that for welded pipes by 50 percent by 1985. This ambitious expansion program is geared entirely towards the domestic market which, however, may not be large enough to absorb its output (paras 45 and 46). The Market for Steel Pipes 45. Total consumption of pipes in Romania grew by about 10 percent annually over the last five years and reached just over 1 million tons in 1977. 0:E this total welded pipes accounted for 469,000 tons, and seamless pipes for 570,000 tons. Compared to previous periods there has been an acceleration in the annual growth rate of pipe consumption as Romanian indus- try, the main market outlet, expanded rapidly. In particular the consumption of welded pipes increased sharply beginning in 1970, whereas that of seamless pipes began to slow down, for the reasons described in para 40 above. 46. Romania is projecting that domestic pipe demand would double between 1977 and 1985, to reach 2.0 million tpy. This would represent a per capita consumption of 85 kg, well above the levels experienced in other industrial countries. While pipe demand can be expected to be reasonably high in Romania in view of the country's rapid industrialization and the continued production of oil and gas, the level projected by Romania for 1985 appears excessive and it is estimated that overall demand will not exceed 1.6 million tons by 1985. Further, it could well be that in the late eighties, or early nineties, when Romania's economy is well developed and oil and gas resources may start to decline, pipe demand would gradually decline. 47. As noted in paragraph 41, Romania is already an important pipe exporter, principally to the COMECON countries, whereoit ranks second to Czechoslovakia. Romania's production surplus is expected to increase from 372,000 tpy in 1977 to 550,000 tpy in 1980, representing about 30 percent of production. However, based on the Bank's estimate of future demand, if all planned investments are carried out, pipe exports could be as high as 900,000 tpy in 1985, which would make Romania a major world exporter. In view of the ambitious investment program planned and the high level of exports this could generate, the Investment Bank would cause a review of projected supply and demand for steel pipes in both the domestic and international markets by  - 14 - June 30, 1980, would submit this updated analysis to the Bank and exchange views with the Bank on its basis and conclusions including the appropriate set-up and arrangements for export marketing (Section 3.02, Loan Agreement). The Market for Large Seamless Steel Pipes 48. The large seamless pipes to be produced by the project are defined as pipes with a diameter larger than 270 Tmn. They are used principally in the energy sector (oil and gas in particular) and to a lesser extent in the chemical and metal working industries. Between 1970-75, pipe consumption increased at an average annual rate of 5.8 percent and in 1977 total consump- tion of large seamless pipes in Romania was 88,000 tpy. The market is small and therefore subject to considerable fluctuations. The five principal large seamless pipe products are casings (for use in oil and gas exploration and production), line pipes (for transmission of natural gas and to a much lesser extent for use in the chemical industry), structural pipes (for use in ship building, marine platforms, chemical and steel plant construction, machine tool and earth moving equipment fabrication), boiler tubes (for use in power stations and industrial plants), and drill collars (for oil well drilling). Romania is projecting that the demand for large seamless pipes would double by 1985 to reach 160,000 tpy. However, based on a more realistic assessment of the factors which affect the growth of demand, it is estimated that the consumption of large seamless pipes in Romania will not exceed 110,000 tpy by 1985. 49. At present, large seamless pipes are produced in Romania with a maximum diameter of 370 mm and wall thickness of 14 mm. Out of the 116,000 tons produced in 1977, 69,000 tons were consumed locally together with 19,000 tons of imports, and the remaining 47,000 tons were exported, mainly in the form of casings and drill collars, with 85 percent going to COMECON countries and primarily to the USSR. With a capacity of 130,000 tpy, the project will contribute to meeting domestic requirements for 60,000 tpy by 1985, of which about half would substitute for imports and the other half would be trans- ferred from the existing large seamless pipe mill which now produces with great difficulty pipes with a diameter higher than 340 mm. Of the 70,000 tpy available for export from the project in the mid 1980's, 35,000 tpy are expected to go to the USSR and China, both very promising markets for the future, and with which Romania already has long experience. The balance, 35,000 tpy would be exported to other countries (mainly oil producing coun- ries) where it would constitute less than 3 percent of total trade. 50. Examination of the international market for large seamless pipes shows that while in 1980 some surplus production capacity is expected to remain, demand and supply are expected to be in balance by 1985. Demand in non-Communist countries is expected to increase by about 4.5 percent annually over the 1978-85 period and over the same period Communist country net imports from OECD countries are estimated to increase substantially above the present 200,000 tpy. On the supply side, about 500,000 tpy additional capacity is expected to be installed by 1985. During the last few years, export prices for large seamless pipes have been extremely volatile as a result of stock- piling by oil companies in 1974-75 followed by world economic recession. In  - 15 - 1976 and 1977 export prices hit a record low, declining by more than 50 per- cent. In 1978 they have increased again, but still remain lower than during 1960-70 when they were not subject to sudden fluctuation. As the demand picture is likely to improve steadily up to 1985, it is expected that prices will increase by 5 percent in real terms by then. To take full advantage of these export opportunities, Romania needs to improve its export sales organi- zation. Provided it does so (see para. 51), it should be able to export 35,000 tpy successfully on the international market. However, in case the market in other countries does not develop as anticipated, exports to COMECON countries and China could be further increased as those countries are expected to remain substantial net-importers of large diameter seamless pipes. 51. Exports from the project will be handled by METALIMPORTEXPORT, the national pipe export sales organization, which operates through a network of representatives based in Romania's embassies abroad. If Romania is to achieve the high volume of exports anticipated from the project and from other pipe investments in Romania, METALIMPORTEXPORT will have to streamline its market organization and sales policies, including technical assistance to customers, regularity of deliveries, extension of credit and pricing. As a part of the market analysis (see para. 47), the Investment Bank would cause a review of the appropriate set-up and arrangements for export marketing to be carried out by June 30, 1980, and would exchange views with the Bank on its findings (Sec- tion 3.02 Loan Agreement). The Borrower 52. 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 begins with preparation; its staff appraises all major investment projects technically and financially and recommends for or against their financing to the Government. When a particular project and its financial plan has been approved by the Council of State, all funds are channelled through the Investment Bank in accordance with the approved finan- cial plan. All payments for the execution of a project must be authorized by the Investment Bank, which keeps separate accounts for each category in the financial plan for every enterprise. The Investment Bank is required to ensure that a project is executed according to the financial and technical data included in the final technical and economic study approved by the Council of State. Its inspectors check whether the project is proceeding according to the schedule approved in the Plan. 53. While the Investment Bank's supervision and control function is thus rather strong during implementation of a project, its functions are much more limited during operation of a project. Although it has the right and obligation to verify that an enterprise is meeting the targets set in the investment plan, it has no legal authority to influence directly the manage- ment of the enterprise or to force the enterprise directly to take operational  - 16 - 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. 54. The Investment Bank is the channel for all sources of major domestic investment financing other than in agriculture, but its own funds for onlend- ing as credits are relatively small. The primary source of its funds is the State Budget. The Government would ensure the availability of sufficient funds including foreign exchange requirements for the implementation and operation of the project (Section 2.02, Guarantee Agreement). The Government would also ensure that the Investment Bank can meet the debt service on the Bank loan (Section 2.01, Guarantee Agreement). The Government confirmed that the new economic reforms (see para. 20) will not affect the role of the Investment Bank as a channel for Bank funds, nor the agreements reached for the proposed project. The Beneficiary 55. The project would be an expansion of the existing Roman Enterprise which was established in 1957 to produce seamless pipe. Its present produc- tion capacity is 450,000 tpy, of which 116,000 tpy are large seamless pipes (above 270 mm). The mills are well maintained and operated. A new mill with a capacity of 110,000 tpy has just been commissioned, and another mill to produce small diameter pipes and with a capacity of 86,000 tpy is under con- struction. 56. Roman Enterprise is a fully established organization with full legal authorities and jurisdictions as normal under Romanian law. Decision making power at the enterprise level formally belongs to the Enterprise's General Assembly which includes all the workers and normally meets twice a year. A Working People's Executive Committee, chaired by the enterprise's General Director and consisting of elected workers' representatives and some members of the management is responsible for operations. The General and Technical Managers of the enterprise are responsible for implementing the decisions of the Executive Committee. 57. The financial position and performance of Roman Enterprise are satisfactory. Under the new economic reforms announced recently in Romania, individual enterprises will have greater financial autonomy than previously. This is not expected to alter Roman Enterprise's future financial position. PART IV - THE PROJECT 58. The project was proposed to the Bank in February 1976 as one of a number of projects for which the Romanians sought Bank financing during the 1976-80 Five Year Plan. Following preparation of project data requested by the Bank, it was identified as a project of further interest in May 1976. A preparation mission visited Romania in April 1977 to further discuss the  - 17 - project. More complete information on the project was received in July 1977, and additional preparation missions visited Romania in August and November 1977. Thie project was appraised in March 1978, and negotiations were held in Washington in November 1978. The Romanian delegation was led by Mr. Gheorghe Popescu, President of the Investment Bank, and included representatives of the Investment Bank and the Ministry of Metallurgical Industries. The Staff Appraisal Report (No. 2090 RO of December 15, 1978) is being distributed separately to the Executive Directors. Project I)escription 59. The project would consist of a Pilger mill, the first of its kind in the country, with a capacity of about 130,000 tpy of seamless wall pipe with a diameter range of 270-680 mm, wall thickness of 7-50 mm and fabricated from carbon atnd alloy steel. About 100 different types of pipes would be produced, in the form of casings, line pipes, construction pipes and boiler tubes. The project would include ingot preparation facilities, a main Pilger line capable of transforming ingots into tubes up to 500 mm diameter, a hot expansion press to enable 4,000 tpy of the Pilger mill production to be enlarged up to 680 mm, finishing facilities and ancillary facilities such as maintenance workshops. It is to be located at Roman, 500 km north of Bucharest, as an expansion of the existing Roman Enterprise. Some of the ingot preparation facilities, now tentatively planned at Roman enterprise, would be better located at Tirgoviste Steel Works, the raw materials source. The Government would exchange views on this matter with the Bank, before the final decision is made, and in any event not later than December 31, 1979 (Schedule 2 Loan Agreement). The ingots presently produced at Tirgoviste are not of the quality necessary for the project. While Tirgoviste has an adequate program underway to expand its steel making capacity and upgrade its ingot making facilities, additional knowhow and expertise will be needed to produce ingots of the quality required by the project. The Government would make all the necessary investments at Tirgoviste for Pilger ingot production in a timely manner; would make appro- priate arrangements with the Pilger mill supplier for testing outside Romania the Pilger ingots produced by Tirgoviste Steel Works at least 18 months before the scheduled commissioning of the project; and, if the tests show that the ingots are not of the quality required, would take all necessary measures, including technical assistance, to obtain ingots of the quality and in the quantity required by the project at least six months before the scheduled commissioning date (Section 4.01(a) Loan Agreement). The supply of utilities is satisfactory and the project includes adequate measures to protect the environment. The Government agreed that Roman Enterprise would staff the project at adequate levels (Section 4.01(b)(iv), Loan-Agreement). Project Implementation 60. The project would be implemented by the existing Roman Enterprise, which has had long experience of steel pipe manufacturing. A project manage- ment team is being selected now and will consist of staff from the Central, Roman Enterprise, METAROM (the foreign trade enterprise of the Ministry of Metallurgical Industries), and IPROLAM (design institute of the Central). The team will be led by a Project Manager, who will report to the General Director  - 18 - of Roman Enterprise, and be responsible for overall project coordination as well as site construction. Under Romanian law, civil works and construction will be carried out by construction trusts from the Ministry of Industrial Construction, under the supervision of IPROLAM, and international procurement will be handled by METAROM. Local procurement will be carried out by the Project Manager. These sorts of arrangements are well established under the Romanian system and have worked satisfactorily for previous projects. Tech- nical assistance on engineering, procurement, erection, training, commission- ing and operation of the project will be provided by the supplier of the Pilger mill. Procurement for project technology and main equipment has already started and the main contract is expected to be signed in March 1979. The project is scheduled to be completed by mid 1982 and to operate at full capacity by 1986. Project Cost and Financing 61. The estimated total financing required for the project, including interest during construction, is $139.4 million equivalent, with an estimated foreign exchange component of $74.4 million. The costs of equipment and materials as well as working capital have been estimated at prices prevail- ing in March, 1978. Physical contingencies have been estimated at 10 percent of the base cost. Price contingencies on foreign exchange costs are based on an annual increase of 7-7.5 percent for imported equipment during the construction period. Due to very low inflation under the Romanian system of administered prices, price contingencies on local costs have been calculated at one percent per anum. 62. The proposed Bank loan of $40 million would finance 54 percent of the estimated foreign exchange cost of the project. The proposed loan to the Investment Bank would be for 15 years including a grace period of 3 years and would be guaranteed by the Government. Of the balance of the foreign exchange costs, an estimated $20 million would be financed by suppliers' or financial credits or a mixture of both. The Investment Bank would arrange this financ- ing by December 31, 1979 (Section 3.03 Loan Agreement). The remaining $14.4 million, including interest during construction, together with all local cur- rency funds required by the project would be financed from the State Budget. The approval and effectiveness of the technical and economic indicators 1/ for the project by the Government would be a condition of effectiveness of the proposed loan (Section 7.01 Loan Agreement). Procurement 63. Procurement for the project is underway. There are three main cate- gories. The main technology/equipment package for the core of the Pilger 1/ The technical and economic indicators document is the final approval required by law for each major investment project in Romania. It estab- lishes the physical, financial and economic indicators for the project.  - 19 - mill, estimated to cost $32 million, is being procured under international competitive bidding in accordance with the Bank's guidelines. Pilger mill technology is highly specialized and worldwide there are only two companies which are capable of supplying the Pilger mill. Following a two stage bidding procedure, technical discussions have been completed and separate bids on a cash and credit basis will be requested in January, 1979. It is expected that credit financing on reasonable terms and conditions will be available for a major portion of this package. Other imported equipment and spares, not manufactured in Romania at present, and estimated to cost $28 million, would be procured through international competitive bidding in accordance with the Bank's guidelines by the end of 1979. A smaller amount of less specialized equipment, which is manufactured in Romania, and estimated to cost $8 million would also be procured through international competitive bidding in accordance with the Bank's guidelines by the end of 1979. Romanian suppliers participat- ing in such international competitive bidding would be accorded a margin of preference of 15 percent or the applicable customs duty, whichever is lower. It is expected that Romanian bidders would win almost all these contracts. Imported equipment and spares in all the categories described above, but either available from a limited number of suppliers or needed at a critical juncture, or costing less than $250,000 up to a total of US$2 million may be purchased after solicitation of bids from at least three member countries and Switzerland, subject to prior Bank approval of the lists of items concerned. Disbursement 64. As discussed above (para. 62), it is expected that cofinancing credits would finance a major portion of the main technology package. Thus it is expected that the Bank loan would be disbursed over about three years for (i) 100 percent of foreign expenditures for technology, training, tech- nical assistance, and some proprietary equipment, i.e. the balance of the main technology package ($7.0 million); (ii) 100 percent of foreign exchange expenditures for other imported equipment and spares ($28.0 million); and (iii) 100 percent of local expenditures ex-factory for other equipment and spares which are expected to be won by Romanian suppliers following inter- national competitive bidding ($5.0 million). In the event that credits for the main technology package are not available or that their terms and condi- tions are more onerous than those for bilateral lines of credit available to finance the other imported equipment and spares, the Bank loan would be disbursed over about three years for 100 percent of foreign expenditures on the main technology package ($32.0 million), and the balance would be divided between other imported equipment and spares ($5 million) and other equipment and spares ($3 million). Any changes in the agreed list of all equipment and serviices in the project however financed and eligible for Bank financing would be made only by prior agreement between the Bank and the Borrower. Benefits and Risks 65. Tne piuject would contribute to meeting Romania's growing and more varied demand for large seamless pipe products, and would enable Romania to earn scarce foreign exchange, by more than doubling its exports of large seamless pipe products. Pipes produced under the project would find a wide  - 20 - range of applications across Romanian industry, including oil and gas explora- tion and production, chemicals, boiler, machine tool and earth moving equip- ment manufacture and ship building, and marine platform manufacture - thus making a major contribution to Romania's continuing development effort. Net annual foreign exchange benefits of the project at full production are esti- mated at $74 million. Transfer of the Pilger mill technology will also be a benefit to the Romanian pipe industry. The project would be located in a region with relatively little industry and would provide employment for about 900 people. The estimated economic rate of return for the project is 12 percent, which compares favorably with return expectations for investments of this kind in industrial countries. 66. The major risk to the project is the vulnerability of its economic viability to the high share of production for export and the consequent impact of fluctuations in international prices. However the long-term international market which is based on world energy exploration, production and consumption appears favorable, and Romania's share of the international market will not exceed 3 percent with the project at full production. In addition, if market opportunities in countries other than China and members of COMECON did fall below expectations, Romania could increase without much difficulty its exports to COMECON countries (USSR in particular) and to China. These countries will be major pipe importers in the future, and Romania maintains close ties with them. Further, the implementation of the recommendations of the market analysis (see paras. 47 and 51) would limit the risks to the project. Under these conditions, the commercial and marketing risks of the project are considered acceptable. There is a moderate risk that steel ingots of the required quality could temporarily not be produced in Romania but this would be minimized by the assurances on ingot testing outside Romania, training for ingot production, and technical assistance if required. There is also a small risk of possible delays in project completion and of technical difficulties in the early years of operation as the project will be the first pipe mill in Romania using the Pilger technology. But the Pilger process is well proven, Romania is experienced in seamless pipe production, and as mentioned above technical assistance is available and would be sought if required. PART V - LEGAL INSTRUMENTS AND AUTHORITY 67. The draft Loan Agreement between the Bank and the Investment Bank of Romania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, and the report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 68. Features of the project of special interest are listed in Section III of Annex III. 69. The special condition of effectiveness of the proposed loan is that the technical and economic indicators for the project have been approved by the Government and have become effective (Section 7.01 Loan Agreement).  - 21 - 70. I am satisified that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 71. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 21, 1978 Washington D.C.  -22 -LX Page 1 of 5 pages TABLE 3' ONMIA - "ICLL I:DICATOUS DATA SHtET RmER9XCH CROUP8 (ADJU8TtD AVERA:RS LAND AREA (THOUSAND SQ. IN.) I - NOST U_CW RSTI3MATE) TOTAL 237.5 8MSE SAME NEXT HIGHER AGRICULTURAL 149.0 IOStT RECOT GECEDHtC ISC0I ICQIZ 19t0 /b 1970 EbTDEAT2 REGION jl j 03OW GIL QOUP /l GNP PER CAPITA 1USJ) 190.0 530.0 1580.0 1898.8 1798.4 2839.0 ENERGY CONSDKPrIOW PER CAPITA (KILORRIA8 OF COAL EUYIVALtIT) 1342.0 3013.0 3803.0 1869.3 1525.0 2376.4 POPULATION AND VITAL STATISTICS TOTAL POPULATION, MID-TEAR (MILLIONS) 18.4 20.3 21.7 . URBAN POPULATION (PERCUIT OP TOTAL) 32.0 40.8 43.0 43.0 52.2 FOPULATION DENSITY PEE SQ. KM. 77.0 85.0 91.0 81.4 27.6 55.8 PER SQ. EN. ACRICULTURAL LAND 126.0 136.0 146.0 135.2 116.4 83.6 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 27.9 if 25.9 25.4 26.2 34.8 40.0 13-64 YRS. 64.9 L 65.5 64.8 63.4 56.0 55.3 65 YRS. AND ASOVE 7.2 / 8.6 9.8 9.9 S.7 3.8 POPULATION CROWF RLTE (PERCENT) TOTAL 1.2 1.0 1.0 0.8 1.6 2.9 URBAN 3.8 3.4 2.1 2.2 3.4 C*RUDE BIRTH RATE (PER THOUSAND) 23.9 19.0 19.7 19.2 27.0 31.7 CRUDF DEZATB RATE (PER THOUSAND) 10.9 8.9 9.3 9.0 9.9 7.F *.ROSS REPRODUCTION RATe 1.2 1.3 1.3 1.3 1.9 1.6 FAMIILY IlLANNI IP. ACCPFroRS. A