Romania - Tire Project

Docwmgnt of 'The World Bank FOR OMCIAL USE ONLY Report No. 6674 PROJECT COMPLETION REPORT ROMANIA TIRES PROJECT (LOAN 1536-RO) March 9, 1987 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their offciai duties. Its contents may not otherwise be disclosed without Wortd Bank authorization.  ABBREVIATIONS IB - Investment Bank of Romania IIPTIC - Process Engineering and Design Institu_e for Chemical Industries Central - Industrial Central for Rubber and Plastics Processing Enterprise - The Zalau and DTS Enterprises Zalau Plant - Zalau Truck Tlre Plant DTS Plant - Drobeta Turnu Severin Tractor and OTR Tire Plant OTR - Off-the-Road (Giant) Tires kWh - Kilowatt-hour MW - Megawatt CURRENCY EQUIVALENTS Appraisal - US$1 * Lei 20 Actual - US$1 - Lei 20 (Through March 1978) - US$1 - Lei 18 (Mar. 1978 - Dec. 1980) - US$1 - Lei 15 (Jan. 1981 - Dec. 1982) - US$1 = Lei 16.5 (Jan. 1983 - June 1983) - US$1 - Lei 17.5 (July 1983 - Dec. 1983) - US$1 - Lei 21.5 (Jan. 1984 - Oct. 1984) - US$1 = Lei 17.5 (Nov. 1984 - ) WEIGHTS AND MEASURES tpy - tons per year ton - 1,000 kg - 2,206 pounds (lb) kilogram - kg - 2.2 lb Kilometer - Km - 1,000 m = 0.62 miles FISCAL YEAR January 1 - December 31  FOR OmCIAL USE ONLY THE W ORlD BANK WAshmnqion DC 2043) uA OQsfc of DOitcinw.Cev March 9, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Romania - Tires Project (Loan 1536-RO) Attached, for information, is a copy of a report entitled 'Project Completien Report on Romania - Tires Project (Loan 1536-RO)" prepared by the Industry Department. Under the modified system for project performance auditing,further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restncted distributson and may be used by reciptents only in the petformance of their official duties. Its contents may not otherwise be disclosed without World Bank authornzation.  FOR OFmFCIAL USE ONLY PROJECT COMPLETION REPORT ROMANIA - TIRES PROJECT (LOAN 1536-RO) TABLE OF CONTENTS Page No. PREFACE ..................... ...................................... i BASIC DATA SHEET. ......... ........................... ii HIGHLIGHTS ...... iv It INTRODUCTION ...**......** ............*. ........... 1 II. PROJECT BACKGROUND ........ ......... 1 A. Project Preparation, Appraisal and Loan Approval ......... I B. Project Objectives and Description ....................... 1 III. PROJECT IMPLEMENTATION AND MANAGEMENT ....... ................ 3 A. Achievement of Project Objectives ........................ 3 B. Project Scope Changes 3..................... ....... ...... 3 C. Project Management .. ..................................... 3 Do Employment and Training ...... . ...... . o....o.... * 4 E. Use of Suppliers' Personnel ...... ........................ 4 F. Equipment Procurement ........4...................... ... 4 G. Ecology ............6. .................................... 6 H. Implementation Schedule .....6............................. 6 I. Capital Costs, Financing and Loan Disbursement 7........... 7 IV. OPERATING PERFORMANCE ..9.............................. .... 9 A. Production Build-up ......9.. ................. ....... 9 B. Tire Market Development ....9........................... ... 9 Vo FINANCIAL PERFORMANCE .... .*............. 11 A. Production Costs and Average Domestic Sales Prices ....... 11 Bo Financial Analysis 3. ........... .............. .... ....... 12 VI. ECONOMIC PERFORMANCE e......... 13 VII. BANK ROLE AND LESSONS LEARNED ...,.*...@...e............ 14 At Bank Role ..***...**.*........* .........***..*. 14 B. Lessons Learned . .................. ............... ....... 14 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (contd.) ANNEXES Page No. 3-1 Procurement of Bank-Financed Goods and Services by Country of Origin .. ........................... ,15 3-2 Estimated and Actual Project Implementation Schedules 16 3-3 Capital Cost and Financing Required - Zalau Enterprise 17 3-4 Capital Cost and Financing Required - DTS.Enterprise ....... 18 3-5 Annual Investments in the Project .......................... 19 3-6 Estimated and Actual Cumulative Loan Disbursement Schedules 20 5-1 Input Consumption, Unit Prices and Total Cost - Truck Tires 21 5-2 Input Consumption, Unit Prices and Total Cost - Tractor Tires .......................................... 22 5-3 Input Consumption, Unit Prices and Total Cost - OTR Tires .. 24 5-4 Financial Projections - Zalau Tire Enterprise ............. 26 5-5 Financial Projections - DTS Tire Enterprise 27 5-6 Cost and Benefit Streams for Financial Rate of Return Calculations ..... --**** 29 6-1 Financial and Economic Input Prices 30 6-2 Cost and Benefit Stream for Economic Rate of Return Calculations ..........-.. ..................... 31 ATTACHMENT I Comments Received from the Banca De Investitii ............ 33  PROJECT COMPLETION REPORT ROMANIA - TIRES PROJECT (LOAN 1536-RO) PREFACE Ioan 1536-RO for US$85.0 million was signed on March 30, 1978, and became effective on June 9, 1978; it was fully disbursed by September 30, 1984. The main objectives of the Loan were to finance the construction of a truck tire plant at Zalau and a tractor and off-the-road heavy-duty tire plant at Drobeta-Turnu Severin and to secure up-to-date technology for the latter. These plants were designed to meet growing domestic demand as well as for export and the Project's objectives have been on the whole attained. The Project Completion Report has been prepared by the Industry Department on the basis of a draft submitted by the Investment Bank and the findings of Industry Department missions to Romania in August 1985 and February 1986. A copy was sent to the Investment Bank and their comments are attached to the PCR as Attachment I. Suggested changes have been considered and reflected in relevant portions(parss 3.16 and 3.17, and in the Highlights para.(iv)). This project has not been audited by the Operations Evaluation Department.  PROJECT COMPLETION REPORT ROMANIA - TIRES PROJECT (LOAN 1536-RO) BASIC DATA SHE Loan Amount Original Disbursed Cancelled Repaid/Outstanding a/ (US$ M) 85.0 85.0 - 31.9/53.1 Cumulative Loan Disbursement 1978 1979 1980 1981 1982 1983 1984 Planned 14.8 59.4 78.6 85.0 - - - Actual - 5.2 37.5 4i.1 66.9 82.5 85.0 Z of Planned - 8.8 47.7 55.4 78.7 97.1 100.0 Appraisal Estimate Actual iCey Project Data Start of Preparation 05/76 Appraisal Date 02/23/78 Board Approval 03/23/78 Loan Signing 03/30/78 Loan Effectiveness 06/09/78 Loan Closing Date 12/31/81 06/30/84 Completion Date -Zalau Truck Tires 01/80 12/81 -OTS Tractor Tires 01/81 12/83 -DTS OTR Tires 01/81 10/85 Time Overrun (months) -Zalau Plant 23 -DTS Tractor Tires 35 -DTS OTR Tires 57 FiAxed Costs (US$ M) -Zalau Plant 130.8 153.5 -OTR Plant 110.8 120.8 Cost Overrun (US$ M) -Zalau Plant 22.7 -DTS Plant 10.0 a/ As of December 31, 1985.  - ii1 T MISSION DATA Month/ No. of No. of Missions Year Days a/ Persons Report Date Project Identification 05/76 9 3 06/04/76 Preparation 1 08/76 6 2 09/04/76 Preparation II 01177 5 3 03/02/77 Appraisal 07/77 20 3 02/23/78 Initial Supervision Summary 09/78 - 1 09/25/78 Supervision I 10/78 3 1 12/29/78 Supervision II 03/80 5 2 05/10/80 Supervision III 11/80 4 3 12/23/80. Supervision IV 09/81 5 2 10/06/81 Supervision V 09/82 9 3 09/27/82 Supervision VI 07/83 5 1 08Y24/83 Supervision VII 08/84 10 2 09/05/84 Supervision VIII 08/85 3 1 08/28/85 Completion 02/86 5 1 06/30/86 _/ In many cases, missions were combined with other work in Romania.  - iv - PROJECT COMPLETION PEPORT ROMANIA - TIRES PROJECT (LOAN 1536-RO) HIGHLIGHTS i. The Tire Project is part of the Bank's efforts to assist Romania in its industrial development and modernization through the acquisition of new technology in the production of particular types of tires, specifically the off-the-road (OTR) and truck tire for equipment vehicles used in construction, industrial and agricultural sectors, and by closing the inter-industry linkage gaps through the utilization of domestically produced raw materials and intermediate products for the manufacture of products likewise required by other industries (para 2.04-2.08). ii. Appraised in July 1977, the Project was the third in the chemical and fertilizer subsector assisted by the Bank, and it was aimed at increasing production capacity to meet both domestic requirements as well as the projected exports. The project components comprised of (i) the Zalau Plant with an annual capacity of 1 million radial steel belt truck tires, (ii) the Drobeta Turnu Severin Plant (DTS) with a manufacturing capacity of 150,000 tractor and 20,000 giant OTR tires, and (iii) common facilities for reception, handling, mining of raw materials, supply of compressed air, and other utilities. iii. There was no major project scope change against that agreed at appraisal except the modification in the DTS plant layout in order to avoid contamination arising from the proximity of the plant's raw material storage area to a neighboring factory processing agricultural products. This did not affect the capacity or technology of the DTS component units and even positively resulted in the vulcanization section, the main steam consumer, getting closer to the thermal plant built in the vicinity of the tire plant (para 3.02). iv. Project implementation and commissioning suffered a significant delay mainly due to the (a) difficulty in finding a suitable source for the giant tire technology and obtaining specialized equipment for the manufacture of OTR tires; (b) failure of the imported automatic metallic cord bias-cutting machine to achieve the quality and productivity performance provided for in the contract which resulted in litigation before an Arbitration Court in Paris; and (c) delay of more than one year in the delivery of imported automation components for calendering line and locally made segmented tire molds (paras 3.14-3.16). Other than these difficulties, transfer of modern specialized technology has been successful and operating performance is quite satisfactory. Also the Japanese Consortium which supplied the main technology equipment package for OTR tires collaborated %Zth the Romanian agencies, to the Borrower's satisfaction, and willingly continued their technical assistance in equipment installation, testing and staff training even after their contractual obligations had lapsed (para 3.08).  -v - v. The actual total cost required for the project was US$283.5 million, which is 12.6% higher than the appraisal estimate of US$251.7 million. Expressed in local currency, however, the total actual cost would be 6.1% below appraisal due to changes in exchange rate. Total financing was US$312.9 million or 21.2% higher than the appraisal estimate of US$258.1 million due to longer implementation period which resulted in much higher interest during construction (para 3.17-3.18). vi. The production performance of the Zalau Plant lagged behind schedule reaching only 10% in 1982 and 16% in 1983 due to failure to obtain the required automation components which was later overcome, and the poor performance of a major piece of equipment. On the other hand, the DTS facilities reached full capacity level operation in 1984 and erection was completed in the fourth quarter of 1985 (para 4.01-4.02). vii. Tire consumption lags five years behind the appraisal estimate mainly due to the slump in the Romanian economy and the general worldwide economic slowdown which affected both domestic sales and exports. Since the time of appraisal, international market prices for tires have decreased by about 35%. Cost of many materials needed for tire manufacture also deteriorated and resulting project ERR is 8.2% compared to 14%-30% projected at appraisal (para 6.03). viii. Overall, despite the delays in implementation and start up, the transfer of technology in this project has been successful, and the objective of increased production capacity to meet the needs of the industry and other economic sectors has been achieved.  PROJECT COMPLETION REPORT ROMANIA - TIRES (LOAN 1536-RO) 1. INTRODUCTION 1.01 The Tires Project is part of che overall Romanian plan for the development of the country's industry by closing inter-industry linkage gaps:. in this case specifically through the utilization of domestically produced synthetic rubbers, carbon black and other intermediate products to produce a product incorporated into truck, tractor and heavy-duty vehicles also produced in Romania and destined for export or for other economic sectors, mainly agriculture, mining, transportation and construction. The Tires Project was the third project in the chemical and fertilizer subsector assisted by the Bank in Romania and it was aimed at meeting growing domestic needs as well as projected exports. 1.02 The Project has been ptepared and implemented undet the following organizations: Ministry of Chemical Industries (MCI), Industrial Central for Rubber and Plastics Processing (the Central), Process Engineering and Design Institute for Chemical Industries (IITPIC) and the Tire Enterprises of Zalau and Drobeta-Turnu Severin. -I. PROJECT BACKGROUND A. Project Preparation, Appraisal and Loan Approval 2.01 After discussions between Romanian authorities and Bank representatives, a project identification mission of the Industry Department I/ visited Romania in April/May 1976 and selected this and two other projects then being planned in the chemical subsector as being suitable for Bank consideration. The Project was appraised in July 1977, and the corresponding Staff Appraisal Report was issued on February 23, 1978. 2.02 The Process Engineering and Design Institute for Chemical Industries (IIPTIC),. under the Ministry of Chemical Industries, was responsible for general project design, technical selection of tire manufacturing processes, equipment specifications and site locations. Based on information supplied by the Central, process licensors, and foreign and domestic equipment suppliers, IITPIC was also in charge of civil works and detailed engineering designs. B. Project Objectives and Description 2.03 The Project's main objective was to increase the productive capacity of Romanian tires industry so that the domestic demand for tires 1/ At the time of appraisal, the Industry Department was called the Industrial Projects Department.  -2- could be fully met leaving a surplus for exports, including convertible currency exports. In particular, the Project was intended to cover the neede of giant off-the-road (OTR) tires for the construction and mining industries, including tires required for heavy-duty vehicles manufactured in Romania for export. 2.04 The project comprised: (a) The Zalau Plant with an annual capacity of 1 million radial steel belt truck tires; (b) The Drobeta-Turnu Severin (OTS) Plant comprising: (i) a section for the manufacture of up to 150,000 tractor tires; (ii) a section for 20,000 OTR tires; and (hii) common facilities for the reception, handling and mixing of raw materials, and for the supply of compressed air and other utilities. 2.05 The Zalau Plant is located in the norttiwestern area of the country, Salaj County, an area which at the time of the appraisal was relatively industrially underdeveloped. The Drobeta-Turnu Severin plant is located on the Danube River, in the Mehedinti County, in the country's soathwestern region. The two plants are directly linked to the Romanian highway and railroad networks and the Drobeta-Turnu Severin plant is also connected to the Danube river transport system, which makes it easier to procure raw materials and market the production. 2.06 The manufacturing processes used to produce truck tires in the Zalau tires enterprise and tractor tires in the DTS enterprise are Romanian processes adapted from foreign suppliers of technology or developed by the Research Institute for Rubber and Plastice Processing. There was, however, no modern technology available in the country for the manufacture of OTR tires and,. therefore, within the general objectives of the Project, an important specific target was the introduction of up-to-date technology through a major technology/equipment package. 2.07 Natural robber, making up about 12% of the truck tires and 24% of the OTR tires by weight, is imported. Other raw materials - mainly synthetic rubber, carbon black and steel and textiles required for the production of tires are mostly of local origin. Only a very small volume of vulcanizing chemicals must be imported. (Bead wire, which had been imported at appraisal time, is now produced locally.) The heat (steam and hot water) and electric power at Zalau and Drobeta-Turnu Severin are supplied from thermal power plants built for this and other industries in the same area and from electric substations receiving power from the national electric grid. Labor was available at both sites but training for skilled operators was needed (para 3.07).  -3- III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Priett-OblIctives 3.01 The main objectives - introduction of new technology for the manufacture of giant tires and increased production of tires for industrial, agricultural and construction uses - have been attained and the training of staff for the new processes has been successful (para 7.02) B. Project Scope Changes 3.02 There have been no important changes in project scope compared with that agreed upon during appraisal, except that the DTS plant layout was modified in 1979 by rearranging its component units within the site (but not affecting its capacity and technology). The Bank indicated in May 1980 that it had no objection to this change. The main reason for the change was to avoid the risk of contamination arising from the proximity of the plant's raw material storage area to a neighboring factory processing agrtcultural products. The new layout required modifications in the disposition of the access road and the railway spur. A positive result of the change was that the main consumer of steam - the vulcanization section - was placed nearer to the thermal plant being built in the vicinity of the tire plant. C. Proiect Management 3.03 Project implementation followed normal practice in Romania: the Central had the general responsibility for tire production in Romania and for planning new tire production capacities. The Zalau and Drobeta-Turnu Severin Enterprises, established in November 1977 and April 1978, respectively, acted as project managers. The implementation of the Project was a complex undertaking, in which, as described in the following paragraphs, several other Romanian agencies participated. 3.04 In addition to its role in general project design, IITPIC was entrusted with the selection of foreign technology and main equipment specifications, site layout, detailed engineering, and plans for the civil works and erection of the Project units. Based on the designs and specifications developed by IITPIC, IntdustrialExporttmport (another Government agency) was in charge of all foreign procurement (including technology) using the services of the Central and the Research Institute for Rubber and Plastics Processing as technical consultants. Romanian equipment was procured directly by the user enterprises assisted techntcally by IITPIC. 3.05 The construction and erection works were the responsibility of the General Enterprises for Industrial Construction of Cluj-Napoca and Craiova which are specialized enterprises under the Minlstry of Industrial Constructions. During project implementation, Romanian and foreign companies supplying technical know-how and major equipment have participated closely in checking the correct erection of equipment and  -4- plant commissioning. The day-to-day coordination of the implementation work has been handled by the Enterprises, under the Central, while overall supervision and liaison with other ministries and central bodies has been carried out by the Ministry of Chemical Industries. D. Employment and Training 3.06 When fully operational, total employment at Zalau will be 2,515 workers (there are 1,940 workers at present) and 1,470 workers at Drobeta-Turnu Severin (960 are employed at present). These figures compare with the appraisal estimates of 2,515 and 1,800 workers at Zalau and Drobeta-Turnu Severin, respectively. At present, project employment is comprised of 3% managerial and higher-level technical personnel, 8% technical and supervisory staff, 82% skilled labor and the balance of 7% unskilled labor. The staff for these two new enterprises have been largely drawn from other enterprises operating under the same Central. 3.07 On-the-job training was mainly provided by the Victoria-Floresti and Danubiana-Bucharest enterprises, supplemented by training provided by the suppliers of technology and major equipment (17 workers, technicians and engineers were trained in Japan by Mitsubishi/Yokohama, the suppliers of the main equipment/technology procurement package). Intermediate level technically trained personnel were also recruited locally at Zalau and Drobeta-Turnu Severin. E. Use of Suppliers' Personnel 3.08 As previously mentioned, the Central, IITPIC and the DTS and Zalau Enterprises had the responsibility for project design and implementation and no foreign consultants or engineering firms were required. Basic data and know-how for the units involved in the manufacturing of OTR tires were supplied by Mitsubishi Co. in cooperation with Yokohama Rubber Co. (Japan). During the implementation of the Project, staff from the licensor of OTR tire technology and the suppliers of specialized equipmnnt provided technical assistance. Staff from the Mitsubishi and Yokohama companies were particularly useful in this undertaking because of their willingness to continue their assistance in equipment erection, tests running and training of staff, even after their contractual obligations had lapsed. F. Equipment Procurement 3.09 For goods and services financed by the Bank, ICB procedures were followed except for small items (costing less than US$100,000) for a total value of US$2.3 million. Potential suppliers were prequalified following procedures acceptable to the Bank, taking into account the technical capacity and past record of interested firms. At least two or three foreign firms were prequalified for each bid package and Bank procedures were adhered to in all cases. As mentioned above, the Enterprises, technically assisted by IITPIC, handled procurement of goods and services not financed by the Bank and coordinated all procurement activities, including the contracting of civil works and plant erection.  -5- 3.10 The procurement of the technologylequipment package for giant (OTR) tires presented difficulties and resulted in the delayed implementation of the project because of the limited number of interested qualified suppliers and the complex technical aspects that needed to be clarified before the formal bidding process could be started. From May 1977 until October 1978 proposals were repeatedly and unsuccessfully requested from the main potential suppliers of OTR technology in the USA, England, Japan, France, Italy and Federal Republic of Germany and the Investment Bank requested the Bank's assistance in obtaining responses from these firms. Two companies agreed to present proposals for the major OTR technology/equipment package following ICB procedures. Only one of these proposals, submitted by Mitsubishi Co. (Japan) - which had Yokohama Rubber Co. as a technical partner - was a complete technical and commercial tender fully responsive to the bid invitation documents. Consequently, the Bank agreed on the decision to award the contract to this company. This contract was signed in September 1980, 24 months later than expected at the time of project appraisal. 3.11 Out of the total amount of the loan, US$54,9 million (64.6%) were used to finance imported goods and services. Among foreign suppliers, the most important ones were from Japan, France, US and Italy (Annex 3-1). All Bank-financed domestic procurement was based on international bidding procedures. In the Appraisal Report it was anticipated that 32.9% of the total value of the Bank Loan would be used to import technology and equipment required to manufacture OTR tires (Category I), 46.7% to import other equipment and materials (Categories II and III) and 20.4% of the loan to procure equipment through ICB with participation of Romanian suppliers (Category IV). The actual cost of the OTR equipment and technology and that of other goods is shown in the following table. Dstribe4on