Document of FL cOPY n j The World Bank FI LE r FOR OFFICIAL USE ONLY Report No. P-2679-Ro REPORT AND RECOMMENDAEION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A COVURLUI IRRIGATION PROJECT December 26, 1979 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$1.00 Leu 1.00 = US$o.08 3. Conversion Rate for Traded Goods Lei 18.00 = Us$1.00 Leu 1.00 = US$0.06 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. Be- ginning 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. Fiscal Year January 1 to December 31 GLOSSARY OF ABBREVIATIONS BAFI - Bank for Agriculture and Food Industry CAP Agricultural Production Cooperative (Cooperative Farm) ICA - Intercooperative Association IAS - State Agricultural Enterprise (State Farm) MAFI - Ministry of Agriculture and Food Industry SMA - Station for Agricultural Machinery (State Mechanization Units) FOR OFFICIAL USE ONLY ROMANIA COVURLUI IRRIGATION PROJECT Loan and Project Summary Borrower: Bank for Agriculture and Food Industry (BAFI) Guarantor: Socialist Republic of Romania Beneficiary: State enterprises and cooperatives Loan Amount: US$90.0 million Terms: Repayable in 15 years, including 3-year grace period, through semi-annual installments. Interest at 7.95 per- cent per annum. Relending Terms: The loan from BAFI to Agricultural Production Cooperatives (CAPs) for buried pipelines would be for 25 years includ- ing 5 years' grace and for on-farm irrigation equipment, 8 years including 3 years' grace. The interest rate would be 3 percent with penalty rates of up to 5 percent. Investment loans to State enterprises (IASs) would be for up to 10 years and carry interest rates of 2 percent during construction and 4 percent thereafter with penalty rates of up to 6 percent. The Government would bear the foreign exchange risk. Project Description: The main objectives of the project are to increase and stabilize crop production and to raise productivity in a gross area of 148,400 ha (143,250 ha net) located about 250 km northeast of Bucharest. This would be accomplished through construction of an irrigation and drainage system and related facilities. The project works would include construction of two main pumping stations, 60 repumping and pressure pumping stations and a storage lake. Distri- bution networks, soil reclamation and valley training would also be included. About 114 km of 110 kv and 20 kv power lines together with related transformer substations would be constructed to supply energy to the pumping stations. Equipment for operation and maintenance of irrigation and drainage works and farm machinery to intensify agriculture on the area to be irrigated would be supplied. The project is expected to increase the gross production value in the project area from a fluc- tuating annual average of about $35 million equivalent to a relatively stable annual average of about $83 million. Yield increases in various crops would range from 40 per- cent to over 210 percent and cropping intensity would increase about 19 percent. The project would also more This document has a rtficted distribution tnd may be usod by recipients only in the perfomance of their officl duties. Its contents may not otherwis be dilosed without World Bank authorization.__ - ii - than double labor productivity and is expected to create about 4,000 new jobs during construction and 1,500 there- after. It faces no special risks. Estimated Cost: Estimated Cost Foreign Local Foreign Total Exchange Item --- US$ Million----- % Irrigation and Drainage Works 155.9 60.9 216.8 28 Miscellaneous Works 36.4 6.4 42.8 20 Land Compensation 1.1 - 1.1 - Equipment 14.0 8.1 22.1 37 Engineering and Administration 18.9 2.1 21.0 10 Physical Contingencies 15.5 5.5 21.0 26 Price Contingencies 7.3 22.5 29.8 76 Total Cost 249.1 105.5 354.6 /_ 29.8 Financing Plan: Local Foreign Total ----US$ Million----- State Budget and Bank for Agriculture and Food Industry 225.3 15.5 240.8 /2 Sub-borrowers 23.8 - 23.8 IBRD - 90.0 90.0 Total 249.1 105.5 354.6 Estimated Disbursement: Bank FY 1981 1982 1983 1984 1985 1986 Annual 12.0 18.0 27.0 13.0 10.0 10.0 Cumulative 12.0 30.0 57.0 70.0 80.0 90.0 Rate of Return: About 16 percent Appraisal Report: Report No. 2726-RO; dated December 17, 1979 EMENA Projects Department /1 Total cost includes $1.2 million as taxes and duties. /2 Includes possible cofinancing of up to $100 million from commercial lending institutions. REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY OF ROMANIA FOR A COVURLUI IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bank for Agriculture and Food Industry of Romania, with the guarantee of the Socialist Republic of Romania, for the equivalent of US$90 million to help finance a Covurlui Irrigation Project. The loan would have a term of 15 years, including 3 years of grace, with interest at 7.95 percent per annum. Cofinancing of up to US$100 million is being sought, all from commercial lending institutions. 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. As preparation for the produc- tion of a Country Economic Memorandum, an economic mission visited Romania during June 1979 to collect information on economic performance in 1978 and to discuss the 1979 Annual Plan and the new economic measures announced in February 1978. This part incorporates the mission's findings. Country social and economic data are given in Annex I. 3. Over the past 25 years the Romanian economy has undergone a radical transformation and has sustained one of the highest growth rates in the world. 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 substan- tially, 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. Further- more, Romanian participation in the world economy has changed significantly as the level of trade has risen and its composition altered. 4. These changes 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 coun- tries. 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 development 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 rela- tions; and the development of human resources. 1/ This Part I is identical to that contained in the President's Report for a Danube-Black Sea Canal Project to be considered by the Execu- tive 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 and 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, by sector and branch and on a regional basis, specific tasks for economic and social units. It is drawn up through a combination of central directives and aggregation of individual enterprise plans, any differences being reconciled through discussions between the entities involved. Over the past decade, Romania has undertaken 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 accumula- tion 1/ 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 1978 industry was the leading sector of the economy, accounting for 58 percent of national income, and employing approximately 33 percent of the labor force compared with 14 percent in 1950. Heavy industry, led by chemicals, ferrous metallurgy, engineering and machine building, comprised 64 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 1/ That is, net investment plus change in stocks. - 3 - wide range of raw materials found in Romania and recent efforts to conserve and economize on the use of raw materials and energy, Romania has become a net 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 out- paced the growth of domestic production. Having started to import oil in 1968, Romania became a net: importer of energy in 1973 and in 1979 is expected for the first time to import more crude oil than is produced domestically. In response to those changing circumstances, the Government has recently published an energy program for the period 1980-2000, proposing the develop- ment of all energy resources and the restructuring of energy use to reduce reliance on hydrocarbons. This program, and the reassessment of future petrochemical development which is taking place within the context of the preparation of the 1981-85 five-year plan, indicates the substantial impact upon the Romanian economy that the oil price increases and the curtailment of oil production in Iran are having. It is not possible to quantify the impact of the price increases upon Romania's import bill because we have no informa- tion upon the contract prices; however, the impact was certainly exacerbated by the curtailment of supplies from Iran (which supplied about 50 percent of imported oil) and the nee,d for Romania to purchase oil on the spot market in the short-term while looking for new contracts. 9. Notwithstanding the emphasis on industrialization, agriculture remains a key sector of the economy, still employing 33 percent of the labor force in 1978 (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 15 percent by 1978. 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 estimated average GNP growth of approximately 9 percent per annum since 1950, calculated on the basis of official national income statistics, implies a percentage growth in output per head of about 8 percent per annum, with GNP per capita reaching an estimated $1,750 in 1978, using the 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 10.6 percent in 1978 to an average of 2,011 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 - 4 - 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 in- crease 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 $8.64 billion in 1978. Exports have also grown rapidly, reaching a level of $8.06 billion in 1978, and the share of manufac- tured goods in total exports has increased to 50 percent, reflecting the progress of Romania's industrialization. Trade with LDCs and developed market economies has also been increasing rapidly in response to policies of diver- sifying 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 cover cooperation in production, technical assistance and economic relations. In 1977 and 1978 the convertible balance of payments deteriorated, however, reversing the trend of the previous three years. After a surplus of $76 million in 1976, the trade balance experienced a deficit of $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. In 1978, the deficit increased to $560 million; to a large extent this was the result of poor agricultural performance, but it also reflected shortfalls in production in some industrial subsectors, continued weak demand in developed market economies for some Romanian exports and the need for supplementary imports of raw materials. With an increased deficit on the invisibles account of $219 million compared with $192 million in 1977, there was a convertible current account deficit of $779 million in 1978 compared with $273 million in 1977. 14. The structure of Romania's trade with the developed market economies is still characterized by exports of natural resources and imports of capital goods, although there has been a gradual increase in the share of exports in the form of manufactured goods. Because of the present low level of reserves, any instability in export earnings, as frequently arises from shortfalls in agricultural output or a softening in prices, tends to place the import program, largely sophisticated machinery and components and raw materials, in immediate jeopardy. Recent Economic Developments 15. The current Five-Year Plan covers the period 1976-80. The high rates and the pattern of growth planned for this period suggest that the - 5 - present decade has been viewed as the decisive period during which Romania should overcome the major constraints on its transformation from a developing country into a developed and technologically advanced country. 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 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. How- ever, 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 retail trade and services for the population have been increased. 17. Although the most recently available figures published by the Gov- ernment indicate that the economy is expected to fulfill, more or less, the five-year plan targets, very high rates of growth of the major economic indicators will be required in 1979 and 1980 to make up for the relatively disappointing performance in 1977 and 1978. In March 1977, the economy was dealt a serious blow when a violent earthquake occurred in the east of the country, causing damage valued at $2 billion and leading to a detrimental effect upon the balance of payments totalling $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. While these efforts enabled the economy to continue its growth, 1977 plan targets were only partially fulfilled. National income increased by 8.6 percent compared to a plan target of 11.3 percent and an increase in the previous year of 10.5 percent. Economic performance in 1978 also fell below plan, although the economy continued to grow at a relatively rapid rate. National income increased by 7.6 percent, compared with the annual plan target of 11-11.5 percent. Gross industrial production increased by 9.0 percent rather than the planned 10.6 percent, and there are sizable shortfalls in the production of several major products, particularly oil, coal, chemicals and food products. Gross agricultural production increased by only 2.4 percent compared with a plan target of 6.9-16.1 percent growth and most of the growth was in the livestock subsector. Arable output fell far below plan targets, partly because of climatic difficulties but also as a result of managerial weaknesses and shortages of inputs. The shortfalls not only affected the production of industries using agricultural raw materials but also resulted in lower exports than planned. Investment, on the other hand, increased almost as quickly as planned, 16.2 percent compared with a plan target of 16.8 percent; however, in absolute terms, it did not make up the shortfall brought about by the earthquake, despite the considerable physical and human resources introduced into the construction sector. The transfer of labor from agriculture to the non-agricultural sector increased faster than planned, and, indeed, the economy, as in previous years, showed relatively greater ability to create new production than to use existing resources more efficiently; the targets for increased labor productivity and reduced material expenditures could not be attained. While production targets were generally underfulfilled, consumption rose more or less as planned. Average monthly wages rose by 10.6 percent and real incomes of the.population by 8.9 percent, one percent more than planned. 19. The Annual Plan for 1979 signals no significant deviation from the previous path. The growth rates published in the plan - 8.8 percent for national income, 11.5 percent for net industrial production (in keeping with the new economic measures, the 1979 Plan specifies industrial growth in net rather than gross terms), 5.1-5.6 percent for gross agricultural production, 16.6 percent for foreign trade, 9.1 percent for investment and 7.5 percent for real incomes - do not, however, fully reflect the high rates of growth expected by the Government during the current year. Early in 1979, the Gov- ernment announced that the shortfalls in production from 1978 should be made up in the last two years of the plan period, so that the economy may attain its 1980 plan levels. Thus, for the major indicators the real growth rates must be considerably higher than those included in the annual plan. 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 proportion of profits, have increased responsibility for socio-cultural expenditures, be more concerned in the final stages of the annual plan prep- aration, be permitted to enter into longer term contracts to ensure a closer correlation between the plan and actual contract provisions and will have more -7- direct responsibilities. for the achievement of foreign trade targets. The measures are still under detailed discussion, with further refinements being considered, although the major changes in planning, net output targets, profit-sharing and enterprises' financial responsibilities were introduced as of January 1, 1979. In early 1979, the Government announced that the measures for net output and profit-sharing would be extended to cooperative agriculture. In a complementary vein, the creation was also announced of approximately 700 Agro-industrial Councils which will coordinate the develop- ment of agriculture within a given geographical area and provide a forum for determining the most efficient use of resources in the sector (see para. 43). All these measures are designed to make the existing management and planning system operate more efficiently rather than to cause radical changes. How- ever, they are a step in the direction that the basic economic report sug- gested 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 borrowing abroad and by mounting a major effort to expand exports and tourism earnings. In 1978, new commitments of convertible medium and long-term loans totalled $1,216 million and consisted mainly of supplier and financial credits with relatively short repayment periods. Gross disbursements of convertible medium and long-term loans during the year were $1,167 million. This repre- sented a net inflow of $585 million after accounting for the country's repay- ment obligations. There was also a net inflow of $456 million on short-term loans during 1978. After almost a decade of gradually reducing the size of outstanding short-term debt, the Government was compelled in 1977 to reverse temporarily its policy of reducing reliance on short-term debt, because of the additional financing needs generated by the earthquake. This action had to be continued in 1978 because of the size of the current account deficit, which could not be covered by medium and long-term sources, despite Romania's increased involvement in the Eurocurrency market. 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, ten 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 $10-15 million, the seventh agreement, signed in early 1977 with Citroen, involves a contract of FF 2.5 billion (about $500 million) and will lead to a total capital inflow of aproximately $250 million. The eighth agreement is for a joint production company with British Aircraft for the manufacture of commercial aircraft; the ninth is with Data-products Corporation, USA, for the manufacture of computer software; and the tenth is a joint shipping company in cooperation with Libya. However, negotiations have been broken off by Romania and Kuwait for the construction of a petro-chemical complex which would have cost $1.25 billion and involved a capital inflow of about $500 million. Many other joint ventures are at various stages of nego- tiation. 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 $80 million for the expansion of the port of Constanta. In 1975 Romania succeeded in securing a $100 mil- lion, eight-year loan from Kuwait as part of a general cooperation agreement and also a $420 million loan from Iran on concessionary terms. However, 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 Eurodollar loans totalling $125 million. In January 1978, Romania negotiated a further $100 million on the Eurocurrency market and late in the year, a further borrowing of $300 million. The terms for the latter, an 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 con- sortium raised a $53 million loan in April 1978 to finance Romanian participa- tion in the Island Creek coal mine in West Virginia. In March 1979, Romania secured a loan of $320 million from a consortium led by Canadian banks to supplement a $650 million loan by the Export Development Corporation of Canada for the purchase of heavy-water reactors for the first nuclear power project in Romania. Finally, Romania has access to non-convertible currency invest- ment credits from the International Investment Bank, Moscow. 24. Nonetheless, Romania's access to long-term finance in convertible currencies is still very restricted as shown by the fact that, in 1977-1978, in spite of the above developments, short-term borrowing has been necessary. The IBRD remains the major source of long-term development finance, although Romania is making efforts to improve its access to financial markets. The Bank's presence on a significant 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 improving 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 - 9 - 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 managementt. 27. The growth rate is expected to remain quite high by international standards during the next five-year plan period, although the latest figures published by the Government do indicate considerably slower growth between 1980 and 1985 than originally intended. The draft plan Directives published in July indicate an annual growth of national income of 6.7-7.4 percent com- pared with 8.6-9.5 percent in the guidelines for the plan published at the end of 1977. Targets for industry, investment and standards of living have been reduced correspondingly. The Government plans to achieve its targets 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 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 June 30, 1979, Romania's total medium and long-term external debt amounted to $5,958 million. Most of these debts ($5,817 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 convertible debt service payments are estimated to be in the order of $1,141 and $1,142 million a year in 1979 and 1980 respectively. The convertible medium and long-term debt service rat:io was 19.4 percent in 1978 and is expected to be 19.9 percent in 1979. 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. - 10 - Convertible export earnings rose from $830 million in 1971 to $4,072 million (not counting $387 million in non-factor services) in 1978. The preferential trade status accorded to Romania by the European Community in June 1973 is facilitating the expansion of 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, but in view of the earthquake's impact upon the balance of payments and the trade performance in 1978, short- term debt increased again in 1977 and 1978. Assuming a continuation of present export and debt management policies, we estimate that the debt service ratio in 1980 will be about 20 percent 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. With the exception of certain Swedish claims, all pre-war foreign debts of the country had been settled. The Swedish claims concern public loans from the prewar period, nationalized Swedish property and other in- terests, 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 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, therefore, 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 Danube-Black Sea Canal project ($100 million) would bring total Bank commitments to Romania to $1,452.8 million for twenty-five loans in agriculture, industry, power and transport. Disbursements under the Bank's initial loans were slow during 1975, but this situation has improved considerably since 1976. Annex II contains a summary statement of Bank loans to Romania and notes on the execu- tion of ongoing projects as of November 30, 1979. 32. Foreign exchange, especially in convertible currencies, continues to be a major constraint and one of the major objectives of Bank lending continues 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 has been assisting the Government by helping to mobilize cofinancing for appropriate projects. The Bank has helped to attract foreign commercial banks to provide $100 million cofinancing for the Second Livestock Project for which a Bank loan of $75 million was approved by the Executive Directors in March 1979. Through their contacts with commercial banks with assistance from the Bank, and subsequent negotiations with those banks, the Romanian authorities now appear convinced of the positive value of cofinancing in the form of financial credits, and - 11 - have indicated their intention to seek similar arrangements for future proj- ects. 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, including loans for projects for horticulture, irrigation, industry, power, and a fourth livestock project. The Government has also proposed that the Bank consider lending for an integrated road and rail transport project. 34. In addition to leniding, the Bank (through EDI) has assisted Romania by conducting training courses on economic and financial evaluation and analysis methodologies in various sectors, including industry and transporta- tion, for 165 Romanian officials in Belgrade in 1973 and in Bucharest annually since 1975 in collaboration with an academic institution in Romania. Addi- tional courses, including one for agricultural project appraisal, are under discussion with the Government. The methodologies taught in these courses are becoming more widely known in Romania and are expected to begin to supple- ment 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 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 is expected to constitute about 13 percent of Romania's total projected convertible 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 AGRICULTURAL SECTOR IN ROMANIA Agriculture 36. Agriculture continues to be a key sector in the Romanian economy, providing both convertible foreign exchange earnings and industrial raw materials which contribute to progress in other sectors, especially in indus- try. In 1978, agriculture accounted for 15 percent of national income and 33 percent of the labor force (compared with 74 percent in 1950). About 14.9 million hectares, or almost two-thirds of the land area, are used for agricul- ture. Of this area, 65 percent is arable, 20 percent is under pasture and the remaining 15 percent is used for orchards and vineyards. More than half of all agricultural land is in Wallachia, the region composed of the southern plains in the Danube valley. Approximately 64 percent of all arable land is used for grain production (mainly maize and wheat), while industrial crops (mainly sunflower and sugar beet) are the next most important. Vegetables are - 12 - also produced for domestic consumption and export, predominantly by private farmers and individual members of cooperatives, but also often in large-scale commercial greenhouses operated by State farms and cooperatives. Livestock accounted for a relatively high 44 percent of agricultural production in 1978. 37. The major problems of Romanian agriculture are the instability of its output and low productivity. Growth achieved in agricultural production has been slower than in other sectors and has been characterized by year-to- year variations. Investment in agriculture accounted for 12.7 percent of actual total investment in the 1966-70 plan period and 14.1 percent in the 1971-75 plan period. Investment in agriculture in the 1976-80 plan period is expected to be 116 billion lei ($6.4 billion), about 12 percent of total investment and about 50 percent more than during 1971-75 plan period. In- cluded in these plans are major programs of irrigation investment to address the problems faced by agriculture, in particular, the problem of the instab- ility of production. In addition to investment, the Government has also taken other measures, including institutional reforms and price incentives, to stimulate agricultural production. It has also taken a number of other specific measures to increase agricultural productivity including increases in the supply and utilization of fertilizers, investments in livestock production and the promotion of agro-industrial enterprises to provide processing and marketing facilities. The Bank has also identified production instability and low productivity as the two major problems in the Romanian agricultural sector as stated in the Agricultural Sector Survey (No. 953a-RO) and the recent basic economic report (No. 1601-RO). Through the process of preparing these docu- ments and the Bank financed projects, the Bank has maintained a close dialogue with the Government and contributed to improving the design of agricultural development projects. The Bank has assisted the Government efforts in the sector by providing ten loans for agriculture totalling $601.5 million since 1975 when the first Bank loan for agriculture was made to Romania. The Need for Irrigation Infrastructure 38. Instability in agricultural production results from vulnerability to erratic weather conditions and the lack of infrastructure to mitigate their impact. Excessive precipitation and flooding during planting and harvest seasons, and inadequate rainfall during summer growing seasons, have resulted in year to year fluctuations in national output of the order of 10 to 20 per- cent. Fluctuations of production in particular regions can be even greater. Only production of vegetables has increased steadily, reflecting the rela- tively more controlled conditions under which they are produced. The Govern- ment is well aware of this problem and has placed high priority within the agricultural sector on solving it. Forty percent of agricultural investment in the 1971-75 Five-Year Plan was for land reclamation, irrigation and drain- age; the comparable figure for the 1976-80 Five Year Plan is about 20 percent, reflecting a relative decline in infrastructure investment and increasing emphasis on investments to make productive use of irrigation facilities already established. Since 1965, total irrigated land has been increased from about 0.2 million hectares to 2.2 million hectares in 1978, and, the relative reduction in the share of the agricultural budget allocated for irri- gation notwithstanding, another 700,000 hectares are expected to be brought under irrigation during the last three years of the 1976-80 plan period. The - 13 - Government plans to irrigate about 3.7 million ha by 1985. Irrigation works to date have concentrated on large schemes using waters pumped from the Danube. Five such projects have already been financed by the Bank since 1975; execu- tion of these projects, which also include drainage, soil erosion control and farm mechanization components, is proceeding satisfactorily (see Annex II), and the proposed project would continue Bank support in this subsector. In this and in the previous irrigation projects, the Romanians have accepted a number of the Bank's suggestions which improved project design, particularly in canal alignment, location of pumping stations, the design of canals in loess soils, the design of drainage works and methods of soil reclamation. Because of the close understanding on technical and policy matters in this basic sub-sector attained by continuous dialogue with the Romanian authori- ties through missions and negotiations, the Bank has become more involved in recent years in detailed discussions of projects at an early stage in their preparation which has increased the Bank's influence on project formulation. Agricultural Productivity 39. In addition to improving its irrigation infrastructure, Romania is also taking measures to improve productivity through upgrading the quality of farm mechanization, increases in the supply and utilization of fertilizers, and the promotion of agro-industrial enterprises to provide processing and marketing outlets for increased farm production. Steps are also being taken to reduce inequality between State farms and cooperatives in access to farm inputs. State farms, which own 30 percent and cultivate 14 percent of agri- cultural land, received about 42 percent of on-farm investment in the 1971-75 Plan period. Productivity on State farms is correspondingly higher than that of cooperatives, but the Government is now moving toward elimination of the disparities between the two types of farm organizations in order to stimulate general improvement in agricultural productivity. The recent announcement by the Government, establishing Agro-Industrial Councils, is another step towards eliminating such discrepancies (see para. 43). The development of large-scale livestock complexes incorporating significant scale economies and the best managerial staff is contributing to the improvement in productivity. Sector Organization 40. State agricultural units and cooperatives account for the major portion of agricultural production; individual farmers play a much less significant role, except in the production of a few selected commodities. The current sector organization is primarily a result of collectivization and increased government participation from 1949 to 1962, when small-scale, peasant-oriented agriculture was replaced by large, State-owned or State- controlled production units. The dominant form of State-owned agricultural unit is the State enterprise. There are 392 such State farms averaging about 5,100 hectares and about 680 workers each. These large scale, capital intensive farms have been considered a pilot sector in Romania and, as such, have been favored in terms of land allocation, fertilizer distribution and investments in irrigation and mechanization. About 2.0 million hectares of agricultural land are cultivated by these farms, which also own substantial grazing and pasture lands. Workers on the farms are employed on salaries which are fixed by law but vary according to skill levels. The State farms - 14 - are generally well managed by directors (usually agricultural engineers) who are appointed by the Director General for State Farms of the Ministry of Agri- culture and are responsible to workers' councils. The Ministry of Agriculture determines the production plans for individual State farms; it also has a role in determining the use of their net income, a portion of which is remitted to the State treasury. 41. There are about 4,400 agricultural production cooperatives with about 3.4 million member families and cultivating about 9.1 million hectares. Workers in cooperatives are entitled to a minimum salary, which is about 20 percent lower than the salaries of their counterparts on State farms. Sala- ries of cooperators may be supplemented by the cooperator's shares of pro- fits in excess of plan targets, a bonus programmed to be about 2 percent of the planned benefits. More than one member of a family frequently works (on a full- or part-time basis) in the cooperative, and some family members are employed outside of the cooperatives. Cooperators are also allowed to farm about 0.15 hectares each in and around their villages for their personal use, and they are allowed to own livestock. Production on personal plots is always intensive, and produce is either self-consumed or sold to consumption coopera- tives to supplement other income of the cooperators. A cooperative is managed by a General Assembly of cooperators and its elected President; it reports to the District Director General for Agriculture, the local representative of the Ministry of Agriculture. Some cooperatives have begun to pool their resources for large-scale investments in agroindustries and livestock production. These intercooperative associations (ICAs) are operated by State employees paid from ICA revenues. Part of the net income from ICA sales is retained for further ICA development; the balance is divided among member cooperatives in propor- tion to their contribution to shares in the ICA. 42. Individual producers number only about 150,000 families and own about 10 percent of total agricultural land. Their lands are often located in mountainous regions, and include 19 percent of pasture lands and 21 per- cent of orchards. Individual producers own 16 percent of all cattle, 14 per- cent of sheep, and 6 percent of pigs. The individual farming subsector has not received strong government support but is significant in production of potatoes (16 percent of production), meat (13 percent), milk (20 percent), eggs (14 percent), wool (12 percent) and poultry (56 percent). 43. The Government has recently announced that integrated organizations known as Agro-Industrial Councils will be established, each of which will consist of several State farms (IASs) or cooperative farms (CAPs) and one State mechanization unit (SMA) which is responsible for supplying agricultural machinery to these farms when required. There will be about 700 such councils to cover the whole country, each of which will hold on average about 200,000 ha of agricultural land. The Council will be responsible for the overall production plan, allocation of inputs, mechanization and marketing. Although each State and cooperative farm will maintain its budgetary autonomy, decisions on cropping patterns will be made at the Council level, in which directors of the member CAPs, IASs and SMAs will be represented. Establishment of the proposed Councils is currently underway, and it is too early to assess the effectiveness of such Councils in meeting the intended objectives. However, agricultural productivity in the cooperative sector is expected to be improved - 15 - as a result of forming the proposed Councils by making available to the coop- erative sector the underutilized resources tied up in the IAS such as technical expertise, machinery, and generally better management skills. 44. At the national level, the State institution in the agricultural sector is the Ministry of Agriculture and Food Industry. It plays a major role in preparing the Five-Year Plan for the sector and is the supervisory institution for plan implementation. In each district, the Ministry is represented by a general directorate, which is responsible for all agricul- tural activity in the district including both cooperatives and State farms. Marketing is organized nationally under 13 centrals accountable to the Ministry and responsible for processing and marketing specified commodities. Each central obtains produce at the district level and allocates it among domestic retail, processing, storage and export channels. A foreign trade company is responsible for the exports of each central. Agricultural Investment Financing 45. The Bank for Agriculture and Food Industry (BAFI) is the Govern- ment's specialized agency for financing projects in agriculture, irrigation and food processing. As such, BAFI has been the Borrower for all Bank loans in support of agriculture and would be the Borrower for the proposed loan. BAFI was established in 1968 as a channel for, and administrator of, all investment funds provided under the State plan for the agricultural sector. Financing in agriculture had previously been done by a department of the National Bank of Romania., BAFI is involved in all phases of project appraisal, execution and supervision, and it has a large technical and economic staff located in Bucharest, in 39 district (judet) branch offices and in 92 sub- branches throughout the country. One of BAFI's more important functions is that of fiscal agent administering for the account of the national budget all government investment: in State farms and enterprises. BAFI also receives interest free funds from the State budget for investment lending to coopera- tives (and in some cases State farms) and repays the Government as it receives repayments of the sub-loans. BAFI has thorough review and approval procedures for all investment projects. In addition to BAFI's review, all agricultural investments for more than lei 10,000,000 ($560,000) are reviewed and approved by the Ministry of Agriculture and those greater than lei 70,000,000 ($3.9 million) must be approved by the Council of Ministers. BAFI also provides short-term credit to, and maintains settlement accounts for, all cooperative and State agricultural enterprises; it also acts as fiscal agent for the Gov- ernment for collection of State revenues from these enterprises. As the Government's channel for investment financing in agriculture, BAFI's primary source of funds is the State Budget; the Guarantee Agreement therefore in- cludes a provision that the Guarantor shall provide all necessary funds for the implementation and operation of the project (Guarantee Agreement, Section 2.02). The Guarantor will ensure that BAFI can meet the debt service on the Bank loan (Guarantee Agreement, Section 2.01). - 16 - PART IV - THE PROJECT 46. The project is a part of Romania's Plan for bringing about 3.7 mil- lion ha under irrigation by 1985 and was proposed for Bank financing in July 1977. Following an identification mission in March 1978, a project prepara- tion report was submitted to the Bank in September 1978. A preparation mission visited Romania in February 1979 and further data was provided during May 1979. The project was appraised in June-July 1979. Negotiations were held in Washington in December 1979. The Romanian delegation was headed by Mr. Ion Rusinaru, President of BAFI and included representatives of BAFI and Ministry of Agriculture and Food Industry. A report entitled "Staff Appraisal Report" Covurlui Irrigation Project" (No. 2726-RO) dated December 17, 1979 is being distributed separately to the Executive Directors. The main features of the project are mentioned in the Loan and Project Summary and in Annex III. Project Objectives 47. The main objectives of the project are to increase and stabilize crop production and also to raise labor productivity in a gross area of 148,400 ha (143,250 ha net) located primarily in the southern prolongation of the Moldovian Plateau about 250 km northeast of Bucharest (see Map); this would be accomplished through the construction of irrigation and drainage systems and related facilities. The projected cropping patterns for the project areas have been related to domestic needs and foreign markets. These cropping patterns include a range of crops with varying growing seasons which together cover the entire summer period ensuring an almost continuous use of labor and farm implements. The area under major crops would be maize (45 percent), wheat (20 percent), alfalfa (11 percent), sunflower (10 percent), soybeans (3 percent), and sugar beet (2 percent) with the remaining area devoted to vegetables, and orchards and vineyards. Thus, the proposed project would be in line with the Bank's strategy for stabilizing production and increasing productivity in the agricultural sector in Romania. Project Description 48. The project would provide irrigation and other facilities to an area of 148,400 ha gross (143,250 ha net). The project works would consist of a pumping station on the Danube River to lift water into an irrigation canal in the flood plain; and another pumping station, at Vinatori to further lift the water into a system of canals with 16 repumping stations on the Covurlui plateau. A storage dam would be constructed on the Shuhurlui stream to store off season pumped supplies from the Danube for use during months of peak requirements. Water would be distributed to 44 pressure pumping stations through a system of concrete lined canals. These pumping stations would supply water under pressure to distribution networks consisting of buried pipes and on-farm sprinkler and furrow equipment. Also included would be surface drainage works to serve 10,800 ha, tile drainage for an area of 1,100 ha, soil erosion control works for an area of 44,300 ha, valley training on 4 streams in a length of about 270 kms, equipment for operation and maintenance of irrigation and drainage works, and farm machinery to intensify agriculture on the area to be irrigated by the project. About 114 km of 110 kv and 20 kv - 17 - power lines would be constructed to supply energy to the pumping stations. Transformer substations supplied from 110 kv would be constructed at the locations of main irrigation pumping stations. Pressure pumping stations would be served from 20 kv lines through pole-mounted transformers. 49. The existing capacities for processing vegetables, fruits and tomatoes are considered sufficient to absorb the incremental production. Construction of additional grain silos, a sugar factory and wooden storage facilities for maize and modernization of a soybean oil factory have been planned and would be completed during the 1981-85 plan period. These facili- ties are not included in the project, but assurances have been obtained that they would be completed in time to satisfy the needs of the project (Loan Agreement, Section 4.01(c)). Project Implementation and Operation 50. The Ministry of Agriculture and Food Industry, through its various departments and trusts, would be responsible for planning, construction and supervision of the project. Planning and design of all project works would be carried out by the Institute of Land Reclamation and Design, and construction by the Construction Trust for Land Reclamation Works. Both organizations are part of the Ministry's General Economic Directorate for Land Reclamation and Agricultural Construction. The irrigation, drainage and soil erosion control works would be operated and maintained by the Ministry's Directorate for Exploitation of Land ReclaLmation Works. The Ministry of Electrical Energy, through its subordinate enterprises and their units, would be responsible for construction, operation and maintenance of power transmission facilities and for supplying energy to the project area. BAFI would serve as financing agency for all project works under the arrangements noted in para. 45 above. All agencies are competent: to carry out the proposed works and have undertaken previous Bank financed works satisfactorily. A panel of qualified experts in Romania would review the design of the dam at the storage lake and the asso- ciated structures and construction of these facilities. After completion of construction of these facilities, they would be periodically inspected according to procedures to be estabLished between the Bank and the Romanian authorities concerned. Cost Estimates 51. The total project cost, including physical and price contingencies, but excluding interest during construction, is estimated at lei 6,384.1 mil- lion ($354.6 million). The foreign exchange component is estimated at $105.5 million or 29.8 percent of total cost. The cost estimates are based on unit rates of work that are prevailing in Romania under the system of regulated prices of materials and wages. Cost of equipment and spare parts expected to be procured from foreign suppliers, has been calculated at the international prices likely to prevail at the end of 1979 and is estimated at $12 million. Taxes and duties on imported equipment which now average about 10 percent amount to lei 21.6 million ($1.2 million) and are included in the cost esti- mate. Because detailed engineering has already been carried out, physical contingencies have been provided at 7.5 percent of irrigation, drainage and - 18 - soil erosion control works and at 5 percent of other minor items. Price contingencies on foreign costs are compounded annually at 9 percent (1980), 8 percent (1981), 7 percent (1982-85) and 6 percent (1986-87). Due to near zero inflation in Romania, price contingencies on local costs are compounded at 1 percent per annum. Financing 52. The proposed Bank Loan of $90.0 million, representing about 25 percent of total project cost and about 85 percent of foreign exchange costs would be made to BAFI for fifteen years including three years grace. The Government of Romania would bear the foreign exchange risk. The State budget would contribute about lei 3,400.2 million ($188.9 million) or 53 percent of total project costs through budgetary allocations to the General Economic Directorate for Land Reclamation and Agricultural Construction, Central for Exploitation of Land Reclamation Works, State agricultural enterprises (IASs) and stations for agricultural machinery (SMAs), for which funds would be channelled through BAFI. BAFI credits of lei 933.8 million ($51.9 million) to IASs and CAPs would contribute about 15 percent of total costs, with the remaining nearly 6 percent or lei 430 million ($23.8 million) contributed from subborrowers' (CAP, IAS, SMA) own resources. The Government has, in principle, agreed to seek cofinancing of up to $100 million for this proposed project. Judging by the response of cofinanciers to other Bank-financed projects in Romania it is expected that offers of cofinancing will be obtained. The amount and timing of cofinancing will depend on market conditions and amounts being raised by Romania on other Bank-financed projects. It is likely that for this project cofinancing will be in the range of US$50-100 million equivalent. 53. About 30 percent of the costs for buried pipeline, on-farm sprinkler and furrow equipment and small secondary open drainage canals serving CAP-owned lands would come from CAPs' own funds with the remaining 70 percent financed through BAFI loans. These loans would be recovered in accordance with BAFI's standard on-lending terms. For on-farm buried pipelines, the loans would be for 25 years including 5 years grace, and for on-farm irrigation equipment, 8 years including 3 years grace. The interest rate would be 3 percent with penalty rates going up to 5 percent. Investment loans to IASs' would be for up to 10 years and carry interest rates of 2 percent during construction and 4 percent thereafter with penalty rates going up to 6 percent. As in earlier projects, these rates result in a positive spread over BAFI's financial and administrative costs in providing the loans. As a result of Government controls on domestic prices, Romania maintains a domestic inflation rate of around 1 percent per annum, and no significant further increase is expected in the future. Thus BAFI loans under the project would be made at positive real interest rates, on the same terms and conditions as are extended to other borrowers in the agricultural sector. Audit 54. BAFI would keep separate accounts for all project expenditures and its transactions are subject to continuous control by internal auditors - 19 - appointed by the Ministry of Finance and to an annual audit by inspectors from the Court of Superior Control which reports directly to the Council of Ministers and the President. BAFI's accounting system and the audit of its transactions are satisfactory and BAFI's audited operating and financing results would be sent to the Bank not later than six months after the end of BAFI's fiscal year. Recovery of Costs 55. In addition to recovery of on farm costs as discussed in para. 53, the project investment and annual O&M costs would be recovered through both direct and indirect mechanisms. The direct mechanism consists of water charges of three types levied on all CAPs and IASs using the irrigation water. The State also recovers a part of the project costs from IASs and CAPs through the compulsory portions of income paid into various funds and through the recovery of BAFI loans, to ensure future investments. The cost of farm machinery would be recovered by the State through unit rates paid by CAPs and IASs to SMAs for mechanization services and through contributions to the Depreciation Fund for machinery. The resulting cost recovery from these mechanisms would amount to. about 52 percent of investment and O&M costs. In addition, profits made by the State from the purchase of tradeable commodities at administered low farmgate prices and subsequent export at higher world prices and general linkage benefits to the economy resulting from incremental project output are also indirect cost recoveries. Since the State is the main beneficiary, the revenues accruing to the State from these various cost recoveries are very high and could result in a combined direct and indirect Cost Recovery Index of 100 percent or more. Markets 56. Market prospects for internal consumption and export of project output are assured. It is expected that Romania will remain a net exporter of grains (wheat, maize) and sunflower oil, and a net importer of soybean, feed concentrates, and sugar. The incremental production from the implementa- tion of the project for major crops would be: maize 326.9 thousand tons, wheat 52.8 thousand tons, alfalfa hay 102.6 thousand tons, and sugar beet 96.4 thousand tons. An estimated 70 percent of maize, the major commodity under the project, would be used as animal feed, with the remainder used for human consumption, industrial purposes, and export. Maize and sunflower by- products would be purchased by paper and housing material factories, used as combustibles, or turned back into the soil as fertilizer. Annual exports of maize averaged over 350,000 tons during the 1970's through 1977. Despite increases in incremental domestic feedgrain requirements, the grain balance is expected to remain positive, and prospects for continued exports are favor- able. Areas under alfalfa, and double crops (maize silage and vetch hay) would also serve the growing feed demand. Most of sunflower production would be processed into oil, for which demand is increasing, with cake used for feed. Imports of soybean have averaged 100,000 tons per year, and project output would contribute to the goal of self-sufficiency in this product. The incremental output of sugar and vegetables under the project are intended to contribute to planned increases in domestic per capita consumption, and a portion of vegetable production could also be exported. Incremental project output would be handled by the appropriate marketing Centrals and their enter- prises and collection centers in the project areas. - 20 - Procurement Arrangements 57. Equipment and materials equivalent in cost to the proposed Bank Loan ($90.0 million) would be procured following international advertising and competitive bidding in accordance with the "Guidelines for Procurement under World Bank Loans and IDA Credits - March 1977". Romanian manufacturers would be allowed a preference of 15 percent or the applicable customs duty, which- ever is lower. The application of the preference has not affected so far the outcome of bidding on previous irrigation projects, and is not expected to significantly affect the result of bidding on the proposed project. It is expected that foreign suppliers would win contracts estimated to cost about $13.5 million for some of the construction and maintenance equipment (wheeled dozers, drag-lines, motor scrapers, trenching and tile laying machines, concrete pumps, truck cranes, dumpers and air compressors and their spare parts). Other items to be procured through international competitive bidding (about $76.5 million) are available domestically and, based on experience with previous Bank-financed irrigation projects, it is expected that the Romanian manufacturers would be successful in bidding for most of these items. Cost estimates are based on the conversion rate of US$l=lei 18. The remaining equipment and materials, all domestically produced, would be procured under Romanian procedures and would not be eligible for disbursement under the proposed Bank loan. The Bank would not be financing construction works under the project which would be carried out by the Romanian Construction Trusts which are familiar with local conditions, methods and regulations. Disbursements 58. The proposed Bank loan of $90.0 million would be disbursed for (i) 100 percent of foreign expenditures for imported equipment, spare parts and materials procured through international competitive bidding, and (ii) 100 percent of the ex-factory price of equipment, spare parts and materials manu- factured locally and procured through international competitive bidding. International Water Rights 59. There is no international agreement among the Danube River riparian states for the use of its water for irrigation but a convention exists for development of the river for mutual benefits, and for protection of navigation and water quality. The maximum diversion for the project, in July, would amount to about 1.2 percent of the minimum river flow in that month. Diver- sions for the present and future projects in Romania dependent on the Danube River would not adversely affect the Danube supplies for international naviga- tion. There is no reason to expect, therefore, that the project would raise issues on the use of Danube waters, and no agreement of other riparians would be required. However, as for the previous Bank financed irrigation projects in Romania, Government has furnished a letter of representation to the Bank setting forth Romania's treaty obligations on the use of Danube waters and confirming that the project would present no problem on the use of inter- national waters. - 21 - Environment and Health 60. The project area is free of endemic diseases such as malaria and bilharzia. The project would not adversely affect the environment or public health. Construction of irrigation works, with variable water flows in lined canals, a storage lake and a piped distribution network would not promote mosquito breeding and spread of malaria. Drainage of several areas and training of 267 km of stream courses would promote healthier conditions. Benefits and Risks 61. The quantifiable benefits from the proposed project derive mainly from the increase in the value of production with some unquantifiable benefits from valley training (i.e. river embarkments) which will eliminate sporadic flooding and interruption of communications. The project is expected to increase the gross value of production in the project areas at domestic farm- gate prices from a fluctuating annual average of about $34.9 million to a relatively stable annual average of $82.8 million. This would be achieved through increases in the yields of various crops ranging from 40 percent to over 210 percent and through an increase in cropping intensity of about 19 percent made possible by irrigation. The project would also more than double labor productivity, and is expected to create about 4,000 new jobs during construction and 1,500 thereafter. About 51,000 cooperative workers and about 22,900 state farm employees would participate in the project. Benefits to these participants would be mainly indirect through increases in real wages throughout the economy over time, and an improved standard of living and better public services, and some direct benefits through an increase in the likelihood of exceeding production targets and making bonus funds available for distribution among participants. Most of the private plots given to CAP members will also be irrigated under the project and will substantially add to the income of these members from this source. Foreign exchange earnings are expected to accrue to the economy mainly from grain exports, while increased self-sufficiency in crops like soybean will help to save foreign exchange. The project would also result in general linkage benefits to the economy by ensuring increased and stable raw material supplies to processing and market- ing channels. The overall economic rate of return for the whole project is estimated to be about 16 percent. 62. The risk of not. attaining project objectives due to construction delays, cost overruns, or inadequate supply of inputs or services is consid- ered low. Experience with other Bank-financed irrigation projects to date confirms this assumption. The design institutes and construction trusts have experience with similar successful schemes. Project costs are based on offi- cially regulated prices which are not expected to change significantly during the period of project implementation. The supply of adequate agricultural inputs and services is assured. Farm workers are receptive to new technology and would have adequate incentives to participate in the project. Projected yields and their development are based on applied research and experience in comparable areas and are considered reasonable. Sensitivity analysis using switching values shows that the project is moderately sensitive to adverse variations in benefits, but is not sensitive to other variables. A decrease of 31 percent in benefits will, other things remaining as expected, make the - 22 - net present value negative at 9 percent discount rate. Since both ecological and soil factors are favorable, and the proposed technologies are relatively simple, even if there were some bad agricultural years aggregate output should not go below its crossover value. PART V - LEGAL INSTRUMENTS AND AUTHORITY 63. The draft Loan Agreement between the Bank and the Bank for Agricul- ture and Food Industry of Romania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, 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. 64. Features of the project of special interest are listed in Section III of Annex III. 65. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 66. I recommend that the Executive Directors approve this proposed Loan. Robert S. McNamara President by I.P.M. Cargill Attachments December 26, 1979 Washington, D.C. - 23 - ~~~~ANNEX I -23- Page 1 of 5 pages SA8LE 3A ROMANIA - SOCIAL INDICATORS DATA SHEET ROKANIA RE'iRECE GROUPS (ADJUSTEO AqUpAGES LAND AzA (THOUSAND - MOST RSCENT ESTIMATE) - SAME SAME NEXT HICHER ACRICULTURIL 149.6 MOST RECENT GEOGRAPHIC flC0m INCOME 1960 /b 1970 Lb ESTIMATE /b REGION /c GROUP /d GROUP /e GWN PER CAPITA (US) 180.0 510.0 1750.0 2906.3 1942.6 3075.3 ENERGY CONSUIqTION PER CAPITA (KILOGRANS OF COAL EQUIVALEOIT) 1342.0 3013.0 4036.0 2033.2 1646.7 2518.6 POPUrLATION AND Y1TAL STATISTICS POPULATION, MD-YEAR (.MILLIONS) 18.4 20.4 21.6 uRBA POPULATION (PERCENT OP TOTAL) 33.7 40.8 44.0 56.3 51.2 72.1 POPvLATION P&WICTIONS POPULATION IN YEAR 2000 (MILLIONS) 26.0 STATIONARY POPULATION (MILLIONS) 30.0 YZAR STATONARY POPULATION IS IRACHED - 2095 POPULATION DENSITY PER SQ. 1M. 77.0 S5.0 91.0 81.5 28.2 33.5 PER SQ. KM. AGRICULTURAL LAND 126.0 135.0 144.0 138.8 100.5 91.3 POPULATION AGE STRUCTURE (PIRCENT) 0-14 YRS. 28.2 25.9 26.0 25.6 35.4 33.3 15-64 YRS. 65.1 65.5 65.0 62.9 56.3 57.5 65 YRS. AND ABO 6.7 8.6 9.0 10.2 5.1 5.7 POPULATION GROWTH RATE (PELCENT) TOTAL 1.2 1.0 0.9 0.9 1.7 2.1 URBAN 3.8 2.8 2.5 2.6 3.0 CRUDE BIRTH RATE (PER THOUSAND) 20.0 20.0 19.0 18.5 27.5 31.4 CRUDE DEATH RATE (PER THOUSAND) 9.0 9.0 9.0 9.2 9.2 8.2 CROSS REPRODUCTION RATE 1.2 1.3 1.2 1.2 1.8 1.9 PAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. .. USERS (PERCENT OF MARRIED WOMEN) .. .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 85.6 89.0 140.0 115.7 102.0 98.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF BEQUIRL'MENTS) 105.0 118.0 123.0/g 134.2 120.8 112.7 PROTEINS (GRAMS PER DAY) 81.0 92.0 96.7Zi 95.4 80.9 70.3 OF WHICH ANIMAL AND PULSE 24.0 28.0 .. 45.4 31.3 CHILD (ACES 1-4) MoRTALITm RATE 3.0 2.4 1.0 1.3 5.1 2.5 WEALTS LIFE EXPECTANCY AT SIMrH (YEARS) 64.0 69.0 70.0 70.0 65.6 68.7 INFANT MORTALITY RATE (PER THOUSAND) 75.7 49.4 31.0 31.5 45.5 20.8 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. .. .. 69.4 73.9 URBAN .. .. .. .. S5.1 94.6 RURAL .. .. .. .. 43.0 64.6 ACCESS TO EXCRETA DISPOSAL. (PERCENT OP POPULATION) TOTAL .. .. .. . 70.1 URBAN .. .. .. .. 88.3 RURAL .. .. .. .. 33.2 POPULATION PER PHYSICIAN 780.0/f 840.0/i 750.0 661.6 1343.2 981.8 POPULATION PER NURSING PERSON 620.07f .. 590.0 677.1 765.0 397.8 POPULATION PER HOSPITAL 8ED TOTAL 130.0/f 120.0 108.0 180.1 197.6 240.6 URBAN 5so.o7 50.0 60.0 *- 260.2 RURAL 620.07f 770.0 730.0 .. 1055.0 ADKISSIONS PER ROSPITAL sED . 23.0 . 15.3 17.3 19.2 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 3.2/h . . 4.7 URBAN .. 2.8/h .. .. 4.4 RURAL .. 3.4/h .. .. 5.1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 1.4/h .. .. 1.1 URBAN .. 1.3/h .. .. 1.2 RURAL .. 1.4/h .. .. 1.2 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. 49.0/h .. .. 66.0 URBAN 86.O7h .. .. 85.1 RURAL .. 27.07o .. 24 - ANNEX I Page 2 of 5 pages TABLE 3A ROKANSA - SOCIAL INDlCATORS DATA SHEET REFER
Группа Всемирного банка · Memorandum & Recommendation of the President
Romania - Cuvurlui Irrigation Project
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