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DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use

Report No. P-1555-RO

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

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 THE

SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT

January 15, 1975

This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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CURRENCY EQUIVALENTS

1. Official Rate

lei 4.97 = US$1.00

lei 1 = US$0.20

2. Tourist Rate

lei 12.00 = US$1.00

lei 1 = us$o.o8

Conversion Rate for Traded Goods

lei 20 = US$1.00

lei 1 = US$0.05

..Fiscal Year -- January 1 - December 31

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVF LO)PMFNT

REPORT AND RECOMMENDATION OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED

LOAN TO THE BANK FOR AGRICULTURE AND FOODINDUSTRY, ROMANIA, WITH THE GUARANTEE OF

THE SOCIALIST REPUBLIC OF ROMANIA FOR THE

SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT

1. I submit the following report and recommendation on a proposed loan

to the Bank for Agriculture and Food Industry (BAFI) of Romania, with the

guarantee of the Socialist Republic of Romania, for the equivalent of US$30

million to help finance an agricultural credit project. The loan would have

a term of 20 years, including 5 years of grace, with interest at 8 1/2 percent

per annum. BAFI would relend the proceeds of the loan to cooperatives, and

to State farms and enterprises, at 3 and 4 percent per annum for terms up to

20 years including up to five years grace.

PART I - TIE ECONOMY'

2. Romania joined the Bank on December 15, 1972. The second economic

mission visited the country in May 1974, and its report, entitled "Economic

Position and Prospects of Romania" (492a-RO), was circulated to the Execu-

tive Directors on November 4, 1974. Social and economic country data are

given in Annex I.

3. Since the founding in 1947 of the People's Republic of Romania,

which in 1965 was reconstituted as the Socialist Republic of Romania, eco-

nomic management has been organized along socialist principles which have in-

clided state and cooperative ownership of almost all productive resources, and

the absence of private enterprise. Economic activity is directed by means of

obligatory development planning, coordinated by the central authorities. Pro-

ductive enterprises operate within the framework of the development plan which

defines the scope of their activity, the outlines of their production and

investment goals and their targets for operating efficiency. The Plan is

elaborated within a five-year titie frame, each year having a separate Anniual

Plan. The country is presently in the fiftlh year of its Five-Year Plan for

the period 1971-1975, and is currently preparing the next Five-Year Plan for

1976-80.

4. 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. Sub-

ordinate to the Centrals are the enterprises whose principal task is meeting

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production targets. Production enterprises generally are not authorized toengage directly in foreign trade. For this purpose they use special foreigntrade enterprises.

5. Economic development is of paramount concern to the Romanian Gov-ernment. Rapid industrialization is a major objective with priority beinggiven to heavy industry including steel, machine tools and chemicals. Toachieve their growth objectives, the Romanian authorities have made consider-able efforts to mobilize domestic resources for development and to maintaina high rate of capital formation. In the present Five-Year Plan, planned andactual investment rates of around 30 percent of GNP have been the norm. Asa consequence, consumption has been restrained, and the development of theconsumer goods industry has been less strongly emphazised than that of heavyindustry. In 1972, heavy industry (led by machine tools, chemicals and fer-rous metallurgy) accounted for about 70 percent of industrial production.

6. As a result of this strategy, a marked change has been achieved inthe structure of Romania's economy. Rapid industrial growth, which over thelast decade has averaged more than 13 percent per annum, has expanded theshare of the labor force employed in industry (including power and construc-tion) from about 14 percent in 1950 to 35 percent in 1971. During the sameperiod, the share of labor force engaged in agriculture declined from 74 per-cent to around 42 percent; and while agricultural output almost tripled, itsshare in GNP amounted to only 16 percent in 1973.

7. Notwithstanding the emphasis on industrialization, more than halfof the population (about 58% in 1973) still lives in rural areas and agricul-ture remains a key sector of the economy. Apart from supplying food, indus-trial inputs and the residual labor increment for industrial growth (whichrequires an expansion in agricultural productivity), the sector also suppliesupwards of 40% of the nation's convertible foreign exchange earnings. Theseearnings, which are largely used to buy imported inputs for industry, haveoften been jeopardized as a result of unstable production growth in agricul-ture. The maintenance of the industrial development program, therefore, isdependent on the performance of the agricultural sector.

8. Romania's population growth is around 1.0 percent per annum. Thus,the impact of rapid economic growth on per capita incomes has been only mar-ginally diluted by the population increase. In the last decade, GNP growthhas averaged 9.0 percent per annum, implying a growth of about 8.0 percent perannumL of per capita GNP. The fortlhcoming World Bank Atlas estimates GNIP percapit.l for 1972 at $810.

9. The organization of production in both the urban sector and inagriculture is such that all labor is employed and there is no open un-employment. There is, however, some labor surplus. Income distribution isalso relatively equal. In 1973, average monthly wages were 1,563 lei (over

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$75 equivalent) per month, up 4.3 percent over the previous year. Almost80 percent of all monthly wages in 1972 were within the range of 900-2,000 leiand less than 6 percent were under 900 lei. Minimum wages are guaranteed bythe State; they were raised to 1,000 lei per month for full-time workers inSeptember 1971. Prices for essential consumer goods and services such asbasic foodstuffs, rents and urban transport are relatively low and most socialservices, notably education and health care, are provided without charge.Continuous efforts are made to increase the standard of living. Romania alsopursues a positive regional policy which has sought to bring a balanceddevelopment of both human and natural resources to all parts of the country.

10. The official exchange rate of lei 4.97 per US$1 is used only foraccounting purposes. The rate used for tourist transactions is lei 12 perUS$1, having been revalued from a rate of lei 14.38 per US$1 in October 1974.Under a new system introduced in January 1974, the prices of all traded goodsare converted at a uniform rate of lei 20 per US$1, a rate which is consideredby the Romanians as being representative of the cost of convertible foreignexchange. For imported goods, the domestic lei price is found by addingto the foreign price converted at the new rate a tariff rate which variesfor different types of goods. The rate of lei 20 per US$1 has also beenused to convert national income statistics from lei to dollars. Consequently,this rate has been used as the base rate for calculations in the appraisal.

Recent Developments

11. Since the National Party Conference of 1967, which set the stagefor major qualitative advances in Romania's economic and social development,there have been important new emphases in Romania's economic management.Measures were taken to improve the institutional basis of planning (e.g. bycreating the Centrals to assist in plan administration), to increase the ef-ficiency of economic management and to improve upon the quality of productionin industry. In agriculture efforts were made to raise productivity andstabilize growth through irrigation, mechanization and the expanded use ofchemical fertilizers. To expand upon the growth of foreign trade and tech-nical-economic cooperation the Romanian Government has concluded trade andcooperation agreements with a wide range of countries. In this context also,Pomania has made positive efforts to expand its multilateral external rela-tions and to pursue full cooperation with the international agencies, includ-ing UN, UNCTAD, UNESCO, FAO, UNIDO and GATT.

12. Recent measures aimed at continued improvement of the managementsystem include a reorganization (involving a reduction from 217 to 89) in thenumber of industrial Centrals and a concentration of their planning, controland research functions. The pursuit of purely physical goals in productionand trade, while still an important element in the system, is being supplement-ed by much greater emphasis on productive and investment efficiency, productquality, pricing and foreign competitiveness. To eliminate wasteful investmentand production expenditures, a Superior Court of Financial Control has beeninstituted, among other things, to oversee a new system of financial control.

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13. One result of these efforts is that foreign trade has expanded quiterapidly in recent years both in volume and in regional diversity. There hasalso been a tendency to move away from trade on a bilateral barter basis to-ward trade involving multilateral payments. During the period 1965-72, totalforeign trade grew at about 12 percent per annum in current prices. As aresult of both rapid world price increases and expanded volume of trade, thetotal value of trade grew by 38 percent in 1973, with exports growing by 44percent to US$3.7 billion, and imports increasing by 34 percent to US$3.5 bil-lion. About 50 percent of 1973 trade was with non-socialist countries. Over-all trade deficits have generally remained small, and in 1973 there was a tradesurplus of $233 rmillion, while the deficit with the convertible area was re-duced. During 1968-72, the total annual trade deficit averaged about $75 mil-lion (i.e. less than 8 percent of average exports). However, the resultsvaried as between different trade regions. Imports from East European Socialistcountries were slightly lower than Romania's exports to that region. InRomania's trade withi Western industrialized countries, on the other hand, ex-ports typically have been much less than imports. These deficits have some-times been increased by deficits on the invisibles account with Westerncountries.

14. The structure of Romania's trade with the developed market economiesremains essentially unfavorable, despite the decline in deficit in 1973 andexpectations of a surplus on the convertible account for the first time in1974. Raw materials and agricultural commodities, both of which are subjectto unstable price and production conditions, comprise about 60 percent oftotal exports to these countries. At the same time, imports from these coun-tries are largely of machines and equipment and other manufactures. Thus,the present rather strong position in the convertible trade balance could welljust be cyclical and should not be interpreted as an indication that Romania'schronic shortages of convertible currencies is at an end. Because of the pre-sent low level of reserves, any instability in export performance, as frequentlyarises from shortfalls in agriculture (paragraph 7 above), will place theimport program in immediate jeopardy, and shortages of convertible currencieswould persist even if Romania were to have recurring overall trade surpluses.

15. Romania is relatively well endowed with energy resources and forthis reason has been less affected than some countries by recent developmentsin this sector. Romania is a marginal (but growing) importer of crude oilbut is not dependent on this for fuel, using the imports as chemical feedstockto make products for re-export. Romania h-ias substantial deposits of naturalgas, crude oil and solid fuels (mainly lignite) as well as some limited hydro-power, uranium and geothermal energy. There has been a long-standing policyto reduce the use of gas and oil as fuels, conserving these for higher valueuses while expanding the use of lignite as a combustible. This policy wasdevised before the events of late 1973, though priorities were thereafterintensified in the form of a decree on energy use and development issued inNovember 1973. Among other things, the decree imposed rationing of gasoline,though this was suspended in March 1974, following an increase in the domesticselling price of gasoline. One of the implications of the strategies set forthin the decree is that investment needs in the sector will be greater thanbefore, mainly because technical options favored by the decree for electrical

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power development, such as lignite based, hydro electric and nuclear stations,

are all relatively more capital intensive than the alternatives of gas and oil

fired stations. The plan for 1976-80, now being drafted, will contain provi-

sion for an increased share of investments for energy development.

External Assistance

16. 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. Gross

inflows of convertible currency through medium- and long-term loans were

US$542 million in 1973, having grown from US$276 million in 1967. Romania's

access to convertible finance, however, has been almost exclusively confined

to financial and suppliers' credits with relatively short repayment periods.

The net inflow of convertible capital in 1973, therefore, was only US$238

million.

17. As part of its effort to expand its foreign trade and cooperation

relationships, Romania has also takeni active steps to attract long-term pri-

vate capital. A regulation passed in 1972 defines the conditions under which

foreign firms can establish joint ventures with domestic enterprises, prefer-

ably in foreign exchange earning/saving industries. By mid-1974, four joint

venture agreements had been signed, involving direct foreign investment of

about US$20 million. Romania also receives medium-term trade credits from

U.S. Eximbank and trades under ECGD, COFACE, and HERMES credit guarantees with

the United Kingdom, France and the Federal Republic of Germany, respectively.

In addition, Romania has access to non-convertible currency investment credits

from the International Investment Bank, Moscow, from which it has borrowed

$30 million so far.

18. As it stands, therefore, Romania's access to long-term finance in

convertible currencies is still very restricted. The IBRD is the only major

source of long-term finance providing funds at terms beyond ten years, though

Romania is making efforts to improve its access to the major financial markets.

The Bank's presence on a significant scale would have a positive influence in

this regard, and the Bank might serve as a catalyst for involving other lenders

in Romania. This could serve both to increase the total amount of Bank-

sponsored funds available to Romania and to build outside confidence in the

country, thereby enhancing in the long-term its independent access to the

world's financial inarket.

Prospects

19. The current Five-Year Plan (1971-75), for which original targets

in most sectors appear likely to be exceeded, reflects Romania's continued

strategy of rapid growth. The targets contained in the Annual Plan for 1974,

for example, include a 16.7 percent growth in industrial production, 14.6

percent growth in national income, an investment rate equal to 35 percent of

national income and a 41 percent expansion of foreign trade. In convertible

trade, the plan stipulates a 76 percent increase in export earnings and a 51

percent growth in imports. Figures comparable to these have probably been

achieved which will imply a balance of trade surplus with the convertibleareas this year. The Plan also lays stress on a range of qualitative aspectsof development including technical improvements and diversification in industryand foreign trade, improvements in capacity utilization, development of thenation's human resource potential and a continued emphiasis on regional devel-opment.

20. Romania has good potential for furtlher economic growth. Endowedwith important natural resources (fuels, some minerals, timber, rich soilsand a favorable climate both for agriculture and tourism) and located con-veniently with respect to its major international markets in the East andWest, the country has built a broad industrial infrastructure (power, metal-lurgy, chemicals) which will serve as a base for the expansion of secondarymanufacturing sectors such as machine building and consumer durables. Aboveall, Romania has a hard-working and increasingly skilled population devotedto the achievement of the country's development objectives.

21. Economic growth and structural change call for the introduction ofnew technologies, improvements in the quality of products, more economic useof materials and factor inputs, and reductions in production costs. The in-creasing diversity and complexity of Romania's economic structure requirecontinuing improvements in the efficiency of economic planning and coordina-tion and further refinements in economic management. To keep up withi thesechanges and requirements, large programs of education and manpower traininghave been mounted, and efforts are being made to strengthen technical coop-eration with industrialized countries and international organizations.

Creditworthiness

22. At the end of 1973, Romania's total medium- and long-term externaldebt amounted to $1,519 million. Most of these debts ($1,404 million) weredenominated in convertible currencies, the major creditor countries beingGermany, France, UK and Italy. While the total debt does not appear excessivein relation to the volume and growth of external trade, average maturitiesare relatively short and convertible debt service payments are estimated tobe in the order of $340 million a year during 1974-75. The convertible debtservice ratio was approximately 19 percent in 1973, reflecting the unfavorableterms of foreign credits available to the country. The ratio for 1974 isthought to have declined (to around 10 percent), following a very rapid growthin exports.

23. The organization of economic activity in Romania and the pursuitof a development strategy involving high investment/saving rates and rapid in-come growth ensure Romania's capacity to service external debt if domesticresources can be converted into foreign exchange for that purpose. Moreover,the country's major efforts to expand eA;)orts (particularly to convertiblecurrency areas), to attract private joint venture capital and to seek otherforms of bilateral convertible currency financing are increasing the foreignexchange available for debt service. Convertible earnings rose from $585 mil-lion in 1967 to $1,902 million in 1973. The preferential trade status accordedto Romania by the European Communities in June 1973 should facilitate the furtherexpansion of such exports as could the granting of most favored nation status

by the U.S. In 1973, the Government also restLicted the use of short-termcredit facilities from western suppliers in an effort to improve the structureof the country's external debt. Assuming a continuation of preseut export anddebt management policies it can be expected that the debt service ratio willgradually decline during the second half of the 1970's. The country's presentoutward-looking posture, tha success of both its domestic growth and foreigntrade policies, and its potential for continued development, all support thejudgment that Romania is creditworthy for substantial Bank lending.

24. When Romania joined the Bank, most pre-war foreign debts of thecountry had been settled. The only settlements which were still under discus-sion at that time concerned claims in the United Kingdom and in the United States.The Romanian authorities have rzpeatedly assured the Bank of their intentionto settle these old claims, and have from time to time advised the Bank staffof progress towards settlement. In September, 1974, agreement was reached onprocedures for settling the US claims, and Romania has deaposited $300,000 witha fiscal agent (Manufactures Hanover Trust) for advertisemient and registrationof bonds held by US nationals. The UK claims are larger and more complicated,and meetings to discuss settlement were held in London and Bucharest in No-vember 1973 and June 1974, without any decision being reached. More recentcontacts between the two countries have narrowed somewhat the difference intheir positions, and the discussions are continuing.

PART II - BANK GROUP OPERATIONS IN ROMANIA

25. The proposed loan would be the Bank's fifth operation in Romania.Together with the $70 million loan for the Giurgin-Razmiresti Irrigation Proj-ect being proposed concurrently, it would bring total bank commitments toRomania to $290 million. Bank lending to Romania began in June 1974 with the$60 million loan for the Tecuci Fertilizer Project. This operation was fol-lowed in July by a $70 million loan for the Otelinox Special Steel Project anda $60 million loan for the Turceni Thermal Power Project. Anr.ex II containsa summary statement of Bank loans to Romania and notes on the execution ofongoing projects as of December 31, 1974.

26. Our knowledge of the Romanian economy is improving, but it will takesome time to build up the detailed knowledge of the economy which would allowa sharper focus on the outstanding development problems. At present, foreignexchange, especially in convertible currencies, appears to be a major con-straint. During the early phase in the Bank's relations with Romania, there-fore, one of the major objectives of Bank lending is to help alleviate thecountry's shortage of foreign exchange by providing long-term external capitaland by financing projects which will expand foreign exchange earnings or sav-ings. Bank lending will also aim at supporting the Government's efforts tointroduce new industrial technologies to improve the quality of products, tomake more economic use of materials and factor inputs and to reduce productioncosts. Market aspects and marketing, especially for export goods, will alsobe emphasized. Special attention is also being given to agriculture whereproductivity levels are still low relative to industry and there is heavydependence upon favorable weather. The Government is aware of these problems

and has stepped up efforts to develop the agricultural sector as evidenced byrapid expansion of irrigation, the increasing use of fertilizer and the con-tinuing pursuit of institutional improvements in this sector.

27. The proposed project, and the Giurgiu-Razmiresti Irrigation Project,would support these objectives by assisting in improvement of agriculturalinfrastructure and productivity. The possibilities of financing a pulp andpaper project, and second projects for power and irrigation, are also beingconsidered, and the Bank is currently reviewing a list of project proposalssubmitted by the Government during the 1974 Annual Meeting.

28. Romania is expected to rely upon the IBRD primarily for fundsrequired to finance needed convertible-currency imports, and all of the loanshitherto proposed for Romania have been based solely upon the Bank's financingof foreign exchange needs. At the same time, Romania has developed a relativelyadvanced industrial structure and is in a position to supply a large propor-tion of the equipment and supplies required for the execution of many highpriority development projects. Hence, in a few cases, such as the presentone, it may be necessary and appropriate, if the Bank's lending is to provideadequate support to Romania in high priority fields, to incorporate limitedamounts of local currency financing in particular Bank loans.

29. In addition to lending, the Bank (through EDI) has assisted Romaniaby conducting a project appraisal training course for Romanian officials inBelgrade in October 1973. A similar course is being given in Bucharest inJanuary and February 1975.

30. The projects, for which assistance has been committed or is beingconsidered, represent only a small portion of Romania's total need for ex-ternal financing and of its total disbursed convertible debt. However, theyprovide a substantial net addition to the present inflow of convertible cur-rency finance, and may set a pattern for obtaining longer term convertiblefinance from other sources. The disbursed IBRD debt outstanding to the Bankis expected to constitute about 25 percent of Roniania's total projected con-vertible currency debt in 1979; the Bank's share in Romania's debt servicepayments in 1979 would be about 6 percent.

PART III - THE AGRICULTURAL SECTOR IN ROMANIA

Agriculture

31. Romaniia continues to be a hiighly agrarian country in which progressin other sectors (especially in industry) depends upon stable growth in agri-cultural production to provide botlh convertible foreign exchange earnings andindustrial raw materials. Agriculture accounted for 16 percent of 1973 GNP.In 1973, 58 percent of the population lived in rural areas, and 42 percent ofthe labor force was employed in agriculture compared with 74 percent in 1950.About 14.9 million hectares, or almost two-thirds of the land area, are usedfor agriculture; and of this, 8.5 inillion hectares are in Wallachia, the regioncomposed of the southern plains of the Danube Valley. Approximately 65 percent

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of all agricultural land is used for grain production (mainly maize and wheat),while industrial crops (mainly sunflowers) are the next most important. Vege-tables are also produced, often in large-scale commercial green houses, fordomestic consumption and export. Livestock accounts for 39 percent of agri-cultural production, and the national livestock population consisted of 5.8million cattle, 14.4 million sheep, 8.8 million pigs and 64.5 million poultryin 1973.

32. Investment in agriculture has lagged behind that in other sectorswith 12.7 percent of actual investments in the 1966-70 Plan period, and 14.2percent planned in 1971-75. The investments so far achieved in the first threeyears of the current Plan are 12.4 percent of total for that period. Inresponse to this investment shortfall, the Government has relied on othermeasures, including institutional reforms, price incentives, and productiontargets and delivery schedules to stimulate agricultural production. Agri-cultural production is estimated not to have increased at all from 1966 to1970, though it was characterized by sharp year-to-year variations. The majorproblems of Romanian agriculture are the instability of its output and lowproductivity. The proposed project would support improvements in both ofthese areas.

The Need for Irrigation Infrastructure

33. Instability in agricultural production results from vulnerabilityto erratic weather conditions and the lack of infrastructure to mitigate theimpact of weather changes. Excessive precipitation and flooding during plant-ing and harvest seasons, and inadequate rainfall during summer growing seasons,have resulted in the considerable fluctuations in net output noted above. Onlyproduction of vegetables has increased steadily, reflecting the relatively morecontrolled conditions under which they are produced. The Government is wellaware of this problem and has placed high priority within the agricultural sec-tor on solving it. Forty-five percent of agricultural investment in the cur-rent Five-Year Plan is for land reclamation, irrigaticn and drainage. Since1965, total irrigated land has been increased from about 250,000 hectares to1.25 million hectares, and during the next Five-Year Plan (1976-80) another750,000 to one million hectares are expected to be brought under irrigation.This reflects the high priority which is being given to reducing vulnerabilityto weather and stabilizing production in agriculture.

Agricultural Productivity

34. W4hile some productivity gains have been made in recent years, agri-cultural productivity per worker remains at only about one-third that of in-dustry. In addition to improving its irrigation infrastructure, Romania isalso taking measures to improve productivity through upgrading the qualityof farm mechanization, increases in the supply and utilization of fertilizers,and the promotion of agro-industrial enterprises to provide processing andmarketing outlets for increased farm production. Steps are also being takento reduce inequality between State farms and cooperatives in access to farminputs. State farms, which cultivate 30 percent of agricultural land in thesocialist sector, have been receiving about 42 percent of on-farm investmentin the current Plan period. Cooperatives, on the other hand, which have

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60 percent of such land, have been receiving only about 58 percent of agri-cultural investments. Productivity on State farms is correspondingly higher

than that on cooperatives, but the Government is now moving toward elimination

of the disparities between the two types of farm organization in order to

stimulate general improvement in agricultural productivity.

Sector Organization

35. State enterprises and cooperatives account for the major portion of

agricultural production; individual farmers play a much less significant role,

except in production of a few selected commodities. State enterprises are

generally large scale, capital intensive farms which have been favored in

terms of land allocation, fertilizer distribution and investments in irriga-

tion and mechanization. There are about 360 such farms employing about 300,000

people and cultivating 4.5 million hectares of agricultural land. Workers on

the farms are employed on salaries which are fixed by law. The State farms

are generally well managed by a director (usually an agricultural engineer)who is appointed by the Director General of State farms of the Ministry of

Agriculture and is responsible to a workers' council. The Ministry of Agricul-

ture determines the production plans for individual State farms; it also has

a role in determaining the use of their profits, a portion of which are remittedto the State treasury.

36. There are about 4,500 agricultural production cooperatives with about3,500,000 member families and cultivating about 9.0 million hectares. Workersin cooperatives are guaranteed a minimum income, which is generally lower

than the incomes of their counterparts on State farms, but they are entitledto a share in profits after allowances for reserves and reinvestment. More

than one member of a cooperative family frequently works (on a full- or part-time basis) in the cooperative, and some members are employed outside of the

cooperatives. Cooperators are also allowed to farm about 0.3 hectares per

family in and around their villages for their personal use, and they areallowed to own livestock. Production on personal plots is always intensive,and produce is either self-consumed or sold to consumption cooperatives. A

cooperative is managed by a General Assembly of cooperators and its electedPresident; it reports to the District Director General for Agriculture, the

local representative of the Ministry of Agriculture. About half of the on-

farm investment in the project would be made in cooperatives.

37. Individual farmers number only about 150,000 families and own about

10 percent of total agricultural land. Their land is often located in moun-

tainous regions. The individual farming subsector has not received strongGovernment support but is significant in production of potatoes (15 percent

of production), meat (14 percent of production), milk (19 percent of produc-

tion), eggs (18 percent of production) and wool (12 percent of production).

The Government is aware of the continuing importance of individual farmers in

these areas, and more technical assistance is likely to be provided to them

in the future.

38. At the national level, the State institution in the agriculturalsector is the Ministry of Agriculture, Food Industry and Waters. It plays a

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major role in preparing the Five-Year Plan for the sector and is the super-visory institution for plan fulfillment. In each district, the Ministry isrepresented by a General Directorate, which is responsible for all agriculturalactivity in the district including both cooperatives and State farms. Mar-keting is organized nationally under ten Centrals accountable to the Ministryand responsible for processing and marketing specified commodities. EachCentral obtains produce at the district level and allocates it among domesticretail, processing, storage and export channels. A specialized agency isresponsible for the exports of each Central.

The Borrower

39. The Borrower for the proposed loan would be the Bank for Agricultureand Food Industry (BAFI), which is the Government's specialized agency for in-vestment projects in agriculture, irrigation and food processing. BAFI wasestablished in 1968 as a channel for, and administrator of, all investmentfunds provided under the State plan for the agricultural sector. Financingin agriculture had previously been done by a department of the National Bankof Romania. BAFI is involved in all phases of project appraisal, executionand supervision, and it has a large technical and economic staff located inBucharest, in 39 county (Judet) branch offices and 100 sub-branches throughoutthe country. One of BAFI's more important functions is that of fiscal agentadministering, for the account of the national budget, all Government invest-ments in State farms and enterprises. BAFI also receives interest-free fundsfrom the State budget for investment lending to cooperatives and repays theGovernment as it receives repayments of sub-loans from the cooperatives. BAFIhas thorough review and approval procedures for all investment projects. Inaddition to BAFI's review, all subprojects for more than Lei 10,000,000(US$500,000) are reviewed and approved by the Ministry of Agriculture andthose greater than Lei 70,000,000 (US$3.5 million) must be approved by theCouncil of Ministers. In addition to its investment project work, BAFI pro-vides short term credit to, maintains settlement accounts for, all coopera-tive and State agricultural enterprises; it also acts as fiscal agent for theGovernment for collection of State revenues from these enterprises. As theGovernment's channel for investment financing in agriculture, BAFI's primarysource of funds is the State Budget. The Guarantee Agreement, therefore, in-cludes a provision (Section 2.02) that the Guarantor shall provide all neces-sary funds for the implementation and operation of the project.

PART IV - THE PROJECT

Project History

40. In 1970 Romania began construction of the 74,600 hectare Sadova-Corabia Irrigation Project which was completed in south-western Romania alongthe Danube in May 1974. In anticipation of the completion of irrigationworks, Romania requested in January 1973 that the Bank finance a portion ofthe on-farm development in the region. Bank missions reviewed this proposal

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in June and November/December 1973 and January 1974, and the project was ap-praised in May 1974. Negotiations were held in Washington in December 1974.The Romanian delegation was led by Mr. Ion Rusinaru, President of BAFI, andincluded representatives of the Ministry of Agriculture and Ministry ofFinance.

Project Description

41. The project is based upon the ten-year investment program for on-farmdevelopment and agro-industries required to bring the Sadova-Corabia irrigationscheme into full production. This investment program was started in 1971 inorder to increase production and incomes in what has been, because of itssandy dunes and insufficient water supply, one of the poorest regions of Romania.The basic strategy of the program has been (i) to intensify cultivation of cropsbenefitting most from irrigation and also in demand domestically and interna-tionally, (ii) to develop the important livestock sector, and (iii) to providethe necessary agro-industrial processing capacity to handle the production ofthe region. The project consists of about 40 percent of the ten-year investmentprogram and covers subprojects to be started between 1975 and 1978. It alsoincludes dairy farming in the region surrounding the irrigation scheme.

42. Credits under the project would be used to establish about 2,050hectares of modern orchards (peaches, apricots and cherries) and about 2,000hectares of grapes. A fruit handling and storage complex would be constructedto handle the increased production, and 15 refrigerated trucks would be pur-chased to transport fruit and vegetables to domestic and export markets. Aleaf analysis laboratory would also be established to determine the types andamounts of fertilizers which should be used in orchards and vineyards. Theproject also includes a substantial dairy farming component with eight completedairy farms and imported heifers for four additional farms which are alreadybeing constructed. Integrated with dairy farming would be two beef-fatteningfarms which would purchase and fatten male calves from the dairy farms. Insupport of these livestock components, the project would finance a feed milland silo, and a premix feed plant would be constructed to supply protein con-centrates to this and other feed mills. The project would also include machineryand equipment for farm mechanization services to cooperatives. Training wouldbe provided under the project for technicians in dairy farming, beef fattening,livestock research, fruit handling and storage and leaf analysis, as well aseconomists in agricultural appraisal, financing, production and marketingtechniques. Annex III contains a loan and project summary; the AppraisalReport (No. 582a-RO, dated January 14, 1975) is being circulated separatelyto the Executive Directors.

Project Execution

43. The project would be administered by BAFI and its branches in theDolj and Olt districts. BAFI's branch offices would be responsible for directsupervision of the financial and administrative execution of the subprojectswhich would be executed by cooperatives, State farms and State agro-industrial

- 13 -

enterprises. Subprojects costing $500,000 or more would also be reviewed bythe Bank, and a number of stch subprojects have al_:eady been reviewed andapproved. Technical assistance to the cooperatives, State farms and Stateenterprises carrying out subprojects would be provided by units of the Ministryof Agriculture under a well developed program of assistance to such entities.The Ministry would also malke all necessary arrangements for internationalprocurement which would be coordinated by its Directorate for the Land Re-sources, Organization, Standardization and Remuneration.

Project Cost and Financing

44. The estimated total cost of the project is US$59.5 million, with anestimated foreign exchange component of US$22.6 million or 38 percent of totalcosts. A price contingency of 11 percent in 1975 and 7.5 percent annuallythereafter has been used for imported materials and equipment. Local costsare based upon fixed Romanian prices. A relatively low physical contingencyof 7 percent has been included as final plans and specifications have alreadybeen completed for most subprojects.

45. The proposed Bank loan of US$30 million would finance 50 percent oftotal project costs representing an estimated US$22.6 milllon in foreign ex-change costs and US$7.4 million in local costs. An explanation is providedin paragraph 28 above of why it may be appropriate to provide some local cur-rency financing for projects in Romania which have high economic priority butrelatively small foreign exchange components. The remaining project costswould be financed by yearly allocations from the Government budget (TJS$24.3million), couperatives (US$1.3 million), and State farms and enterprises (US$3.9mill ioIl) .

Lending and Relending Terms

46. The proposed loan to the Bank for Agriculture and Food Industry(BAFI) would be guaranteed by the Government and would be for a term of 20years, including five years grace, at an interest rate of 8 1/2 percent perannum. BAFI would relend the proceeds of the loan, together with funds receivedfrom the Government, for anortization and grace periods no longer than those onthe Bank loan aud consistent with the expected implementation periods and yieldsof subprojects and with the repayment capacities of subborrowers (Section 3.02(b)of the Loan Agreement). Current Romanian practice is to lend to cooperativesat tlhree percent, and to State farms and enterprises at four percent, for up to20 years, including up to five years grace. Although this will be the firsttime that State farms have undertaken major investments with non-budget financing(i.e. with long term, interest bearing loans), it is proposed to maintain theseinterest rates in lending operations under the present loan.

47. These interest rates appears low in comparison with other membercountries, but there is virtually no inflation in Romania. The State sets andcontrols almost all prices, and it exerts direct control over incomes andmoney. The central principle of pricing in Romania has been that prices forgiven goods remain fixed for long periods. Production enterprises, which are

- i4 -

confronted with fixed prices for both inputs and outputs, are expected to pur-sue profit increases through cost minimization. Wage increases are controlledto be always less than productivity growth and the economy has been insulatedfrom foreign inflation by a system which automatically offsets foreign pricemovements through internal equalization payments. Producer (wholesale) priceswere last reset in 1963. The retail price index of 100 in 1963 was 101.4 in1973.

48. The new price law introduced in 1971 provides for a more frequentadjustment of producer prices, the first round of which is now being imple-mented. The law, in conjunction with a regime of foreign trade pricing in-troduced in January 1974, increases the scope for price changes of importsto be reflected in the cost structure of domestic industry. In principlethis increases the possibility that Romania's domestic prices will be influ-enced by world inflation. However, indications are that such effects will bekept to a minimum, for at least three reasons: (a) under the new foreigntrade regime the tariff component of the price of an import is to be used asa cushion against foreign inflation, the tariff being reduced when foreignprices rise; 1/ (b) increases in the price of imports will result initiallyin reduced profit margins rather than domestic price increases; (c) whilesome price increases may be inevitable, these will continue to be offset byprice reductions in those industries where costs have declined. A measureof the influence of these factors is thiat, in the resetting of producerprices presently being implemented (to be completed by the end of 1975), itis expected that the final movement in the index of these prices will be a3.3 percent increase over the level in 1963 (i.e. an annual average increaseof 0.3 percent over a period of twelve years).

49. Interest rates in Romania are paid on investment credits, workingcapital loans and loans to individuals. These rates are institutionally deter-mined by the central authority and are not influenced by the forces of demandand supply of capital, since there is no money market in Romania. Conceptually,therefore, they are more akin to a tax on capital than to a "price" of capital.By the same token, they do not necessarily reflect the social opportunity costof capital because the return of resources to capital investments is made notonly througlh interest payments but tlhrough taxes and the net surplus afteroperations which is retunied by the state enterprises to the state budget.Interest rates, tlherefore, are relatively low. However, from the absence ofsignificant inflation in the economy, it follows that the relatively low nominalinterest rates result in real rates whicii are quite high in comparison witireal rates of interest prevailing in many countries today.

1/ The Romanians are applying the new regime with considerable caution whichillustrates their determination to prevent internal inflation. Sincerecent price increases for raw materials lhave been more marked than thetariff cushion could allow for, ttue operation of the new pricing regimehas been temporarily suspendecl on this category of goods, which are nowpriced under the previous system which provides a cushion against foreigninflation through automatic payments from the equalization fund.

- 15 -

Audit

50. BAFITs transactions are subject to continuous control by internalauditors appointed by the Ministry of Finance and to once-a-year audit byinspectors from the Court of Superior Control whose reports may go to the Coun-cil of Ministers and the President himself, if necessary. BAFI's accountingsystem and the audit of its transactions are satisfactory and BAFI's auditedoperating and financial results would be reported to the Bank not later thanfive months after the end of BAFI's fiscal year (Sections 6.01 (c) and (e) ofthe Loan Agreement).

Procurement

51. US$37.1 million of materials, equipment and livestock to be used forthe project would be procured either through international competitive bidding,or on the basis of international price quotations, in accordance with the BankGuidelines. Contracts for US$21.6 million of materials and equipment whichcan be bulked for tendering in amounts of US$100,000 or more will be awardedon the basis of international competitive bidding; included among these con-tracts would be specialized equipment needed for the feed mills and the fruitstorage unit which would be procured on the basis of equipment orders whosecomposition will be determined in agreement with the Bank to guarantee thetechnical integrity of these facilities. For purposes of bid comparisonunder international competitive bidding, local suppliers would be accorded apreference of 15 percent or the applicable customs duty, whichever is lower.In the spring of 1974, a law was passed to allow bidding between local andforeign suppliers; and it is expected that at least one-third of the amountof i.c.b. contracts would be won by foreign suppliers. Cost estimates arebased upon a conversion rate of US$1 = 20 lei. Since Romanian currency is notfreely convertible, international tender documents would state the conversionrate to be used for bid evaluation. About US$2.9 million of small contractitems not available in Romania and female dairy cattle expected to cost $12.6million would be procured on the basis of price quotations from suppliers inat least three countries (Schedule 4 to the Loan Agreement).

Disbursements

52. The Bank loan would be disbursed for (i) 58 percent 1/ of the amountsdisbursed by BAFI for approved subprojects and (ii) 100 percent of the foreigncost of the leaf analysis laboratory and training financed under the project.

Benefits

53. The project would increase the gross value of annual agriculturalproduction in the project area by an estimated US$13 million annually at fulldevelopment. The principal output of the project would be peaches, grapes,milk and beef. The project would help to meet growing domestic demand, im-prove incomes of about 1,700 families working on cooperative farms and yield

1/ Percentage computed to disburse 50 percent of estimated total costs(including contributions of cooperatives and State entities) in fiveyears.

- 16 -

direct revenues to the State from general taxes and State farm earrings. The

economic rate of return for the project is estimated at 16.5 percent.

54. Full-time employment would be provided by the project to some 2,600

skilled and unskilled workers. In addition, it is estimated that temporary

work for about three months a year would be available to some 3,300 persons.

The most striking improvement would occur in the incomes of permanent coop-

erative workers and the seasonal workers (who also come from cooperatives).

Their incomes are expected to rise by at least 50 percent, and incomes of

permanent cooperative workers would approacih those of State farm employees.

In addition, indirect employment would result from the provision of input sup-

plies and from handling and processing of project output. The project would

also increase labor productivity. The project would have no adverse effect

on the environment.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

55. 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, the report of the Committee pro-

vided for in Article III, Section 4(iii) of the Articles of Agreement and the

draft resolution approving the proposed loan are being distributed to the

Executive Directors separately. The special features of the loan documents

are described above.

56. I am satisfied that the proposed loan would comply with the Articles

of Agreement of the Bank.

PART VI - RECOMMENDATION

57. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

AttachmentsJanuary 15, 1975Washington, D.C.

Page of- 2 page3

COUNRYT DATA - ROMANIA1

AREA POPULATIONw DENIm7

237,500 2sa 20.70 slie(mid-1972)Per keSsf aruble land

SOCIAL ThOSCATORI

Reference Countries

Romania Cuosaia Italy W4. OersanyIW 1970 IWO170 97 197

GNP PER CAPITA 112$ (AT.AflBASIS) 330 /u 6104I 810/b 1,9~60 /b 3,3flO/l

DEMOORAF9IICC_3.bthrate (Per tAhoosad) 19 19.6 /uf 1d.2 ab lb.,I 11.6 Il

Crude denth rate (per thousand) 9 9.5 /uf 5.6 ab 9.6 /i1 11.0 IL"

Wnant eurtality rate (per thousand ljbs births) 75 6.2.1 TK5 0.7 2 7,.; 'of 23.3 7-0f

Life especta..ry at birth (years) 66 70 67 71.1 69.4

Oruse repruductio rat 0.6 /c 1.3 1.3 0.9 1.2

Population grauti rut 1.1 1.0 /d 1.0 Id 0.7 /d 0.9 Id

Population growth rain - urban 4 Is 3 75 3 7? 0.7 5h

Ago st-utors (par cent)10-16 28 /c 20 28 26.3 23.0/s

15-6L 65 75 65 64 66.y 63.6 ref65 and os-r 77 9 8 10.8 13.4 Taf

De,a.sdecy ratio 1%0.5 72C 0.7 0.8A/ 1.0 /1 0.6

Uriac perclatioc as prerost uf tutal3 0 4A 5I 5Fanily planning: R- of acceptors ccltvs(thuos.) 32Is 6 jjIh~ /, 38 t..k

No. of users (8 Of macrind cso

EMhLOYMNTSTata1 labor force (thoo=sad) 9,600 /1 9,900 11 9,600 1 9,n00 /s 26,800 /n,uf

Peroategs ssploysd in agricultore 66 75 49 751 52 17 8.2 7r7r7-

Perc..ctags oos,epioyed 0 0- 8 o.8 7C7C-f

INIOME DISTRIBUTIONPorcot of catisnal booms rciv-d by highost 5% I.s- 5I/,

Percet of satic...l ico.o received by highest 20% .. .. 4

P.erot of outiocal i -u-rcived by lowest 20%..s 77

P.rcent Of outio..al iscm roceis-d by loanni 60% . .19

lISThRC710iO OP LARD OWNISHIHP% osod by top 10% of ownrs% onood by seallest 10% of aoners ..

HEALTH AND NUTRI TIONFPp.alatioo Per physician 760 /a 860 / 1,010 550 680

PPeplatio Pe r cursing per-o 300 200 -370 /r 70 /s 350

.Peplation Pe r hospital bed 160 120 180 - 90) 90

Per capita caoiespply as 5 Of rqieet 1)0 110 125 ic I2l It 120 /t

Per capita protein ripply, total (grmas per day) 6 82 82 927 68 75 83 75

Of which, animal and poles 26 28 29 75 ul 75t 56 75Death rate 1-6 years /7 5 Ic 3 /l 2.c 7 5.0 0.9 La0

EDUICATIONAdjusted /Q primary sohool orol1leect ratio 92 109 9. 107 132

Adjosetd secondary ecthl unrolset ratio L2 62 65 59 62

Tears cf sach.olin.g provided, first and s.eond level 12 12-li 12 13 12-151

Vocetio-l sosoll..ot as 5 Of e.- schuol s4oroll,7ss2t cAdult litoracy rate S 9/1589/o 7 26 6

ROUSINAverage No. Of pere..n per eons (urban) .1.3I /c .1/aa1 1. /v 0 7 c

Percent Of occuPied units ithont piped auter .. si 7¾b 3? 38 i 7,ib .1 _

A~coss tn elsoiricity (as 5 of total peplation) .. 49 ~E a 7iid 96 lead 99 /a-d

Percast of Aural pepoatian -oo..cted to electricity .. 27 /r'.ao_

CONUSIrGTIONLETro -roioers per 1000 pepdlatioc 109 151La/ 171/

2 33u 3Zb/

Pas..e ger c.ar per 1000 peplatioc..3-9 3220

Electric peser o-o-aptlon (bus p.c.) 635,651,8 2,26 2207

Newsprint coosoorptio p.c. ig per ysar 0. 2cL 1,288 2.2/c 41675

Notes, Pigur- refer sitter to lbs blen.t perIods or to accuat of nn-iro,annta1 tesperatrar, body weights,an

the latest yearn. Latent periods refer to principle to dietrihation by age and as Of national poPulatione.

tie years 1956-60 or 1966-70; ito latrot yearn in pri.i- /6 Protein etandarde (reqairesenta) for all countries an estab-

ciple on 1960 and 1970. lished by SODA Enunoolo Researh Service provide for a mi.i.ue

a1 Tie for Copoca GNP mnti-e is at nakit price for allowu- of 60 gram Of total protein Per day, an 20 gram of

yours dis- than i960, calcoluted bY the cans coveelo nia an Pulse protein, Of shioh 10 grana sbould b. animal

techoique an tin 1972 World bunt itlun. protein. These stdadr-d. a -esoehat lowe than thoas of 75/2 Aeeruge unibr Of daughters pe, r ca of reproductive grama Of total protein and 23 gramss af animal proteie aa an

age. -aerage for tha acrid, proposd by FAO in the Third World Plod

aI Pnpulctioo goctb rnt-o or fur tie decud-o roding lo / S_.cY.1960 and 1970. /7 Som etodies have agg-etd that crde death rates of children

R Stlo .Of under 15 and 65 and ove age iraciest to ~ urn 1 thruagh 4 say be used as a first approtsation inde of

tih.e i labor forc iracket of ogon 15 tirough 66. malntrition.

Fj AO "efe"reoc stadurdo repreosut piysi.olgical ro- /A Peronotgs carolled of cor-epenling population of school age

qui,rento fo rocre1 crtioity cod health, tokiog as deftoed fcr each cuatr.y.

/a Is 1972 1155 cuonerted at tie rate of DO Lin per USO; 2h 1977; /c 19062; Id 196'0-72; / ue tosic en 183

utter lonaliti.a ihslng urban u0cio-ecanumio obarateri;tice; /f -For the defflition of ur1ba see Demographic Tearbuok

1972, p. 157; g 1971 .ssaoa; /h Popolatios over 2,000; 75 etie of POPol-ti-s under 15 aed 65 aed user. to ittel

inoor force; ~1 1969; /6 Definition Of urban sot avaIlable;, /1 Estimate; Is Dyer 10 years old; /o Estimate

ocsnd on tie raulto .Of a la-bor frca sample surry; /o 1968; SF House.holds; -7 Inclu1des dentists; 7r I-ciodes

midwIve; Ia Hsnpital pernoanel; It 1969-70; /a Pill-time edouction only! 72~ 196l' Ic Pnpuiatinirover 15

ye.ar; /n Isefioitioc 00t aclahe Z 1966; 77 rhan and roral; an Data refer to; d.ailiogs; lab Percetage

of doallingo iltisot piped outer molids; /ac libna units only; /ad Percentags Of dualinge vwith electriTai

lighting; /a- Percentage of -rura dwelli-ngs witi electrical lighting-; /af 1971.

2960 1970fnrcsct of salaried ...rkrn earning oor. tca 2,500 Lisi.

Percent of salaried ...rters marcio,g lass tiac 1,100 Lei . 24.3

o Oreay h"bau - selected nacobjoctice coactry becaus itiIs an industrialiaed EurcPea country with maJor trade

to i- ictanna

iS J-nory 13, 1975

A.M4.

ANNEX I

Page 2 of 2 pages

ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTI (%. constant prices)

US$ Mln. % of G?P 1961-65 1966-70 1973

GNP at Market Prices 18,585 100 9.0 L. 7.7 /1 10.7 /1

Cross Fixed Domestic Investment 5,283 28 11.3 11.2 9.1

Exports of Goods 3,738 20 9.0 /2 10.9 /2 3.9 /2

Imports of Goods 3,505 19 10.7 /2 12.7 /2 33.9 X2

LABOR FORCE IN 1973 GOVERNMENT FINANCE

Mln. % General Goverrment

(lei Bill.) /. of NNI LAgriculture 4.2 42 1973 1973 ___-0_

Industry 2.8 28Services 3.0 30 Current Receipts 176.0 60.9 59.8

Cturrent Expenditure 168.1 58.2 50.1;Total 10.0 100 Current Surplus 7.9 2.7 9.4

Capital Expenditures 42.2 14.6 14.4BALANCE OF PAYMENTS

-

(Mln. US $)RETAIL PRICES 1969 1970 1971 1972

1967 1971 1972 1973 (1966 = 100) 100.6 101.0 101.6 101.6

Exports of goods 1,396 2,102 2,592 3,667 MERCHANDISE'EXPORTS (AVERAGE 1970-72)

Imports of goods 1,546 2,102 2,615 3,424US $Mln. %

Trade balance -150 0 -23 +243 Capital goods 517 24

Net services -6 -23 -31 -107 Consumer goods 404 18

Foodstuffs 283 13

Balance on goods and services -156 -23 -54 +136 Intermediate goods 232 11

Raw materials 748 34Net MLT capital 152 5 22 83 Industrial (426) (19)

Disbursements 317 350 464 589 Agricultural (322) m

Amortization -165 -345 -442 -506Total 2,184 100

Residual balance -4 -18 -32 -219EXTERNAL DEBT, DECEMBER 31, 1973

RATE OF EXCHANGE US $ MIn.

Total 1,519

Official rate: Tourist rate: of which convertible currencies 1,404

US$1.00 = lei 14.97 US$1.00 = lei 12.00Lei 1.00 = US$0.20 lei 1.00 = Us$0.08 DEBT SERVICE RATIO FOR 1973

National income conversion rate: Convertible currencies only 19

US$1.00 = lei 20

lei 1.00 = US$0.05 IBRD/IDA LENDING, 11ecsember 1974. (illion US $)IBRD IDA

Outstanding incl. Undisbursed 190 -

L Net National Income January 10, 1975

/2 Current prices. 8IeNA Region

ANNEX IIPage 1 of 2 pages

STATUS OF BANK GROUP OPERATIONS IN ROMANIA

A. STATEMENT OF BANK LOANS (As of December 31, 1974)

Amount in $millionsLoan Less Cancellations

Number Year Borrower Purpose Bank IDA Undisbursed

Ln 1020-RO 1974 Investment Fertilizer 60.0 - 60.0Bank

1/Ln 1027-RO- 1975 Investment Special 70.0 - 70.0

Bank Steel

Ln 1028-Ro 1975 Investment Thermal 60.0 -6o.

Bank Power190.0 190.0

Of which repaid

Total now outstanding 190.0 - 190.0

Amount sold - -

of which repaid -

Total now held by Banj' 190.0

Total undisbursed 190.0 190.0

B. STATEMENT OF IFC INVESTMENTS (As of December 31, 1974)

None

/ Not yet effective

i/ Excluding exchange adjustments

ANNEX IIPage 2 of 2 pages

C. PROJECTS IN EXECUTION

Ln. No. 1020-RO Tecuci Fertilizer Project; US$60 million Loan ofJune 28, 1974; Closing Date: December 31, 1978:

This loan was approved by the Executive Directors on June 27, 1974.It was signed on June 28, 1974 and became effective on December 31. The Gov-ernment has informed us of its desire to change the project site from Tecucito Bacau which may be more advantageous from the point of view of controllingeffluents, and has submitted to the Bank additional information on the tech-nical and economic merits of the proposed new site of Bacau. Meanwhile, pro-curement arrangements are proceeding on schedule and no significant problemshave been encountered in project implementation.

Ln. No. 1027-RO Otelinox Special Steel Project; US$70 million Loan ofJuly 10, 1974; Closing Date: December 31, 1979

This loan was approved by the Executive Directors on July 5, 1974,and signed on July 10, 1974. Suppliers on short lists of firms for bar milland rolling mill contracts have been invited to express their interest in theproject, and detailed tender documents are expected to be sent to them inFebruary. The deadline for loan effectiveness is February 28, 1975.

Ln. No. 1028-RO Turceni Thermal Power Project; US$60 million Loan ofJuly 10, 1974; Closing Date: June 30, 1979

This loan was approved by the Executive Directors on July 5, 1974.It was signed on July 10, 1974 and became effective on November 6. Procurementarrangements for the project are proceeding on schedule and no significantproblems have been encountered in project implementation.

ANNEX IIIPage 1 of 4

ROMANIA

SADOVA-CORABIA AGRICULTURAL CREDIT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Bank for Agriculture and Food Industry (BAFI)

Guarantor: Socialist Republic of Romania

Beneficiaries: Cooperatives and State-owned enterprises.

Loan Anmount: US$30.0 million equivalent.

Terms: Repayable in 20 years, including a 5-year grace period,through semi-annual installments beginning February 1,1980, and ending August 1, 1994. Interest at 8 1/2 per-cent per annum.

RelendingTerms: Relending at 4 percent per annum to state farms and enter-

prises, and at 3 percent per annum for cooperatives. Ainortiza-tion up to 20 years, including up to 5 years grace.

ProjectDescription: The project consists of about 40 percent of the ten-year

investment program for on-farm development and agro-industriesrequired to bring the 74,600 ha. Sadova-Corabia irrigationscheme (in southwestern Romania along the Danube) into fullproduction; it also includes some investment in dairyfarming in the region around the Sadova-Corabia area.The project would include development of about 2,050 haof orchards, 2,000 ha of vineyards, eight complete dairyfarms and heifers for four existing farms, two beef fatteningfarms, a fruit handling and storage complex, 15 refrigeratedtrucks, a feed mill and silo, a pre-mix feed mill, machineryand equipment for farm mechanization services to cooperatives,a leaf analysis laboratory, and training for technicians.The Project would be administered by BAFI. Loans would bemade to cooperative and State-owned enterprises on the basisof detailed plans, most of which have been completed.

ANNEX IIIPage 2 of 4

Cost Estimates:

Lei Million In US$ Million % of % ofFor- For- For-

Local eign Totals Local eign Totals eign Total

Orchard Establishment .... 69.5 11.2 82.6 3.5 0.6 4.0 14 7Vineyard Establishment ... 90.8 13.2 103.9 4.5 0.7 5.2 13 9Pasture Establishment .... 16.8 -.- 16.8 0.8 - 0.8 - 1

Buildings andConstructions ............ 343.8 . 343.8 17.2 - 17.2 - 29

Machinery and Equipment .. 107.3 69.9 177.2 5.3 3.5 8.9 39 15Laboratory Equipment ..... -.- 2.0 2.0 - 0.1 0.1 100 N

Refrigerated Trucks ...... 6.6 13.2 19.8 0.3 0.7 1.0 67 2Breeding Animals .... ..... -.- 219.1 219.1 - 11.0 11.0 100 19

Technical Services ....... 33.5 -.- 33.5 1.7 - 1.7 - 3Technical Training.-.- 2.0 2.0 - 0.1 0.1 100 -

Capitalized Costs duringConstruction ..... ....... 18.1 . 18.1 0.9 - 0.9 - 2

Total Base InvestmentCosts ... 686.4 330.6 1,016.9 34.3 16.5 50.8 33 86

Physical Contingency ..... 52.9 15.8 68.7 2.6 0.8 3.4 23 6Price Contingency.-.- 105.1 105.1 - 5.3 5.3 100 9

Total Investment Cost .. .. 739.3 451.4 1,190.7 36.9 22.6 59.5 38 100

ANNEX IIIPage 3 of 4

Financing:

BAFI LoanState BAFI

Cooperatives Enterprises Resources /1 IBRD Loan TotalUS$M % US$M % US$M % US$M % US$M

Orchards ........... 0.1 1 0.2 3 3.3 46 3.6 50 7.1Vineyards .0.2 2 0.1 2 4.5 46 4.9 50 9.8Dairy Farming .0.8 5 3.2 19 4.3 26 8.3 50 16.6Dairy Animals . . . - 2.3 50 2.3 50 4.6Beef Fattening .0.3 14 0.3 14 0.5 22 1.1 50 2.2Fruit Handlingand StorageComplex .-. - -.- - 0.6 50 0.6 50 1.2

RefrigeratedTrucks ... - - .- - 0.5 50 0.5 50 1.0Feed Milland Silo .-.-.-.- - 2.2 50 2.2 50 4.4

Pre-Mix Feed Mill -. - -. 5.9 50 6.0 50 11.9Machinery Pool - . . - 0.3 50 0.3 50 0.6

Sub-Totals .1.3 2 3.9 7 24.3 41 29.8 50 59.3

Leaf Analysis Lab .... -.- . - -.- - .- 0.1 100 0.1Technical Training .- - . - . - 0.1 100 0.1

Totals ......... 1.3 2 3.9 7 24.3 41 30.0 50 59.5

/1 From Government Budget.

Estimated Disbursements:

IBRD Fiscal Year Amount (US$ million)

1975 2.71976 5.81977 6.61978 6.91979 8.0

ProcurementArrangements: US$37.1 million of materials, equipment and livestock to be used

for the project would be procured either on the basis of inter-national competitive bidding, or on the basis of internationalprice quotations, in accordance with the Bank Guidelines.Contracts for US$21.6 million of materials and equipment which

ANNEX IIIPage 4 of 4

can be bulked for tendering in amounts of US$100,000 or more

will be awarded on the basis of international competitive

bidding; included among these contracts would be the spe-cialized equipment needed for the feed mills and the fruit

storage unit which would be procured on the basis of equipment

orders whose composition will be determined in agreement with

Bank to guarantee the technical integrity of the facilities.

For purposes of bid comparison under international competitive

bidding, local suppliers would be accorded a preference of15 percent or the applicable customs duty, whichever is lower.

In the spring of 1974, a law was passed to allow biddingbetween local and foreign suppliers; and it is expected that

at least one-third of the amount of i.c.b. contracts would be

won by foreign suppliers. Cost estimates are based upon a

conversion rate of US$1 = 20 lei. Since Romanian currency isnot freely convertible, international tender documents would

state the rate to be used for bid evaluation. About $2.9

million of small contract items not available in Romanlia ad(i

female dairy cattle expected to cost $12.6 million would beprocured on the basis of price quotations from suppliersin at least three countries.

TechnicalAssistance: Specialized and on-the-job training outside of Romania under

programs to be agreed with the Bank for technicians in the

fields of dairy farming, beef fattening, livestock research,

fruit handling and storage, and leaf analysis, and for economistsin agricultural appraisal, financing, production and marketingtechniques.

Economic Rateof Return: 16.5 percent

AppraisalReport: Number 582a-RO of January 14, 1975

EMENA Projects Department

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