Romania - Roman Seamless Pipe Project

Document of The World 'ank FOR OFFMCIAL USE ONLY Report No. 7351 PROJECT COMNI-STION REPORT ROMA141A - ROMAN SEAM4LESS PIPES (LOAN 1651-RO) June 30, 1988 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of 1 * 1-I v i * 'I * i't *W.1 'rI t'-  ItME WORLD BANK Washington. DC 20433 USA Office of D1tectw-CefiIfi Opsatuw EvuItuun June 30, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Romania - Roman Seamless Pipes Project (Loan 1651-RO) Attached, for information, is a copy of a report entitled "Project Completion Report on Romania - Roman Seamless Pipes Project (Loan 1651-RO)" prepared by the former Industry Department. As a result of the reorganization the PCR was reviewed by the Europe, Middle East and North Arrica Regional Office. Further evaluation of tnis project by the Operations Evaluation Department has not been made. Yves Rovani by Graham Donaldson Attachment This document has a restricted distribution and may be used by recipients only in the performance of their olficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJE'T COMPLETION REPORT ROMANIA - ROMAN SEAMLESS PIPES (LOAN 1651-RO) TABLE OF CONTENIS Pate No. P'reface ..... ...... .* *.....o--........ ...............** l Basic Data Sheeth...et..t..t.. . . ...................... .l**a * ii Hghlightso-oooo............................... o............... iio I. PROJECT BACKGROUND . . . . . . . . . . . . .. . A. Project Preparation, Appraisal, and Loan Approval. ... . . 1 B. Project Description and Objectives . . . . . . . . . . . . 1 II. PROJECT IMPLEMENTATION AND MANAGEMENT . . . . . . . .. . 2 A. Project Scope Changes. . .. . . . . . . . . . . . . . . 2 B. Project Management .. . . . . . . . 2 C. Employment and Training . . . . . . . . . . . . . . . 2 D. Procurement . . * . . . . . . . . . . . . . . . . . . 2 E. Implementation Schedule.... .. . ... 3 F. Ecology. . . . . . . . . . . . 4 G. Capital Costs and Financing Plan .. . . . . . . . . . . . 4 H. Disbursements . .. . . o . . . . . 5 AII. OPERATING PERFORMANCE . . . . . . . . . . . . . . . . . . . . 6 B. Product Mix ... . . . . . . . . 7 C. Market Developments . . o . .o . . . . . . . . 0 0 . . 0 7 IV. FINANCIAL AND ECONOMIC PERFORMANCE . . . . . . . . . . . . . 7 A. Financial Results . . .. . . . . . 7 B. Financial Rate of Return . 8 . . 0 . . . . 0 0 . 0 . a C. Economic Rate of Return . . . 8 . . . . . . . . . . 8 Vo CONCLUSIONS . . . . . . . . . . . . . . . . . . . 9 A. Jverall Assssessment................. 9 B. Lessons Learned . . . . . . . . . . . . . . - . - . 10 ANNEXES 1. Financial Rate of Return. . . . . . . . . . . . . . . . . . . 11 2. Economic Rate of Return 1. . . o o o . . 0 0 0 0 . . 12 3. Comments from the Investment Bank of Romania . . . . . . . . . 13 BORROWER PROJECT COMPLETION REPORT. . . o . . . . . . . . . . . . 15-66 IThis document has a restricted distribution and may be used by reipients oIy in the performance |of their offcial duties. Its contents may not otherwise be disclosed without World Bank authodzeon.  PROJECT COMPLETION REPORT ROMANIA - ROMAN SEAMLESS PIPES (LOAN 1651-RO) PREFACE Loan 1651-RO for the Roman Seamless Pipes Project for US$40 million was signed on February 1980 and closed on December 1985, at which time the loan had been disbursed in full. The main objective of the loan was to increase annual production capacity of large diameter pipes to minimize the reliance of imports of critical products needed in the energy and industrial sector. This Project Completion Report has been prepared by the Industry Department based on drafts prepared by the beneficiaries and the findings of an Industry Department mission in December 1986. Comments were received from the beneficiary in April 1988, and are attached to this report as Annex 3. Where appropriate, the report has been adjusted to reflect these comments. In a:cordance with the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department (OED), but the project was not audited by OED staff.  - ii - PROJECT COMPLETIOQN REPORT ROMANIA - ROMAN SEAMLESS PIPES (LOAN 1651-RO) BASIC DATA SHEET PROJECT DATA Loan Amount (USS million) Original Disbursed Cancelled Repaid Outstaudiua 40.0 40.0 - 13.3 26.7 Cumulative Disbursements (US$ million3 Bank FY: 1979 1980 1981 1982 1983 1984 1965 1906 Appraisal Est. 0.5 11.0 33.0 40.0 40.0 40.0 40.0 40.0 Actual - 1.4 6.2 17.8 30.2 34.0 39.1 40.0 Project Appraisal March 1978 Board Approval January 1979 Loan Signing February 1979 Loan Effectiveness July 1979 Loan Closing December 1985 Completion December 1985 MISSION DATA No. of No. of bport Month/Year Days PersorA DAwe Identification 05/76 10 2 05/76 Preparation 07/77 1 1 07/11 Preparation 08/77 2 1 06/77 Preparation 11/77 10 4 12/71 Appraisal 03/78 $0 3 04/176 Appraisal (follow-up) 08/78 3 2 06176 Supervision 05/80 5 2 05/60 Supervision 03/81 5 2 04/61 Supervision 02/82 5 2 03/62 Supervision 02/83 4 2 04/63 Supervision 04/85 5 1 04/85 Supervision/PCR 12/86 4 1 12/|6  - iii - ROMANIA ROMAN SEAMLESS PIPES (Loan I6b1-RO) PROJECT COMPLETION REPORT Highlights i. Implementation was completed about 24 months behind schedule in the main project component and an additional 24 months delay for the finishing equipment. The total cost of the fixed assets amounted to US$124.5 million, up to 3.4% over the US$120.3 million appraisal estimate (Para 2.11). The main reasons for the implementation delay were: (i) delays in finalizing the contract for the main technolkgy package; (ii) review of the project scope to rinimize imported equipment which required design changes and delayed procurement; (iii) severe weather conditions which hampered progress in civil works; (iv) delays in supply by domestic manufacturers, and (v) delays in the procurement of critical foreign finishing equipment (Para 2.09). ii. Although actual commissioning of the Pilger Mill took place in December 1983, parts of the mill had to be removed and reinstalled during 1984 in order to reduce excessive vibrations. Installation of the finishing equip- ment was completed throughout 1985. By the end of 1985, the whole capacity of the plant had been commissioned (Para 2.08). Actual production in that year was about half of the appraisal estimate and was expected to build up at a slower pace than anticipated due to adverse market conditions. This is despite the fact that present product mix is less complex and diversified than estimated at apnraisal and the mill is operating satisfactorily (Para 3.01). iii. The company is expected to incur operating losses until produ_tion reaches full capacity utilization in 1988. However, this is based on the assumption that more than half of the project's output can be exported. The financial position of the Roman Enterprise as a whole continued to be satis- factory (Para 4.01). The project is now expected to achieve a financial rate of return of 4% compared to 5% in the appraisal (Para 4.03). The economic rate of return is estimated at 5.7% compared to 7.72 in the appraisal (Para 4.05). The main reasons for the decreased returns are the implementation delays, depressed international prices and increased production ccsts. If prices were to increase by 101, the economic rate of return would increase to 11.62. Some market analysts believe that there are good prospects for a price recovery in the medium term (Para 4.06).  - iv - iv In summary, the project can be considered worthwhile, although only marginally successful in terms of its economic beuefits. The project is expected to have a positive impact in Romania development plans in the pipe industry wh.ch aim at self-sufficiency and maintaining at least marginal exports, although these benefits will materialize at a slower pace thun originally expected (Para 5.01). The Bank had a limited role in project design or choice of technology, but it was influencial in defining its economic size. The Bank also secured the necessary assurances regarding arrangements that would ensure the proper quality and quantity of steel ingots required for the project. v. The Roman Seamless Pipes project was the last in a group of six industrial projects identified and appraised during the late 1970s and benefited, to some extent, from experience gained during the implementation of earlier projects. Nevertheless, some of the lessons learned have similiarities with past projects and relate to the need to establish realistic schedules for: (i) bidding, negotiating and finalizing international contracts; (ii) implementation of civil works, and (iii) domestic manufacturing of equipment. Finally, greater attention should be placed during appraisal on marketing forecast and arrangements. The latter, particularly, in export oriented projects are critical to ensure the sustainability of project benefits. Covenants for future studies by themselves can do little to reduce the project's market-related risks (Para 5.07).  PROJECT COMPLETION REPORT ROMANTA - ROMAN SEAMLESS PIPE PROJECT (LOAN 1651-RO) I. PROJECT BACKGROUND A. Project Preparation, Appraisal, and Loan Approval 1.01 The project, which was proposed for Bank financing by the Romanian Investment Bank in May 1976, was subsequently reviewed by three preparation missions and preappraised in December 1977. The project was formulated and designed by the Design Institute for Rolling Mills (IPROLAM) who prepared the technical and economic study for the project. 1.02 The project was appraised in March 1978. It wae agreed that the analysis of the project would be based on a 130,000 tpy production output to be reached over a four year period, particularly since the lower capacity under which the project had been internally approved in Romania (108,000 tpy), would not yield an adequate economic return. 1.03 In November 1978, negotiations between the Romanian authorities and the Bank took place and on January 1979, the Bank's Executive Directors approved a loan for US$40.0 million to the Investment Bank to be onlent to the Roman Enterprise. The loan became effective in July 1979. B. Project Description and Objectives 1.04 The project description is covered in detail in the Romanian PCR (para 2.04). The main objectives of the preject were: (a) to increase annual production capacity of large diameter pipes from 115,000 tons to 245,000 tons per year; (b) to minimize the reliance of imports of critical products needed by the energy and industrial sectors; (c) to earn critically needed foreign exchange since it was expected that half of the project's output would be exported; (d) to facilitate exports of engineering goods from Romania, since its competitiveness would be enhanced by being able to provide the entire assortment of pipes needed for the supply of these products; and (e) to introduce new Pilger technology for the manufacturing of seamless pipes.  -2 - 1.05 These objectives will, in all likelihood, be only partly accomplished. The foreign exchange savings and earnings generated 5y the project will be substantially lower than the appraisal estimate since pipe imports have been drastically curtailed and due to depressed world market conditions, most of the project's exports will be to COMECON countries (USSR in particular) througr bartering arrangements. 11. PROJECT IMPLEMENTATION AND MAUIAGEMENT A. Project Scope Changes 2.01 Ouly one minor change in project scope was introduced with Bank approval relating co the ingot preparatioa facilities which were shifted from Tif-zoviste to the project site. B. Proiecl. - ,agement 2.02 The project was implemented by the Roman Enterprise. IPROLAM designed and engineered the project; the management team included staff from the existing Roman pipes works, IPROLAM and Usinexportimport all of which we- considered at appraisal to be experienced in the design, procurement, construction and operatioi of steel rolling mills and pipe manufacturing facilities. 2.03 The Investment Bank of Romania su-ervised the implementation of the Roman project, together with Bank supervision missions and periodically between Bank missions. Given the experience and level of competence of all the Romanian institutions involved, the degree and frequency of problems requiring intervention by the investment Bank or the Bank were few. All communications and queries from the Bank on implementation and procurement matters were promptly answered by the Investment Bank. C. Employment ard Training 2.04 By 1988 when the project is expected to achieve its full production capacity, the total work force will be 860 employees, which is 40 workers less than the appraisal estimate. For operations in which the country had ample experience, training waL done at operating pipe works as well as in the existing Roman Stiefel pipe mill. For the operation of the Pilger mill, specialized training was provided by the supplier as part of che main technology package. The Romanian PCR (paras 4.02 and 4.03) covers in detail the staff specialization and training of personnel at Roman. D. Procuremer.t 2.05 All major machinery and equipment, financed by the Bank, were procured under international competitive bidding (ICB) using Bank guidelines. There were three categories of procurement: (i) a main technology package consisting or the core of the project (i.e., the Pilger mill); (ii) the balance of imported equipment not fabricated in Romania; and, (iii) a much smaller group of less critical equipment for which both foreign and local bidders could compete.  -3- 2.06 Originally the Bank was expected to finance only a portion of the main technology package with a provision that, in the event that export credits could not be obtained or their terms were deemed unduly onerous (so that it would become more advantageous for Romania to use credits for other imperted packages), the Bank would finance the entire package and the balance of the loan would be split between other imported packages. With this proviso, a co-financing covenant in an approximate aggregate amount of US$20 million was included in the loan. The original bank allocation is shown below: US$ million Main Technology Package 7.0 Other Imported Packages 28.0 Other Equipment & Spares 5.0 40.0 2.07 Some significapt changes occurrea in project concept during implementation. First, some components of the main technology package were either manufactured domestically (on the basis of drawings provided by the main supplier) or imported from eastern block countries, and second, a number of items that were originally assessed as necessary to be imported were shifted to domestic production. This major shiht from foreign to local costs substantially reduced the foreign exchange requtrements of the project. The procurement of items was spread among eight cot;ntries. Among foreign suppliers, the most iniportant ones were FRG (84%), USA (8%) and Italy (3%). The total value of procurement won by foreign suppliers was US$27.6 million or 69% of the loan amount. E. Implementation Schedule 2.08 A comparison of the appraisal and actual implementation schedules is presented in Annex 1 of the Romania PCR. At the time of appraisal it was estimated that the project would be completed by December 1981. Although actual commissioning of the Pilger mill took place in December 1983, parts of the mill had to be removed and reinstalled during 1984 in order to reduce excessive vibrations. Installation of the finishing equipment was completed throlighout 1985. In summary, a delay of two years occurred in the Main project component and an additional two years for the finishing equipment. 2.09 Much of the delays can be identified as follows: (i) delays in flnalizing the contract for the main technology package during 1979; (ii) review of the project components during mid-1980 with a view to minimizing imports which required design changes and delayed procurement of affected equipment; (ii!) a severe winter of 1981/82 which hampered progress in civil works; (iv) delays in supply by domestic manufacturers charged to produce critical equipment for the first time in Romania which in some cases did not meet design standards and had to be reordered; (v) delays in  - 4 - the procurement of critical foreign finishing equipment due,in one case, to the inability of the supplier to obtain the export permit, and in another case by the bankruptcy of the s-lected supplier. Against this backdrop of project implementation difficulties, there were cumbersome procedures compounded b: fragmented responsibilities for project implementation that contributed to the overall ptoject delay. F. Ecology 2.10 As indicated in the appraisal report, the project generates very little effluents except for solid steel scrap which is efficiently recycled due to its high value. Water treatment and sewerage are adequately treated through appropriate facilities. Roman is in compliance with the Romanian laws on protection of the environmerc. G. Capital Costs and Financing Plan 2.11 The total costs of fixed assets for the project amounted to US$124.5 million, up 3.4% over the US$120.3 million appraisal estimate. Some capital cost figures provided in the narrative of the Romanian PCR (para 3.11 and 3.12) ant Annex 3 were revised in response to Bank comments in order to ensure comparability with the original SAR estimate. These changes, however, are minor and do not affect the overall conclusions. A summary of final project cost and financing required is provided below. Romania - Roman PiPes: Project Costs and Financial Required (in US$ million) Appraisal Increase Increase Estimate a/ Actual b/ ($) (%) Equipment, Machinery and Spare Parts 89.6 88.4 (1.2) - Others 32.9 36.1 3.1 10 Total 122.5 124.5 2.0 2 Working Capital 9.8 12.9 3.1 32 Total Project Costs 132.3 137.4 5.1 4 Interest During Construction 7.1 6.6 (0.5) - Total Financing Required 139.4 144.0 4.6 3 a/ Puice and physical contingencies included in the appraisal estimate are distributed among individual cost items. b/ Converted at official rates o& exchange at the time of disbursement. 2.12 Due to the pressures to reduce foreign exchange expenditures by substituting foreign equipment with locally manufactured goods (para 2.07), foreign exchange expenditures for fixed assets were reduced by 39% from  - 5 - US$68.6 to US$42.0 million. Conversely, local costs expressed in US dollars increased by 35% from US$53.) million to US$72.5 million. It should be noted, however, that during appraisal the exchange rate was estimated to remain constant at around Lei 18 per US dollar whereas the actual weighted exchange rate average during the *ore of the implementation period was about Lei 15.8 per US dollar. Thus, expressed in US dollars, a portion of the local cost overrun is explained by the exchange rate differential. Other reasons were price realignments in the Romanian economy during 1980-1982 and increases in working capital. 2.13 The actual financing plan for the project compared with the appraisal is summarized below: Romania - Roman Pipes: Financing Plan Appraisal Actual Change US$ Z of US$ % of US$ Million Total Million Total Million IBRD Loan 40.0 29 40.0 28 Supplier's Credit 20.0 14 - - (20.0) State Funds 79.4 57 104.0 72 24.6 Total 139.4 100 144.0 100 4.6 2.14 As indicated above, in addition to the net cost overrun which was financed solely from state funds, the major difference in the financing plan relates to the absence of supplier's credit. As a result of savings in the main technology package (para 2.07) and increased local content of other packages, the foreign exchange component of the project was reduced to US$42.0 million, of which US$40.0 millien was covered by the Bank loan. As a result the Borrower requested and the Bank agreed to delete Section 3.03 of the Loan Agreement regarding cofinancing. H. Disbursements 2.15 The original closing date of the loan was December 31, 1982. After three extensions, the loan was officially closed on June 30, 1985. Compared to the appraisal estimates, disbursements were as follows: Romania - Roman Pipes: Disbursements Schedule (cumulative in US$ million) FY79 FY80 FY81 FY82 FY83 FY84 FY85 Appraisal Estimate 0.5 11.0 33.0 40.0 40.0 40.0 40.0 Actual 0.0 1.4 6.2 17.8 30.2 34.0 40.0 Actual as Z of Estimate 0 10 19 45 76 85 100 _ - - ---M===  -6- 2.16 Disbursements for the loan did not start until the second quarter of 1980 as a result of delays in finalizing the rontract for the main technology package. By mid-1984 about 85% of the loan had been disbursed and essentially all of the production equipment had been procured. Delays in remaining disbursements were mostly related to the procurement of finishing equipment some of which was outside of the Borrower's control. Other reasons associated with thoj lag in disbursements ate explained in para 2.09. 2.17 The actual allocation of loan proceeds compared to the appraisal estimate was as follows: Romania - Roman Pipes: Allocation Proceeds (US$ millions) Original Disbursed SAR Reallocated (Actual) Category I 29.5 28.5 28.5 Category II 10.5 11.5 11.5 III. OPERATING PERFORMANCE A. Production 3.01 By the end of 1985, the whole capacity of the plant had been commissioned. Actual production in that year was slightly over half of the appraisal estimate, and, throughout 1988 when the project is expected to reach full production, capacity utilization is expected to remain between 10-20% below estimate. This is despite the fact that at present the product mix is less complex and diversified than originaily expected and the mill is operating satisfactorily. Therefore, the main reason for the slower build-up in production is related to market developments (para 3.03). Romania - Roman Seamless Pipes Project Planned vs Actual Growth in Production (thousands of tons) 1982 1983 1984 1985 1986 a/ Project Component Appraisal Estimate 46 85 104 117 130 Actual b/ - - 7 23 77 Roman Enterprise Appraisal Estimate 686 725 744 757 770 Actual 508 479 514 528 624 a/ Latest available estimate. b/ Of which 90% are carbon steel seamless pipes.  -7- B. Product Mix 3.02 As previously indicated (para 2.01) there were no changes in the scope of the project that would affect the product mix. However, two factors which have affected the overall market prospects for the prcject, have influenced, at least in the short term, the present and future product mix. First, decreased oil and gas exploration resulting from low prices have reduced the demand from the energy sector, the main user of large seamless casings and line pipes. Second, changes in technology have now made possible the substitution of seamless pipes with welded pipes, particularly for low level drilling, with considerable savings in operating costs. Now, at full production in 1988, the project is expected to produce 76,000 tons of casings and line pipes compared with the appraisal estimate of 99,000 tons, a reduction of 30% which will be compensated by increased production of structural pipes (i.e., used in the construction of industrial plants and machinery). C. Market Developments 3.03 The Romanian PCR addresses this subject only briefly. In fact, discussions on market developments during project supervision were never very fruitful. For example, domestic market projections were mostly based on the Five-Year Plan budgetary targets and were not frequently updated within the cycle to reflect the actual performance of the consuming industries. Thus, because of considerable delays in the implementation of domestic projects, there was always a tendency to overestimate local demand. On the other hand, information on the international market for large seamless pipes is very difficult to obtain since very little published statistics are available on the subject. Als3, given the competitive nature of the market, pipe producers avoid releasirg information. These reasons have made past market projections highly questionable. 3.04 As previously stated (para 3.01), production and sales have fallen below appraisal estimate mostly as a result of adverse market conditions. The Romanian PCR indicates that by 1988 more than half of the plant's output at full production (i.e., about 70,000 tons) would have to be exported. Although in the present conditions of oversupply it will be difficult for a new producer to penetrate the international market, it is expected that the Comecon countries, China, India and Indonesia will remain importers of large seamless pipes and good customers of the project. It is unlikely, however, that in the short term the project can export its total available surplus. IV. FINANCIAL AND ECONOMIC PERFORMANCE A. Financial Results 4.01 The projected financial performance for the seamless pipe project indicates that operating losses will be incurred until production reaches full capacity utilization in 1988. This is based on the assumption that in  -8- that year more than half of the project's output can be exported. The appraisal report had estimated losses only for the first year of operation. The major reasons for lower profits are: (i) slower production build-up; (ii) 41% lower margin of contribution per ton of product, (lii) charges in product mix resulting from market conditions. The slower production build-up is primarily associated with delays in commissioning the different project components with a contributing factor being the adverse market situation. The lower margin of contribution results from increases in the cost of principal inputs like steel ingots, energy and labor not fully reflected in the domestic price of pipes (to contain domestic inflation) and lagging export prices. 4.02 The financial performance of the Roman Enterprise as a whole, continued to be satisfactoryl/ Its operating margins on the existing operations are higher than previously estimated reflecting continuing high productivity and yield factors as well as good product quality. Since this performance is expected to continue, the enterprise oill remain financially viable despite reduced income from its large diameter seamless pipes. B. Financial Rate of Return 4.03 The financial rate of return (FRR) calculated in the PCR prepared by the borrower (Annex 9) has been adjusted to reflect: (i) revised working capital ustimates provided to the mission; (ii) a small revision in capital costs; (iii) revised actual production for 1985 and 1986; and (iv) higher production unit costs during the period of the initial learning curve. 4.04 The new FRR is estimated at 4% compared with 5% estimated at appraisal and 7.4% in the PCR. The main reasons for the reduced FRR are the longer implementation period, the longer production built-up and a deterioration in the margin of contribution, as explained in para 4.02. C. Economic Rate of Return 4.05 Since in the Romanian context domestic selling prices only assure that the enterprise will cover production costs, the ERR is a more meaningful measure of the project's benefits. On the other hand, because of the extensive product mix, the lack of published price statistics and the difficulties in estimating border prices and related adjustment to input prices, the calculation of ERR is difficult. The major assumptions in the ERR were: (i) taxes on imports were eliminated; (ii) the average economic price per ton of seamless pipes is set 25% higher than the financial prices and reflects FOB European prices for export sales and CIF prices (FOB Europe plus freight, insurance and handling) for domestic 1/ Conventional financial analysis in the Romanian context is of limited significance since the primary responsibility of industrial enterprises is to meet the physical production targets established by higher authorities. Thus, financial profitability does not necessarily reflect the enterprise's potential profitability.  - 9 - sales; and (iii) major inputs have been adjusted to reflect their economic cost. 4.06 The incremental ERR of the project is 5.7% compared to 12.5% estimated at appraisal. The main reasons for the decreased return are implementation delays, depressed international prices and increased production costs. In real terms, while the average selling price increased by 44% the average cost of production increased by 68%. The return is very sensitive to prices. If prices were to increase by 5% and 10%, the ERR increases to Q.9% and 11.6%, respectively. Conversely, a decline of 5% reduces the ER .So 1.9%. Some market analysts believe that prospects for price recovery in the medium term are good. V. CONCLUSIONS A. Overall Assessment 5.01 In summary, the project can be considered worthwhile although only marginally successful in terms of its economic benefits. The project is expected to have a positive impact in Romania's development plans in the pipe industry which aim at self-sufficiency and maintaining at least marginal exports, although these benefits will materialize at a slower pace than originally expected. Due to depressed prices, reduced domestic consumption and increased export to COMECON countries, it is also highly unlikely that the project will yield the foreign exchange savings and earnings originally expected. 5.02 The Bank had a limited role in project design or choice of technology but was influential in defining the economic size of the project (130,000 tpy vs. 108,000 tpy), and in determining the appropriate number and type of equipment (particularly finishing) to be incorporated in the project. The Bank also secured the necessary assurances regarding arrangements that would ensure the proper quality and the adequate quantity of steel ingots required for the project. 5.03 Many of the risks identified during appraisal have affected the project in various degrees. The most important so far is the decline in the international market resulting from a worldwide slowdown in oil and gas exploration, increased protectionism, environmental issues (such as thcae related to the construction of nuclear plants) and overall economic recessioa. Contrary to appraisal expectations the domestic market has been 'lo sezriously affected thus increasing the surplus production available for exports. 5.04 These market risks associated with the project were expected to be reduced through a covenant requiring the Remanians to undertake thorough market analysis of domestic and international supply and demand of seamless pipes, including marketing set-up and arrangements. Although a bona-fide effort was undertaken and the covenant was fulfilled, (i) the market study was of poor quality and both the domestic and international analysis lacked analytical depth, and (ii) no special marketing set-up or arrangements  - 10 - appear to have been made and the product continues to be promoted and sold through existing channels (METALIMPORTEXPORT). Even if this covenant had been more effectively carried out, it is unlikely it could have significantly reduced the project's vulnerability to market risks. 5.05 Regarding the quality of the raw material ingots, although some are being rejected, they are quickly replaced and production build-up, which is slower than anticipated anyway, has not been affected. Agreements reached in this area, particularly with regards to-the testing of ingots by the equipment manufacturer well ahead of the start of commercial production, proved very effective. Although Pilger technology was used for the first time in the country, technical assistance arrangements and training with the equipment manufacturer together with the country's proven experience in the manufacture of seamless pipes, were critical to the successful process of transfer of technology and technical operation of the project. 5.06 Finally, the project did suffer longer than expected implementation delays, many as a result of the prevailing strong tendency in Romania to produce locally as much equipment as possible to alleviate foreign exchange constraints. For example, some of the equipment supplied for the project was being manufactured for the first time in Romania and this resulted in manufacturing delays. Also, occasionally local equipment did not meet design standards and had to be corrected. To this extent, the economic costs associated with implementation delays were never fully appreciated by the Romanian authorities. B. Lessons Learned 5.07 The Roman seamless pipes project was the last in a group of six industrial projects identified and appraised during the late 1970s and benefited to some extent from experience gained during the implementation of earlier projects. Nevertheless, some of the lessons learned in carrying out the Roman project have similarities with past projects and relate to the need to establish realistic schedules for: (i) bidding, negotiating and finalizing international contracts; 'ii) implementation of civil works; and (iii) domestic manufacturing of equipment. Finally, greater attention should be placed during appraisal on market forecasts and marketing set-up and arrangements. The latter, particularly in export-oriented projects, are critical to ensure the sustainability of project benefits. Covenants for future studies by themselves can do little to reduce the project's market-related risks.  - 11 - ANNEX 1 PROJECT COMPLETION REPORT ROMANIA - ROMAN SEAMLESS PIPF. PROJECT (LOAN 1651-RO) Financial Rate of Return (1985 Terms) - 18 Years (IRR - 4.4%) Fixed Working Operating Operating Net Year Assets Capital Costs Revenie Benefit 0.99 Price 1979 - - - - 0.0 irr 4.4% 1980 3.6 - - - -3.6 1981 15.3 - - - -15.3 1982 38.7 - - - -38.7 1983 29.6 - - - -29.6 1984 15.5 0.6 3.9 2.3 -17.7 1985 12.5 1.8 16.2 13.5 -17.1 1986 7.9 4.9 46.5 45.8 -13.5 1987 - 1.5 54.3 53.8 -2.0 1988 - 3.8 74.9 89.7 11.1 1989 - - 74.9 89.7 14.8 1990 - - 74.9 89.7 14.8 1991 - - 74.9 89.7 14.8 1992 - - 74.9 89.7 14.8 1993 - - 74.9 89.7 14.8 1994 - - 74.9 89.7 14.8 1995 - - 74.9 89.7 14.8 1996 - - 74.9 89.7 14.8 1997 - - 74.9 89.7 14.8 1998 - - 74.9 89.7 14.8 1999 - - 74.9 89.7 14.8 2000 - - 74.9 89.7 14.8 2001 -12.3 -12.6 74.9 89.7 39.7  . - 12 - ANNEX 2 PROJECT COMPLETION REPORT ROMANIA - ROMAN SEAMLESS PIPE PROJECT (LOAN 1651-RO) Economic Rate of Return (1985 Terms) - 18 Years (IRR 5.7%) Fixed Working Operating Operating Net Year Assets Capital Costs Revenue Benefit 1979 - - - - 0.0 1980 3.4 - - - -3.4 1981 14.6 - - - -14.6 1982 36.9 - - - -36.9 1983 27.8 - - - -27.8 1984 15.0 0.6 5.0 2.9 -17.7 1985 11.8 1.8 20.8 17.0 -17.4 1986 7.5 4.9 59.8 57.8 -14.4 1987 - 1.5 69.8 67.9 -3.4 1985 - 3.8 96.3 113.3 13.2 1989 - - 96.3 113.3 16.9 1990 - - 96.3 113.3 16.9 1991 - - 96.3 113.3 16.9 1992 - - 96.3 113.3 16.9 1993 - - 96.3 113.3 16.9 1994 - - 96.3 113.3 16.9 1995 - - 96.3 113.3 16.9 1996 - - 96.3 113.3 16.9 1997 - - 96.3 113.3 16.9 1998 - - 96.3 113.3 16.9 1999 - - 96.3 113.3 16.9 2000 - - 96.3 113.3 16.9 2001 -11.7 -12.6 96.3 113.3 41.2  - 13 - ANNEX 3 BORROWER CONENTS ZCZC OERPO1'4 J.S0534 GEDD2 REF : TCPI NET * OEDD2 * JUS0534 ZJP929 IN 30/04:02 OUT 30/04:10 TELEX NO. 170/30.04.88 KR. ALEXANDER NOUICKI CHIEF OPERATIONS EVALUATION DEPARTHAMENT RE: PROJECT COHPLETION REPORT ROMAN SEAMLESS PIPES PROJECT THANK YOU FOR THE COPY OF PROJECT COMPLETION REPORT PREPARED DY THE INDUSTRY DEPARTMENT SENT TO US AND UE LET YOU KNOU THE FOLLOUING COMMENTS: 1. SECTION 1.02, THE SECOND PHRASE UOULD BE REUORDED HAVING IN VIEU THAT THE PROJECT HAD BEEN ALSO INTERNALLY APPROVED FOR A CAPACITY OF 130,000 tPY, AS IT RESULTED FROM THE DECREE NO. 197 OF MAY 19,1979 FOR THE APPROVAL OF THE MAIN TECHNICO-ECONOMICAL INDICATORS OF THE PROJECT. A COPY OF THIS DECREE HAD BEEN SENT TO THE DANK FOR THE LOAN EFECTIVENESS. 2. SECTION 2.037 IN THE FIRST PHRASE TO BE ADDED THE FOLLOUING: ,. ... AND PERIODICALY BETUEEN DANK MISSIONS BY THE HEADOFFICE OF THE INVESTMENT BANK AND ROMAN BRANCH OF THE INVESTMENT BANK ENSSURED A PERMANNET SUPERVISION OF THE PROJECT IMPLEMENTATION ., 3. SECTION 2.09, THE FIRST PHRASE, ITEM(IV) TO BE REPLACED., .... UHICH OFTEN DID NOT HEET DESIGN STANDARDS AND HAD TO BE REORDED.,, UITH.. .... UHICiH IN FEU CASES DID NOT MEET DESIGN STANDARDS AND HAD TO BE REMELED.,,. 4. IN SECTION 2.12. THE FOLLOWING TO BE REPLACED: .. DUE TU THE PRESSURES ... .. UITH ,. DUE TO THE CONCERN... . AND ,. ... SUBSTITTIONG FOREIGN EQUIPMENT UITH LOCALLY MANUFACTURED GOODS...,, UITH*, ... SUBSTITIUTUING FOREISN EQUIPMENT WITH LOCALLY MANUFACTURED EQUIPMENT OF GOOD QUALITY 5. SECTION 5.04., THE SECOND PHRASE, ITEM (I) TO BE REUORDED AS FOLLOWINU .. (I) THE MARKET STUDY AND BOTH THE DOMESTIC AND INTERNATIONAL ANALYSIS UERE NOT POSSIBLE TO HAVE AN ANALYTICAL DEPTH DUE TO LACK OF INFORMATION ON THE INTERNATIONAL MARKET FOR LARGE DEAEEEE SEAMLESS PIPES FOR BUICH PUBLISHED STATISTICS ARE NOT AVAILABLE AND NO ACCESS TO THE INFEMATION OF THE FEU PRODUCERS OF SUCH PIPES, AND....,. UE HOPE THAT IN THE FINAL DOCUMENTS TO BE DISTRIVUTED TO THE BANK , S EXECUTIVE DIRECTORS, THE PCR PREPARED BY US UILL BE ENTIRELY INCLUDED. THANK YOU FOR YOUR COOPERATION. YOURS SINCERELY, ALEXANDRU OLTEANU DIRECTOR INVESTHENT BAK OF ROMANIA dtMIAZ KHPXNV R  - 15 - I PROJECT COMPLUBTION REPOR? ROMANIA: ROMAJ SAMLESS PIP! PROJECT i~~~~~~-* L LOAN 1651 RO) Invstment Bank Paor'ign Rlations Department December,1985  - 17 - .01.. Sewales Pipes of 20 Inches Rlli111 MMllrojeot is part of overall program of Romenia for development and diversifyin the steel ind;utry production, one of t main brvaohes of the national economye The Project's implimentation enure the Import sub. stitution of large diameter of seamless pipes reqired sepeciuly for th dee7lopment projects of petroleum drillizg and power secta aimin at providing the energy independence of the country. The Project in alo providing the Introduction of a new well-proven technology - PLlger process - in the Romaniau steel industry, and, accordingly, by substituting the imports,. it ensure oonsiderable Import savings, as well as ts export incom. 1.02. The Project was preparod and supervised during its Implementation by 0tellurgical Industry Ministry, Industrial entral for Metallurgical Processing and Roman Pipes Nnterpreso. As specialised agencien, Design Institute for Rolling 1ill,s, Industrial Construction Trut and Usinexportimport Foreign Trade Iterpriss had an Important role in Projectse lmplementatior Teh Project's finencing was mainly oovered by the own resource of Romn Pipes Interprie and by a loan granted by the World Bank of US $ equivalent 40 million. Et. PROJBCT B&ACKGROUND A.* Project Prenaration an4 Anraisal 2.01. The Romanian Government requested Bank assistance In the developmnt of the steel Industry; to that end a preliminsz toehical-ecoomio study was submitted to the Bank, ia October 1976, and updated In June 1977; on the basis of these studies a p"Jojt preapproaial mission had discussioxs with Bomnian specia- lists ia November 1977. 2.02. Buherest 3ndustrial oeatral for Metallurgical Processing with Metallurgical ustrcy MRListry was respousible for plasm  - 18 - nz liauprvisin mad *aobeviag th pipes prsdhotiea of VW outa, em4 t@0ther wIth Roman Pipes hterprise gad Desigs Mstitute fre 311aI9 Onll prepared the teohnioal-ecomeaio dooumatgtiea (llota do oGOEadl' mad "ieioatul de exoeouve " for 20 inabe s easls poo g1liag moll frm Rman Pipes ktezprise On the beasi of thoo to oltooooio deoumentationg the Projeot's main tehical GoMi@ la4iomtors wer aPProved 2n 1y 1991979. 2o03 The ProJeot wa, appraised in 1978 on tho basis of the adloo and information gatbsrcd in the course ef the preapprisal mind Opprsiasl m10isOns On January 11,1979, the Bank's Nzoutiv Diootaro approved a loan for US 8 40.0 million for the Implementa- t1on of' the uamleos pipes rolling mill i bama Pipes Enterprise. te Loan Agreement was signed on February 2619799, and bocemo o