Document of The World Bank FILE COpy FOR OFFICIAL USE ONLY Repor No. P-2924-RO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO TEE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE A)ND FOOD INDUSTRY WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR A FOURTH LIVESTOCK PROJECT December 3, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Leu (Plural Lei) 1. Official Rate Lei 4.47 = US$1.00 Leu 1.00 = US$0.22 2. Tourist Rate Lei 12.00 = US$1.00 Leu 1.00 = US$0.08 3. Conversion Rate for Traded Goods (as of January 1, 1981) Lei 15.00 = US$1.00 Leu 1.00 = US$0.07 The Official Exchange Rate of lei 4.47 per US$1 is used only for accounting purposes. The rate used for tourist transactions is lei 12 per US$1. Beginning on January 1, 1981, a trading rate of lei 15 per US$1 will be used to convert the prices of all traded goods. Fiscal Year January 1 to December 31 GLOSSARY OF ABBREVIATIONS BAFI - Bank for Agriculture and Food Industry (Banca pentru Agricultura si Industrie Alimentara) CAP - Agricultural Production Cooperative (Cooperative Farm) ERR - Economic Rate of Return ICA - Inter-Cooperative Association IAS - State Agricultural Enterprise (State Farm) MAFI - Ministry of Agriculture and Food Industry SMA - Agricultural Mechanization Stations (State Mechanization Units) UAC - Unified Agro-Industrial Councils FOR OFFICIAL USE ONLY ROMANIA LIVESTOCK IV (CATTLE) PROJECT LOAN AND PROJECT SUMMARY Borrower: Bank for Agriculture and Food Industry (BAFI) Guarantor: Socialist Republic of Romania Beneficiaries: State farms, Cooperatives, Food processing enterprises, and individual producers. Loan Amount: US$80 million Terms: Repayable in 15 years, including a 3-year grace period, through semi-annual installments. Interest at 9.25 percent per annum. Relending Terms: Relending to State enterprises at 2 percent per annum during construction and 4 percent after construction. Relending to cooperatives and individual producers at 3 percent per annum. State enterprises subloan maturities would be up to 10 years including up to 3 years grace, and cooperative subloan maturities would be up to 16 years including up to 3 years grace. Individual producer subloans would be for 5 years. The Government would bear the foreign exchange risk. Project Description: The project would consist of selected investments undertaken between mid 1981 and mid 1984 as part of Romanian Five Year Plan for 1981-1985 for milk and beef production. The project would comprise about 60 percent of the total planned investment over the three year period, and include; 92 new and 32 modernized dairy farms, 17 new specialized breeding heifer production farms, 19 new beef fattening units, 109 improved pasture units, milk and beef processing and storage facilities, on-farm production of milk, meat and breeding animals by individual producers, and technical services and research. The project would address the unsatisfied domestic demand for milk and beef products and generate additional foreign exchange earnings. Substantial production efficiency improvement is expected through technical innovations and institutional improvements under the project. At full development, incremental project production would reach about 3.8 million hectolitre (hl) of milk, 40 thousand tons of carcass beef and 33 thousand breeding heifers. Additionally, a This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - substantial amount of fertilizer would be produced from the incremental farmyard manure. The project would reach full development in 1985-1987, and faces no greater risks than can normally be expected with operations of this type. Cost Estimates: Foreign Local Exchange Total ------------ Million ----------- Dairy Farms 107.5 44.3 151.8 Heifer Rearing Farms 9.2 5.2 14.4 Dairy Farm Modernization 9.6 6.0 15.6 Beef Fattening Farms 20.4 7.6 27.9 Meat and Milk Processing and Storage 18.0 7.7 25.7 Pasture Improvement 27.7 9.0 36.7 Credit to Individual Producers 18.1 7.7 25.8 Technical Services and Research 3.2 3.0 6.3 Incremental Working Capital 44.6 14.6 59.2 Base Cost 258.3 105.1 363.4 Physical Contingencies 7.7 3.3 11.0 Price Contingencies 8.0 29.8 37.8 Total Project Cost 274.0 138.2 412.21/ Financing Plan: Local Foreign Total ----------US$ Million ---------- Bank for Agriculture and Food Industry (BAFI) and Cofinanciers 164.9 58.2 223.1 Sub-borrowers 109.1 - 109.1 TBRD - 80 0 80.0 Total 274.0 138.2 412.2 Estimated $ Million Disbursement: FY 1982 1983 1984 1985 Annual 13.3 25.9 27.5 13.3 Cumulative 13.3 39.2 66.7 80.0 Economic Rate of Return: About 22 percent on 88 percent of the total costs for which benefits have been quantified. Appraisal Report: No. 3139a-RO, Date: November 24,.1980 EMENA Projects Department 1/ Including tax and duties of $1.8 million. REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANK FOR AGRICULTURE AND FOOD INDUSTRY OF ROMANIA FOR A FOURTH LIVESTOCK PROJECT 1. I submit the following report and recommendation on a proposed loan to the Investment Bank of Romania, with the guarantee of the Socialist Republic of Romania, for the equivalent of US$80 million to help finance a Fourth Livestock Project. The loan would have a term of 15 years, including 3 years of grace, with interest at 9.25 percent per annum. Cofinancing of up to US$100 million is being sought, all from commercial lending institutions. PART I. THE ECONOMY1/ 2. The first basic report on Romania (Report No. 1601-RO, "The Industrialization of an Agrarian Economy under Socialist Planning") was circulated to the Executive Directors on April 20, 1978. An updating Country Economic Memorandum (CEM) discussing the New Economic Measures was introduced in January 1979. The CEM was circulated to Executive Directors on August 20, 1980 (Report No. 2757-RO). Country social and economic data are given in Annex 1. A. Long-term Trends and Development Strategy 3. Over the past three decades, Romania has pursued a development strategy designed to industrialize a primarily agrarian economy. The main features of this strategy have been (a) a high rate of investment; (b) development of a broad industrial base, with priority given to heavy industry; (c) development of local natural resources, including the reorganization and modernization of agriculture; (d) balanced regional distribution of production and incomes; and (e) training of a skilled labor force. This strategy had been carried out through a system of comprehensive central planning and management, guided by central party and government authorities. 4. As a result, Romania's economic development since 1950 has been impressive, characterized by a rapid economic growth and considerable structural change. According to official statistics, national income has grown in real terms at an annual average rate of about 9 percent. Per capita GNP in 1978 is estimated to have been US$1,750, according to the Bank Atlas methodology. Since 1950, investment has grown at an average annual rate of 13 percent, as a result of which the share of gross investment in GNP has risen, averaging about 33 percent in the 1976-80 plan period. Industry, which has grown at more than 13 percent per annum over the past decade, has been the driving force of economic growth, receiving around 50 percent of investment, most of which has been allocated to the capital goods industry. As a result, industry has become the leading sector, accounting in 1978 for about 50 percent of GDP and for 33 percent of the labor force, compared with agri- culture's 14 percent share of GDP and 33 percent of the labor force. With the transfer of labor from agriculture to industry, the population has become 1/ This Part is identical to that contained in the President's Reports for a Fourth Power Project and a Bucsani-Buzau-Siret-Prut Irrigation (BBSP) Project which have been circulated to the Executive Directors for their consideration on December 23, 1980. - 2 - increasingly urbanized. Standards of living have increased substantially, partly because of the growth of personal incomes and partly because of provision through the state budget of expanded and improved education, medical services, housing and social expenditures of other kinds. Furthermore, Romania's integration into the world economy has increased, as the level of trade has grown and its composition altered. B. Recent Economic Developments 5. During the first four years of the present Plan period (1976-80), the expansion of the Romanian economy has slowed down perceptibly. The average annual rate of national income growth of 8.4 percent was below the planned growth rate of 11 percent, and growth has been decelerating, falling annually from 10.5 percent in 1976 to 6.2 percent in 1979. These changes reflect the emergence of a number of internal and external constraints, notably the pace at which improvements in productivity and efficiency can be attained; the ability of the economy to bring new capacity into operation as planned; a serious deterioration in the terms of trade; and trade restrictions in important export markets. 6. Industry continued to be the leading sector of the economy. However, the growth of industrial production also slowed down from an average of 12 percent per annum during 1976 and 1977, to 9.0 percent in 1978 and 8.1 percent in 1979. As in the past, the growth of capital goods exceeded that of consumer goods and the fastest growing subsectors were metallurgy, machine-building, chemicals and construction materials. Agricultural production grew at a respectable average rate of 6.3 percent between 1976 and 1979, displaying however, large annual variations due to changing weather conditions. 7. As elsewhere, energy has become a critical sector for the Romanian economy. In the aftermath of the 1973 fuel price increase, an emergency decree was issued, fostering domestic energy production and imposing cuts and stringent restrictions on industrial energy consumption. These steps were followed by further measures in 1977 and 1979, designed to conserve domestic oil and gas resources and expand use of domestic coal and hydropower resources. Although small increases in domestic oil production were originally planned in the present plan period, production has in fact fallen while natural gas production has stabilized. Coal production increased only 8 percent in the first three years of the plan, but jumped by 12 percent in 1979 and strenuous efforts are being made to expand it further. In spite of the campaign to restrain the growth of energy consumption, the difficulties in bringing new coal mines into operation on schedule has resulted in a tripling of oil imports between 1975 and 1979.The comprehensive directives for the preparation of the energy development program for the period 1980-2000, published in July 1979, is designed to make Romania self-sufficient in energy by 1990, through further development of coal and hydropower resources, through the rapid introduction of nuclear power and through development of non-conventional renewable energy sources. This may be optimistic, given the rapid pace of coal and nuclear power development required to meet the target, but the vigorous adjustment of - 3 - policies and priorities by Romania to the changed energy situation is expected to result in striking changes in the pattern of energy production by 1990, and further improvements in the efficiency of energy use by consumer. 8. Between 1976 and 1979 investment fell about 6 percent short of planned levels. The shortfalls occurred chiefly in industry where the planned annual growth rate of investments of over 20 percent could not be met, partly because of the diversion of resources in 1977 to the repair of earthquake damage. Industrial investment, in fact, grew by 13 percent a year--in itself a very respectable achievement. The shortfall in investment does not reflect difficulties in mobilizing sufficient financial resources, but a number of supply-related factors, in particular, capacity constraints of design institutes, shortfalls in the production of construction materials, capacity constraints in the construction sector, production shortfalls for some domestic equipment and more restrictive foreign exchange allocations for imported capital goods. 9. Changes in the level and distribution of employment accompanied the growth and structural change of production. The total labor force increased by only 0.5 percent per year between 1976 and 1979, but large intersectoral shifts in the labor force continued. Between 1976 and 1979, the agricultural labor force fell from 38 percent to 33 percent of the total. The outflow from agriculture, which is determined chiefly by the needs of non-agriculture sectors rather than the ability of agriculture to compensate for the loss through mechanization, appears to be leading to some seasonal labor shortages; recourse has been necessary to students and other groups to meet short term labor needs. The Government recognizes that the transfer of labor has to slow down to some degree, to avoid adverse effects on agriculture output, and is thus giving even greater emphasis to increases in labor productivity. Between 1976 and 1979, labor productivity in industry rose by 7.9 percent per annum, about one and a half percent more than was achieved between 1971 and 1975. In agriculture, labour productivity rose by 10 percent per annum. C. New Economic Measures 10. The slow-down of growth during the current plan period reflects to some extent the increasing maturity and complexity of the economy and the difficulties of moving from a development strategy emphasizing growth through increases in capacity to growth from using existing capacity more efficiently. As part of its efforts to improve productivity and efficiency, the Government introduced in January 1979 a number of changes in the planning and management system, commonly referred to as the "New Economic Measures". Their main purpose is to increase the responsibility of enterprises for implementing plan targets by extending the scope of enterprise autonomy and by sharpening the impact of financial rewards for success and financial penalties for failure. 11. The centerpiece of the New Economic Measures is the replacement of gross production by net production as the major performance indicator complemented by physical output targets. The change from gross to net production is to heighten the inducement for reducing inputs. To reinforce concerns about net production at the enterprise level, a new system of - 4 - enterprise revenue and expenditure budgeting has been introduced which combines evaluation criteria, computation of income bonuses and penalties for over and under-fulfillment of net production targets, and the tax assessment of enterprises. The second major element of the New Measures is the modification of the planning system. The changes introduced have two components; first, the greater involvement of enterprises in the resolution of inconsistencies and constraints in the planning process. Second, the measures increase the use of purchasing and delivery contracts. Whereas, in the past enterprises could make annual contracts only after the finalization of the plan, they are now able to make multi-year contracts which will form the basis for the first draft of the annual plan. Both of these changes are intended to bring greater reality to plans. 12. The New Measures also involve important changes in financial flows between the enterprises and the state budget. In the past, enterprises retained very little of their profits, and transferred most, in the form of taxes and other payments to the state budget. In future, enterprises will retain a greater share of profits. The major payment to the budget will be a "prelevation tax", which is calculated on the value of net production and paid from profits, but the enterprise will retain a greater part of its profits for distribution between funds for investment, working capital, housing, socio-cultural activities and profit-sharing fund. The New Measures, however, are explicitly not intended as a step towards "decentralization". Central planning remains the foundation of the system and will not be relegated merely to determining major macro-economic ratios and setting price or policy parameters, on the basis of which enterprises would autonomously prepare their own output plans. The New Measures are, in fact, a conservative attempt to strike a balance between extended enterprise autonomy dictated by the growing complexity of the economy on the one hand and a firm belief in centralized planning and control as the means of obtaining high growth rates and structural change on the other. D. External Trade and Foreign Borrowing 13. In foreign trade, developments have in the current plan period been substantially different from and decidedly less favorable than those planned. The five-year plan envisaged growth rates of 13 percent per annum for imports and 18 percent for exports in real terms aiming at a trade surplus which would allow the country to repay some of its foreign debt. Between 1976 and 1979, in fact, imports increased at an annual average rate of 16.4 percent and exports of 13.1 percent in current prices. This resulted in a sharply growing trade deficit which in 1979 reached $1.3 billion, virtually all of it in the convertible currency area. On the import side, the deteriorating trade balance reflects rapidly rising international prices, especially for petroleum. Export growth has been unable to keep pace with import requirements, partly because of less favorable price movements in Romania's principal export markets. The insufficient growth of exports is also explained by the vulnerability of Romanian exports to import demand fluctuations and import policies of the receiving countries, and to difficulties in meeting design and quality standards and establishing marketing policies essential to extend the foothold in highly competitive product markets. - 5 - 14. The large trade gap together with rising interest payment has led to a current account deficit of US$1.7 billion by 1979. The deficit has been financed through increased capital inflows, with total medium and long-term debts rising from US$2.8 billion in 1975 to about US$5.6 billion at the end of 1979. Most of the inflows have been suppliers' credits and eurocurrency borrowings; Romania has borrowed almost US$1.1 billion on the eurocurrency market since 1975, and has been able to lengthen maturities and reduce the spread over LIBOR considerably during the period. The scale of term borrowing available to Romania has not been sufficient, however, to finance the current account deficit fully and the Government had to resort to substantial short-term borrowing between 1977 and 1979. The net inflow on short-term debt was particularly large in 1979, about US$1 billion, and by the end of 1979, outstanding short-term debt had increased to US$1.8 billion. E. Development Prospects 15. In November 1979 the Twelfth Congress of the Romanian Communist Party approved the Directives for the preparation of the new five-year plan 1981-85. Although they suggest the continuation in broad terms of the present development strategy, they project lower growth rates than envisaged in earlier drafts of the Directives and than those achieved during the present plan period. However, one major change is the planned reduction of the share of national income allocated to investment. The share of investment in GNP is projected to decline to around 30 percent, compared with 33 percent during the current plan period, and the growth rate of investment is planned to be only around 6 percent compared with 13 percent achieved in the first four years of the current plan period. These changes indicate government recognition that a major issue underlying the development path of the economy in the 1980s is the allocation of resources between consumption and investment. In our view, this planned slowdown of growth momentum is commendable for three particular reasons. First, there is a need to allow Romanian consumers, who compare their economic position increasingly with that in Western European economies, to share more fully in the fruits of economic growth than the high investment levels of the past have permitted. Second, due to the growing complexity of the economy, its rate of growth is increasingly influenced not only by the rate of investment but also by improvement of productivity and efficiency, and, as is now widely recognized within COMECON countries--this cannot be accomplished without tangible incentives translating into higher consumption. And third, as the more recent empirical evidence suggests, the Romanian growth path is approaching the margin of absorptive capacity. It remains to be seen whether the consumer goods industries have the capacity to increase production and to improve their output mix sufficiently, and whether the investment goods industries can provide for the investment requirements of the consumer goods industries. 16. The directives and back-up documents prepared for the Twelfth Congress make clear, that the economy is becoming more dependent upon imported raw materials and--at least temporarily--energy, and more vulnerable to sudden changes in the terms of trade. The Romanian authorities, recognizing the need to economize on the use of energy and imported raw materials, have been reexamining the composition of investment - 6 - in a number of sectors prior to finalizing the new five-year plan for 1981-1985. It is clear that to contain the growth of imports to manageable proportions, domestic production must be stimulated in certain areas (i.e. energy, investment goods) and the efficiency of input use improved. To finance the necessary imports, exports must be increased, and export growth will require both improvements in the sophistication and quality of Romania's industrial goods and improvements in export marketing. Improvements in the planning and management systems will be needed to ensure that all these interlinked goals can be attained. F. Creditworthiness 17. With the large increase in the current account deficit and the associated increases in external borrowing described in paragraphs 13 and 14 above, the debt service payments (including interest on short-term credits) rose to $1.24 billion in 1979 or the equivalent of 12.2 percent of gross foreign exchange earnings. In the convertible currency area where most of Romania's debts were incurred, the debt service ratio was 20.6 percent compared with 17.4 percent in 1978 and 18.6 percent in 1977. For 1980, another large current account deficit is expected reflecting in part the sharp increase in oil prices. To contain future deficits and to keep the service burden manageable, the Government has recently adopted a series of measures aimed at increasing exports and restraining imports. Besides the steps taken in the crucial energy sector (see para. 7), these measures include new financial incentives for exports; a directive giving priority to export production over production for the domestic market; renewed emphasis in offsetting trade arrangements; a consolidation of the investment program which will result in lower imports of investment goods; and increased recycling of raw materials. Changes in the foreign exchange system are envisaged in the near future to reflect the changing economic priorities and world market conditions. Given Romania's strenuous development efforts within the context of well articulated plans, these measures and possible future steps aimed at enhancing exports and economizing the use of imported inputs, are likely to succeed in keeping the country's debt burden within manageable limits, thus preserving its creditworthiness for medium and long-term borrowing. PART II - BANK GROUP OPERATIONS IN ROMANIA 18.1/ The proposed loan would bring total Bank commitments to Romania to $1,707.6 million for 28 loans2/ in agriculture, industry, power and transport. Disbursements under the Bank's initial loans were slow during 1975, but this situation has improved considerably since 1976. Annex II contains a summary statement of Bank loans to Romania and notes on the execution of ongoing projects as of October 31, 1980. 1/ Paras. 19-22 are substantially the same as those in the President's Report for the Orchards Project dated June 2, 1980, and those in the President's Reports for a Fourth Power Project and a Bucsani-Buzau-Siret- Prut Irrigation (BBSP) Project which are being considered by the Executive Directors on December 23, 1980. 2/ Including a $125 million loan for a Fourth Power Project. - 7 - 19. Foreign exchange, especially in convertible currencies, continues to be a major constraint. It remains one of the major objectives of Bank lending to help alleviate the country's shortage of foreign exchange by providing long-term external capital and by financing projects which will expand foreign exchange earnings or savings. The Bank has also assisted the Government to mobilize cofinancing for appropriate projects. The Bank helped to attract foreign commercial banks to provide $100 million cofinancing in August 1979 for the Second Livestock Project for which a Bank loan of $75 million was made in April 1979. In addition, syndicated cofinancing loans of $200 million in total have recently been concluded for the Mostistea and Calmatui Irrigation and Drainage Project for which a Bank loan of $70 million was made in April 1979 and the Third Livestock Project for which a Bank loan of $85 million was made in December 1979. Through their contacts and subsequent negotiations with commercial banks, the Romanian authorities now appear convinced of the positive value of cofinancing in the form of financial credits, and have indicated their intention to seek similar arrangements for future projects. Bank lending also aims at supporting the steps being taken by the Government to introduce new industrial technologies, to improve the quality of products and production efficiency, to reduce production costs and to provide for necessary electric power development. Marketing, especially for export goods, is also emphasized. Special attention is given to agriculture where production is still unnecessarily dependent upon weather and where productivity levels are still comparatively low. 20. A number of further loans are under consideration, including loans for irrigation, industry, power, road and rail transport and regional development. The Government has also proposed that the Bank consider lending for a port project and the development of additional petroleum resources. 21. In addition to lending, the Bank (through EDI) has assisted Romania by conducting training courses on economic and financial evaluation and methods of analysis in various sectors, including industry and transportation, for 169 Romanian officials in Belgrade in 1973 and in Bucharest annually since 1975 in collaboration with a Romanian academic institution. Additional courses, including one for agricultural project appraisal, are under discussion with the Government. The methodologies taught in these courses are becoming more widely known in Romania and are expected for some projects to begin to supplement the methodology normally used by the Romanian planning authorities. 22. The projects, for which assistance has been committed or is being considered, represent only a small portion of Romania's total need for external financing. However, they will provide a substantial net addition to the inflow of convertible currency, and are helping to set a pattern for obtaining longer-term convertible finance from other sources. The disbursed debt outstanding to the Bank is expected to constitute about 13 percent of Romania's total projected convertible currency debt in 1980; the Bank's share in Romania's debt service payments in 1980 is expected to be about 5.5 percent. - 8- PART III - THE AGRICULTURAL SECTOR IN ROMANIA 23.1/ Agriculture continues to be a key sector in the Romanian economy, providing almost all of the nation's food, the raw materials re uired for agricultural processing industries and significant foreign exchange earnings. In 1978 agriculture accounted for 14 percent of GDP, 33 percent of the labor force and 14 percent of export earnings. The proportion of the total labor force employed in agriculture declined from 74 percent in 1950 to 33 percent in 1978, thereby releasing a large number of people for employment elsewhere in the rapidly growing Romanian economy. National income increased at an average rate of about 9 percent from 1951 to 1978. During this period national income in agriculture grew at a rate of 3.5 percent per annum. Agriculture's share of national income declined from 28 percent in 1950 to 15 percent in 1978. 24. About 14.9 million ha, or 63 percent of Romania's land area, are used for agriculture. Of this area, 66 percent is arable, 29 percent is grassland and 5 percent is used for orchards and vineyards. There are three principal agro-climatic zones; the Plains Zone, the Foothills Zone and the Mountain and Tableland Zone. The Plains Zone which is the richest agricultural area, including all of the land in the Danube plains, includes 53 percent of Romania's arable land. About 64 percent of all arable land is devoted to production of grain (mostly wheat and maize). Other crops include sunflower, sugarbeet, soybeans, potatoes, vegetables, fodder crops, grapes and fruit. In 1978 crop production accounted for 56 percent of total agricultural output, while livestock accounted for 44 percent. Sector Organization 25. Romanian agriculture has undergone a major transformation following the collectivization measures introduced since the Second World War. Today agricultural production, especially crop production, is dominated by state agricultural enterprises (IASs) and agricultural production cooperatives (CAPs). For example, in 1978, 87 percent of cereal production was in the socialist sector. Production by individual farmers and from small private plots of cooperative members is important for fruit and livestock but not for field crops. Agricultural mechanization stations (SMAs) play a major role in providing machinery hire services. Recently a number of Inter-Cooperative Associations (ICAs) have been formed through combining the activities of a number of individual cooperatives. These ICAs are engaged in various large scale agricultural operations such as pig and poultry production. 1/ Paras. 23-34 are substantially the same as those in the President's Report for the Orchards Project dated June 2, 1980 and those in the President's Report for a Bucsani-Buzau-Siret-Prut Irrigation (BBSP) Project which is being considered by the Executive Directors simul- taneously with this project. -9- 26. In 1978 Romania had 396 IASs with an average size of 5,100 ha and an average labor force of 660. They farmed 2.0 million ha, equivalent to 14 percent of all agricultural land. Other State agricultural units covered 2.5 million hectares, or 17 percent of agricultural land. In the same year, there were 4,400 CAPs, with an average size of 2,060 ha and 550 members. The total area of land under CAPs was 9.1 million ha, equivalent to 61 percent of all agricultural land. There were 709 SMAs which provide machinery services to producers. Each SMA had an average of 140 tractors plus a wide range of other equipment. Each working member of a CAP is allocated a small plot (normally 0.15 ha) which can be used for production of crops. Members are also allowed to keep limited numbers of livestock on CAP land. About 10 percent of the land controlled by CAPs is used for individual members' plots. Individual farmers number almost half a million and own about 9 percent of total agricultural land. Most of their farms are in the more mountainous regions. They use only 5 percent of the nation's arable land, although they have 19 percent of the grasslands and 21 percent of the orchards. They own 16 percent of all cattle, 14 percent of sheep, 12 percent of poultry and 8 percent of pigs. Together with CAP plotholders they produced 54 percent of all milk, 59 percent of eggs, 41 percent of wool, 53 percent of poultry and 57 percent of fruit in 1978. 27. At the national level, the major State institution in the agricultural sector is the Ministry of Agriculture and Food Industry (MAFI). MAFI plays a major role in preparing the Five Year Plan for the sector and is the supervisory institution for plan implementation. In each district, the Ministry is represented by a general directorate, which is responsible for all agricultural activity in the district including both IASs and CAPs. Marketing is organized nationally under MAFI, with general economic directorates responsible for processing and marketing specified commodities. Foreign trade companies are responsible for the exports of the general economic directorates. Performance in the Agricultural Sector 28. Although considerable progress has been made in developing agriculture in Romania, the sector remains relatively undeveloped. Between 1951 and 1978 gross agricultural output increased at an average rate of 4.5 percent. During this period the area of arable land has remained about the same but crop yields have increased markedly. For example, the average yield of wheat increased from 1.1 tons per ha in 1951-1955 to 2.8 tons per ha in 1976-1978, while maize yields increased from 1.3 tons per ha to 3.2 tons per ha over the same period. Livestoc -ields have increased while there have also been significant increases in nte numbers of all types of livestock. Milk yields for instance, increased from 867 litres per cow in 1950 to 1,968 litres per cow in 1978. Nevertheless, crop and livestock yields in Romania are still appreciably lower than those obtained in a number of other countries. While agricultural production has been increasing, the labor force in agriculture has been falling. Labor productivity has thus increased much faster than agricultural output. In 1978 gross agricultural output per worker was more than six times the level in 1950. Despite this substantial improvement, the absolute level of labor productivity is still relatively low. Labor intensive methods of production, such as hand harvesting of maize and the use of animal-drawn carts, are still common, especially on cooperatives and in the individual farm sector. - 10 - Sector Issues and Development Strategy 29. The growth of Romanian agriculture has been constrained by several factors, especially rainfall, lack of machinery and farm inputs and problems concerned with organization and incentives. Rainfall in Romania is both low and erratic, especially in the main cropping areas in the Plains Zone. Flooding has also been serious in many low lying areas. Fortunately the soils in the Plains Zone are good while there are excellent sources of water in the Danube and its tributaries. Romania has therefore given high priority to development of irrigation and drainage. The total area under irrigation has increased from 200,000 ha in 1960 to 2.2 million ha in 1979. Government plans to increase this to 3.7 million ha by 1985. By then 38 percent of arable land would be irrigated. 30. Serious shortages of machinery and farm inputs, especially fertilizers, insecticides and herbicides have been experienced. These shortages have been aggravated by Romania's foreign exchange needs, for Government has sometimes exported fertilizers or restricted imports of other inputs needed by the agricultural sector. Hitherto, Government policy has given much greater emphasis to development of IASs rather than CAPs. IASs have been provided with the best managers and have received much higher levels of investment and supplies of tractors, machinery and fertilizers, while CAPs have been neglected. In 1978 the level of investment per ha of IASs was more than five times that of CAPs and they were therefore more productive than CAPs. This neglect of CAPs has been one of the key weaknesses of Romanian agriculture, for CAPs control more than 60 percent of all agricultural land. In 1978 Government decided to accord equal treatment to IASs and CAPs. This new policy is to be implemented through the creation of Unified Agro-industrial Councils (UACs) which are responsible for providing equal levels of service and material inputs to IASs and CAPs. About 700 UACs have been established, and for each one there is an SMA. Each UAC will be responsible for coordinating all agricultural activities undertaken by the IASs and CAPs for which it is responsible. On average each UAC will be responsible for about 20,000 ha of land. Implementation of this new policy is still underway and it is too early to assess the effectiveness of the UACs. These organizational changes are being complemented by changes in the structure of wages and incentive bonuses. These changes, which link payments to workers to achievement of profit targets, were introduced in 1978 under the "New Economic Measures". These changes have already been introduced on IASs and their extension to cooperatives is planned. 31. Agricultural policy is formulated within the framework of a national plan approved by Government and the Romanian Communist Party. For the 1981-85 plan, the guidelines forecast that national income will increase between 6.7 and 7.4 percent p.a., gross industrial production will increase in the range 8.0 to 9.0 percent p.a. and gross agricultural production at 4.5 to 5.0 percent p.a. Investment in agriculture in this period will amount to 155 billion lei (US$8.6 billion), equivalent to 12 percent of total national investment for the plan period. The main thrust of agricultural development strategy will be to increase crop and livestock yields through improved organization, the use of more efficient techniques, especially greater mechanization, increased use of fertilizers and other inputs, and further large investments in irrigation. - 11 - Agricultural Investment Financing 32. The Bank for Agriculture and Food Industry (BAFI) is the Government's specialized agency for financing projects in agriculture, irrigation and food processing. As such, BAFI has been the Borrower for all Bank loans in support of agriculture and would be the Borrower for the proposed loan. BAFI was established in 1968 as a channel for, and administrator of, all investment funds provided under the State plan for the agricultural sector. It lends to both IASs and CAPs and repays the Government as it receives repayments of subloans. BAFI is involved in all phases of project appraisal, execution and supervision, and it has a large technical and economic staff located in Bucharest, in 39 district (judet) branch offices and in 92 sub-branches throughout the country. BAFI has thorough review and approval procedures for all investment projects. In addition to BAFI's review, all agricultural investments for more than lei 10,000,000 ($50,000) are reviewed and approved by MAFI and those greater than lei 70,000,000 ($3.9 million) must be approved by the Council of Ministers. BAFI also provides short-term credit to, and maintains settlement accounts for, all cooperative and State agricultural enterprises; and acts as fiscal agent for the Government for collection of State revenues from these enterprises. As the Government's channel for investment financing in agriculture, BAFI's primary source of funds is the State budget; the Guarantee Agreement therefore includes a provision that the Guarantor shall provide all necessary funds for the implementation and operation of the project. Bank Contributions in the Agricultural Sector 33. The Bank's lending strategy is based on the findings of various reports, including the Agricultural Sector Survey of October 1976 (No. 953a-RO), the Basic Economic Report of March 1978 (No. 1601-RO) and a number of recent appraisal reports. A cattle and sheep subsector survey was also carried out during 1979 and its report is under preparation. Beyond the provision of foreign exchange, the main objectives of Bank lending remain to assist the Government in addressing the problems of production instability and low productivity. In addition, in appropriate cases, foreign exchange earnings or savings are an objective. Attainment of these objectives will help to raise the level and quality of domestic food consumption. 34. With increasing experience in the agricultural sector and a greatly improved relationship with the Romanian authorities, the Bank has been able to make other significant contributions. Technical improvements in project concept and design have been attained in a number of fields including irrigation, poultry and pig production and horticulture. Additionally, BAFI has decided to introduce the Bank methodology in its economic evaluation of subprojects. The Bank has made twelve loans for agriculture totalling $741.5 million since 1975. The Giurgiu-Razmiresti Irrigation Project, the first agricultural project financed by the Bank in Romania, has been successfully completed and a completion report on this project is under preparation. No reports of the Bank's Operations Evaluation Department have yet been prepared on agricultural prcjects in Romania. - 12 - The Cattle Subsector 35. The climate and resource base are well suited to cattle and sheep and there is a long tradition of animal husbandry in the country. However, per capita meat consumption in Romania is about 30 and 25 percent below the average per capita consumption in the EEC and Eastern European countries respectively. Per capita consumption of dairy products is also lower than in those countries. The Romanian Government has recently decided to take measures to meet the unsatisfied demand for fresh meat as part of its policy to give increased attention to consumer issues while continuing to earn foreign exchange from agricultural exports. Meat is allocated, through the central planning process, between domestic and export markets. In the past, domestic consumption of fresh meat has been suppressed due to the priority the Government has given to earning much needed foreign exchange. This is reflected in the Second Livestock Project (Loan 1669-RO) which has a heavy emphasis on exports. The three previous livestock projects financed by the Bank are being implemented without any major problems. The proposed project, aside from its considerable technical and institutional improvements, would contribute to raising the level of meat consumption and dairy products in the domestic market as well as providing additional foreign exchange earnings. 36. The livestock sector accounted for 44 percent of gross agricultural production in 1978 with beef and milk accounting for 15 percent. Milk alone accounts for 10 percent making it the single most important agricultural commodity. Production of beef and milk is planned to increase significantly by 1985, to 21 percent of total agricultural production. The livestock population in 1978 included 6.3 million cattle, 10.3 million pigs, 15.6 million sheep and 100 million poultry. The feed base for the cattle industry comprises the by-products and required rotation crops on the 10 million hectares of arable land together with 4.5 million hectares of pasture and meadow not suitable for cultivation. Important crops such as wheat, barley, soybeans, sunflower and sugarbeets provide much of the by-products used for feeding livestock. 37. Of the 6.3 million cattle, CAP plot holders and individual farmers own 43 percent, CAPs themselves own 43 percent and the State owns 14 percent. Due to higher productivity, beef and milk production attributable to CAP plot holders and individual farmers is higher than the percentage of ownership (milk 53 percent and beef 47 percent). 38. Past growth rates for both cattle and sheep, in numbers and production, are very acceptable for an established industry such as Romania's. However, productivity is low when compared to countries in Europe and North America with similar industries. There are three major reasons for the low productivity; the inappropriate and outdated technologies, the low quality of inputs and the institutional constraints such as poor feed analysis and inadequate nutrition extension services available for livestock producers. 39. Among the technical inputs applied to animal husbandry in Romania, veterinarian services are virtually the sole satisfactory aspect. Compared to other technical services, veterinarians are well trained. This has caused undue concentration on health and resulted in control of the industry by veterinarians rather than production specialists. Dairy housing, feed harvesting and storage, feeding, manure removal and milking systems are - 13 - outdated and extremely labor intensive. Poor management techniques and generally weak technical support at the farm level also contribute to the relatively poor performance. This is partly because technical specialists and research suffer from poor training and international isolation. 40. Forage quality, all important to economically efficient ruminant animal production, is very poor and there is a gross deficiency of protein feed. This creates serious direct loss to the economy since much more expensive concentrate energy feed, mainly maize grain, is used as a substitute, which otherwise could be exported. It is also a serious indirect loss depressing productivity. At present, the social sector feed base depends heavily on crop production. Yields here are comparatively low despite the high quality resource base, due mainly to inadequate inputs, notably fertilizer and machinery. The Government plans will in part resolve the fertilizer deficiency by 1985 but there will still be insufficient machinery. Grassland utilization, a key factor in the future development of the cattle industry, is underdeveloped. Less than 40 percent of the grassland area receives any fertilizer at all, and the rest usually only very small amounts. However, the Government plans to increase the area receiving fertilizer to 80 percent by 1985. MAFI, through activities of its Pasture Enterprises, is now actively engaged in pasture improvement schemes involving clearing, reseeding, fencing and access road construction. Such improvement will expand the carrying capacity of the pasture, which has the potential for a 50 percent increase. To achieve this, development of pasture management skills must be stimulated. 41. In its 1981-85 Five Year Plan, Romania plans substantial improvement of the cattle subsector through (a) further investment in large, industrial type complexes conducive to greater efficiency in State and cooperative units, improved technology absorption and better use of managerial skills; (b) import of quality stock and upgrading of local cattle to improve beef and milk merits; (c) growth in beef fattening capacities to absorb increased numbers of young animals destined for fattening from new and existing dairy farms; (d) modernization of older dairy and beef complexes; and (e) assistance in expanding production by the individual producers mainly by improving grassland in foothills and mountain areas where their animals are located. The proposed project would be in line with these Government strategies and respond directly to the major problems of the subsector as described above. PART IV - THE PROJECT 42. The project, which is included in the Government's Five Year Development Plan, was orig3nally discussed with a Cattle and Sheep subse -or mission in May 1979 for p--sible Bank financing, following an extensive questionnaire on that suIsl,or submitted to the Government in January 1979 and answered in early April. A preparation mission, including a cattle nutrition consultant, iisitez Romania in September 1979. Another preparation mission, includir& i dairy engineer to review the milking technology, visited Romani;, inT I-vembei and Decembcr 1979 and discussed the Government's preliminary prepar.t ion re. ri-. Through these stages of preparation, the Bank has dis ' ;rd the project conce[c extensively with the Government and has made significant contributions to project design. As a result of these discussions, the Government has decided to develop a - 14 - nationwide feed analysis service and a nutrition extension service for farm animals to gain substantial reductions in output costs. Additionally the Government will alter the current tandem milking method to the herringbone system proposed by the Bank on the nationwide basis which will result in considerable efficiency improvement. Also, the Government has agreed for the first time to include pasture improvement for Bank financing which would assist Romania to make better use of its relatively underdeveloped and so far neglected pasture resource. The project was appraised in April and May 1980, and negotiations were held in Washington in November 1980. The Romanian delegation was headed by Mr. Ion Rusinaru, President of BAFI and included representatives from BAFI and the Ministry of Agriculture and Food Industry. A report entitled "Staff Appraisal Report - Livestock IV (Cattle) Project" No.3139a-RO dated November 24, 1980 is being distributed separately to the Executive Directors. The main features of the project are mentioned in the Loan and Project Summary and in Annex III. Project Description 43. The proposed project is designed to contribute to expanding production of beef and milk to increase domestic consumption and generate additional foreign exchange earnings. This would be achieved through increased investments incorporating new technology and through the creation of new institutions to serve the sector. The principal innovations under the project would include improved design of cow housing, introduction of herringbone milking parlors into all dairy subprojects, improved forage quality and the augmentation and strengthening of four major support services: a) animal production and grassland research, b) milking machine testing and maintenance service, c) forage and concentrate feed analysis laboratories, and d) animal nutrition advisory service. Investment in grassland improvement would serve to specialize and expand production, an important source of low cost feed in area less well suited to arable agriculture. 44. The project would consist of selected investments over a three year period (mid 1981 to mid 1984) as part of the Romanian Five Year Plan for 1981-1985 for milk and beef production. The project would comprise about 60 percent of the total planned investment over the three year period. It would include; (i) 92 new dairy farms each of about 920 cows, (ii) 32 modernized dairy farms, expanding from 520 cows to about 680 cows each, (iii) 17 new specialized breeding heifer production farms, (iv) 19 new beef fattening units with about 7,700 head capacity each, (v) 109 improved pasture units, each averaging 1,000 ha, (vi) about 5 milk processing plants, 6 cheese cold stores, 2 cattle slaughtering and processing facilities and 2 beef product cold stores, (vii) a line of credit for individual producers for milk, meat and breeding animal production, and (viii) technical services and research. Large scale on-farm milk production investments would be undertaken by both IASs and CAPs and located both in hills and plains areas to make use of available forage. A minimum cost feed base would be assured through the maximum use of by-products and required rotation crops having no economic opportunity cost. This, together with improved forage quality, would ensure minimum use of high cost concentrate feeds and those having a high opportunity cost. Exclusive use of loose stall housing and herringbone milking parlors, laid out to avoid _15 - bottlenecks in the flow of operations, would minimize labor needed for both milking and feeding and also improve control of the animals and reduce the incidence of mastitis. The project would provide four regional forage and feed analysis laboratories and a specialized nutrition advisory service to link these to the farms. This would ensure full knowledge and correct usage of the available feeds and forages. A milking machine maintenance and testing service would assist in ensuring mechanical performance of both the project machines and others. Applied research would develop country specific data on the nutritional aspects of Romanian produced feeds as well as on milking systems performance and pasture utilization. Details of the research program would be agreed upon with the Bank. Only on-farm subprojects incorporating the modern technology and utilizing the supporting technical services would be included in the project. Beef fattening and breeding heifer production to be undertaken in the project by IASs and CAPs would be exclusively in the hills area to maximize use of the lower cost grass forage. Grassland improvement in the project would be confined exclusively to the rainfed hills area, defined as mainly between 400 and 800 meters in elevation, to ensure that there would be no opportunity cost to utilizing these areas as grassland. Improved grassland would be utilized for grass and hay, partly by IASs and CAPs but mainly by CAP plotholders and individual farmers. For the latter, it would be administered by the Popular Council (local district general administrative bodies) and would be mainly for beef production although some manufacturing milk may also be produced. Processing and storage facilities would also be constructed to meet incremental capacity requirements under the 1981-85 Five Year Plan. The technological aspects of these are well known in Romania as both slaughtering and processing facilities and cold stores have been financed by the Bank under the previous livestock projects. Project Cost and Financing 45. The estimated total cost of the project is $412.2 million, including $1.8 million duties and taxes, with an estimated foreign exchange component of $138.2 million. The cost estimates are based on unit rates of work under the Romanian system of administered prices. The cost of equipment and materials has been estimated on the basis of the prices prevailing in mid-1980. Physical contingencies have been provided at an average of 4 percent which will be adequate because the cost estimates are based on detailed production models. Price contingencies on foreign exchange costs are based on an increase of 5.25 percent for the second half of 1980, 9 percent for 1981, 8 percent for 1982, 7 percent for 1983-85 and 6 percent thereafter. Reflecting experience with other Bank-financed projects to date, price contingencies on local costs have been taken at one percent. 46. The proposed Bank loan of $80 million would finance 19 percent of the estimated total costs and 58 percent of the estimated foreign costs of the project. The balance of the project cost would be financed by sub-borrowers' contributions ($109.1 million) and loans from BAFI and cofinanciers ($223.1 million). The Government of Romania would bear the foreign exchange risk. The proposed loan would be made to BAFI with the guarantee of the Socialist Republic of Romania, and would be for a term of 15 years, including 3 years grace, at an interest rate of 9.25 percent per annum. The Government has, in -16 - principle, agreed to seek cofinancing of up to $100 million for this proposed project. Judging by the response of cofinanciers to other Bank-financed projects in Romania, it is expected that offers of cofinancing will be obtained. The amount and timing of cofinancing will depend on market conditions and amounts being raised by Romania on other Bank-financed projects. It is likely that for this project cofinancing will be in the range of US$50-100 million equivalent. 47. Out of these funds together with BAFI's own funds, about $155 million equivalent would be onlent to CAPs, about $64 million equivalent to IASs, about $24 million equivalent to food processing enterprises, about $30 million equivalent to MAFI for pasture improvement, about $24 million equivalent to individual producers, and about $6 million equivalent for research and technical services. BAFI would onlend these funds for terms of up to 16 years including up to 3 years grace to cooperatives at 3 percent per annum, for terms of up to 10 years including up to 3 years grace to IASs, MAFI and food processing enterprises at 2 percent per annum during the construction period and 4 percent thereafter, and for terms of 5 years for individual producers at 3 percent per annum. As in earlier projects, these rates result in a positive spread over BAFI's financial and administrative costs in providing the loans. Government controls on prices have limited domestic inflation to around one percent per annum. Thus BAFI loans under the project would be made at positive real interest rates, on the same terms and conditions as are extended to other borrowers in the agricultural sector. Project Execution and Operation 48. The project would be carried out by cooperatives and State enterprises under agricultural credit subprojects administered by BAFI, and BAFI's branch offices would be responsible for overall supervision and monitoring of subprojects. Subloans would be made by BAFI to MAFI for grant financing by MAFI of investment in Popular Council (para. 44) administered pasture improvement schemes. Similarly, funds would be made available by BAFI to MAFI for financing of technical services and research, all of which would be under MAFI's control.BAFI maintains detailed records of sub-borrowers' financial and production results relative to subproject appraisal expectations and would submit to the Bank quarterly reports (Loan Agreement, Section 6.01(c)(ii)). Since necessary information would be available from BAFI's branch offices, the incremental cost of monitoring project implementation would be negligible. Technical assistance to the cooperatives and State enterprises carrying out subprojects would be provided by MAFI, particularly the judet (district) Directorates General for Agriculture, research stations, and the food inspection services, under a well developed program of assistance to such entities. All subproject investment proposals would have to be cleared by the responsible MAFI agency before review by BAFI. BAFI would prepare an individual summary analysis for each investment project, including key operating and investment indicators. For subproject review by the Bank, BAFI would prepare and submit for Bank approval individual summary analysis for representative types and numbers of subprojects according to agreed methodology of analysis (Loan Agreement, Schedule 1, para. 3(e)). In addition, details of the cattle nutrition research, the dairy husbandry research and the pasture research would be submitted to the Bank for comments and agreement prior to implementation (Loan Agreement, Section 3.04). MAFI would have responsibility for all necessary arrangements for international procurement. _17 - Market Outlook 49. The analysis of the market and of the demand and supply pattern indicates that no marketing problems need be expected. The Romanian per capita consumption level of both milk products and meat including beef is low compared with EEC countries and most of the Eastern European countries, and is expected to be so through 1985. Despite the recent growth in milk products sales by the Milk Central (10 percent per annum for fresh products but at a much lower rate for cheese and liquid milk), the demand for milk products is still largely unsatisfied. This is evidenced by frequent long queues for milk products, and peasant market prices for cheeses and cream are well above the social sector controlled prices. Over the country as a whole, the Milk Central estimates that the total milk products market is 15-30 percent undersupplied at present. Under the Bank's assumptions of supply development (5.1 percent annual growth giving 71.9 million hectolitres (hl) as against the Romanian Plan target of 8.1-8.8 percent annual growth giving 85-88.7 million hl), Romania would continue to be in a milk deficit situation up to 1985. The Bank's estimates of supplies available for human consumption by 1985 are 218 kg per capita excluding butter, compared to 1978 consumption of 160 kg per capita. This is below estimated demand of 223 kg per capita in 1985. Should planned butter and cheese exports occur, the unfulfilled gap would further expand. Meat is also in short supply. Pig meat prices on the peasant market are on average 55 percent higher than official prices. Beef is only available through the official market outlets, but its absence in many shops confirms the shortage. The Romanian authorities estimates that per capita meat consumption in 1978 would have been 70 kg rather than the actual figure of 53 kg if supplies were available. By 1985, Romania plans to supply the market with 67 to 72 kg per capita of meat and meat products, which compares to an estimated potential demand for 1985 of 85 kg per capita at present prices. Compared to 12.5 kg in 1978, per capita beef consumption planned for 1985 at 16-18 kg remains relatively low compared with many other countries. Thus, no market problem is expected for beef produced under the project. Romania has been a consistent net exporter of beef over the last decade. In 1979, ten different and diverse countries imported an average of over 2,000 tons beef each. On the basis of the recent FAO projections and the recent Romanian export records, the planned 1985 export target of 30,000 tons of live cattle and 152,000 tons of carcass beef are realistic from the demand standpoint. A detailed review of supply situation for 1985 carried out under the Bank's recent Cattle and Sheep Subsector Survey indicates that insufficient beef is likely to be available to fulfill the Plan domestic consumption and export targets. In the light of this, no overall marketing problems are envisaged in the disposal of beef produced under the project. Audit 50. BAFI would keep separate accounts for all project expenditures and its transactions are subject to continuous control by internal auditors to an annual audit by inspectors from the Ministry of Finance and from the Court of Superior Control which reports directly to the Council of Ministers and the President. BAFI's accounting system and the audit of its transactions are satisfactory and BAFI's audited overall and project operating and financing results would be sent to the Bank not later than six months after the end of BAFI's fiscal year. - 18 - Procurement 51. Equipment and materials equivalent in cost to the proposed Bank loan of US$80.0 million would be procured in accordance with the "Guidelines for Procurement under World Bank Loans and IDA Credits - March 1977." US$78.0 million of the items would be procured through international competitive bidding, and US$1.75 million of specialized equipment for feed and forage analysis laboratories and milking machine testing and maintenance kits would be procured through limited international tendering after soliciting bids from suppliers in at least three countries. US$0.25 million would be expended through MAFI for international training in connection with technical services and research. Romanian manufacturers would be allowed a preference of 15 percent or the applicable customs duty, whichever is lower. The application of preference is not expected to significantly affect the result of bidding on the proposed project. It is expected that foreign suppliers would win contracts for about US$4.8 million for slaughterhouse and meat processing equipment and specialized research equipment which are not manufactured in Romania. Other items to be procured through international competitive bidding and limited international tendering (about US$75.2 million) are available domestically and, based on experience with previous Bank-financed agricultural projects, it is expected that the Romanian manufacturers would be successful in bidding for these items. The Bank would not finance construction works under the project; these would be carried out by the Romanian Construction Trusts, which are experienced and familiar with local conditions, methods and regulations. Disbursement 52. The Bank loan would be disbursed at the rate of 27 percent of the amounts disbursed by BAFI for dairy farms, beef fattening and heifer breeding farms, individual producers, milk and meat processing and storage facilities, and buildings for technical services and research. Disbursement would be made against certificates of expenditure, the documentation for which is not submitted for review but is retained by BAFI and made available for inspection by Bank supervision missions. Reimbursement for BAFI disbursements for equipment and for research and technical services would be at the rate of 100 percent of foreign expenditures and 100 percent of local expenditures ex-factory and training for technical services and research would be made at the rate of 100 percent of foreign expenditures. Prior to disbursement for the following individual components, BAFI would submit to the Bank for its approval (i) details of the National Feed Analysis Service including an implementation timetable, location of laboratories, equipment, staffing and training (Loan Agreement, Schedule 1, para.3(f)) and, (ii) a program and timetable for training and equipping the Milking Machine Testing and Maintenance Service (Loan Agreement, Schedule 1, para. 3(g)). Environment 53. Romania now maintains a comprehensive system of standards and controls to ensure satisfactory waste disposal, and a strict system of penalties is maintained to ensure compliance. Facilities financed under the - 19 - project would be constructed and operated in conformity with this environmental protection code. During construction, each on-farm production complex would be required by law to install suitable waste water treatment works as well as separate well and water pumping facilities. In the manure and waste disposal system, combined solid and liquid manure would be pumped to concrete holding tanks for sedimentation and separation of liquid and semi-solid materials for fertilization of agricultural land. Similarly, the slaughtering and processing facilities and cold stores facilities would be required to construct effluent treatment plans to separate fats and solid materials, prior to discharge into the municipal sewerage system. Provision would also be made for a separate drainage system for rainwater. A strict system of penalties is maintained to ensure compliance with water purity requirements. Benefits and Risks 54. The project would contribute to increased production and even more importantly to increased production efficiency under the livestock development program included in the Government's Five Year Plan for the period 1981-1985. The important technological improvements are described in paras. 43 and 44 above. At the same time, the project would help the Government's effort, begun recently, to improve the quality and quantity of domestic food consumption, a policy objective with which the Bank concurs. Reasons for supporting this greater emphasis on consumption have been given in para. 15. The project would also bring about foreign exchange earnings, mainly through beef products exports. At full development in 1985/86 for all but new dairy units which reach full development in 1986/87, annual incremental off-farm project production would be about 379 thousand tons (3.8 million hl) of milk, 40 thousand tons of carcass beef (or about 165 thousand fattened cattle and 15 thousand cull cows) and 33 thousand breeding heifers. Additionally, the incremental farmyard manure produced would have an active substance fertilizer equivalent of about 14,000 tons of nitrogen, 7,000 tons of phosphate and 16,000 tons of potash. Annual incremental milk production at full development from the project would permit in the absence of exports a per capita consumption of 250 kg in 1985/86 compared to 160 kg in 1978. Even assuming that about 70 percent of the specialized beef units output or some 25,000 tons carcass weight will be exported, additional beef production from this project will permit an increase of 0.7 kg per capita in Romanian domestic beef consumption by 1985/86. Final goods from the project would be sold domestically through the State fixed price marketing system or exported through agencies. In either case surplus funds would be transferred to the State for redistribution in accordance with centrally planned expenditures. 55. The economic rate of return to the project excluding the agro-industries component is 22 percent on 88 percent of the total costs for which benefits have been quantified. The economic rate of return for CAP dairy farms on hills and plains, whose costs are $116 million, is 17.9 percent. The rates of return range between 41.8 percent and 43.8 percent for dairy farm modernizations in CAPs and IASs whose costs are $17.2 million in total. The CAP and IAS beef fattening farms would have the rates of return of 11.0 percent and 14.2 percent with the costs of $11.8 million and $16.2 million, respectively. The economic rate of return is least sensitive to - 20 - changes in capital costs and most sensitive to revenue variations. For the economic rate of return for the total project to fall to 11.3 percent, revenues would have to fall by 10 percent and at the same time the capital and operating costs would have to increase by 10 percent, respectively. Beef production is particularly sensitive to fluctuations in revenue. Due to the cyclical nature of world beef production and prices, these will inevitably occur both upwards and downwards; though less so in Romania than in other countries due to highly competent export market management. Most important in this respect is that the projected long run trend in international beef prices is positive thus ensuring viability for beef production in the future. Agro-industries investments are not analyzed pending BAFI's submission of investment analysis according to the agreed methodology for disbursement applications. Similar investments under previous Bank financed Romanian livestock projects have shown ERRs ranging from 15 percent to 20 percent of total investment and expected to be repeated here. This component accounts for only 6 percent of total investment under the project and would be unlikely to alter the total on-farm components ERR by more than 1 or 2 points. The individual producers component also accounts for about 6 percent of total project investment. Similar types of investment financing under the Second Livestock Project have shown rates of return, both economic and financial, equal to or somewhat greater than for similar investments in the social sector. Consequently a complete analysis of this component would be likely to increase the overall economic rate of return marginally. The project is expected to yield a number of benefits whose value cannot be quantified, including the benefits of the improved technology and technical services as well as those from research to units outside the project including individual producers and CAP plot holders. Given the robustness of the quantified portion of the project and the significant unquantified benefits, project risks, principally delay in upgrading forage quality and provision of agroindustries capacities, are quite acceptable and no greater than can normally be expected with operations of this type. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agreement between the Bank and the Bank for Agriculture and Food Industry of Romania, the draft Guarantee Agreement between the Socialist Republic of Romania and the Bank, and the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 57. Features of the project of special interest are listed in Section III of Annex III. 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 59. I recommend that the Executive Directors approve this proposed Loan. Robert S. McNamara President Attachments December 3, 1980 Washington, D.C. ANNEX I - 21 - Page I of 5 pages WOMANIA - SOCIAL INDICATORS DATA SHEET ROMANIA REFERENCE GROUPS (WEICHTED AVD,ACES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTTHATE) TOTAL 237.5 MOST RECET CEINRALLY PLANNED INDUSTRIALIZED ACRICULTURAL 149.6 1960 /b 1970 /b ESTIMATE /b ECONOMIES COUNTRIES GNP PER CAPITA (US$) 180.0 510.0 1750.0 1186.8 8104.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EO,IVALENT) 1342.0 3013.0 4042.0 2116.2 7021.1 POPULATION AND VITAL STATISTICS POPULATION. KID-YEAR (MILLIONS) 18.4 20.4 21.9 URBAN POPULATION (PERCENT OF TOTAL) 34.1 40.8 46.5 35.5 76.0 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 26.0 STATIONARY POPULATION (MILLIONS) 30.0 YEAR STATIONARY POPULATION IS REACHED 2090 POPULATION DENSITY PER SQ. rH4. 77.0 85.0 92.0 83.6 142.8 PER SQ. DM. AGRICULTURAL LAND 126.0 135.0 146.0 228.0 523.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 28.2 25.9 25.9 30.8 23.5 15-64 YRS. 65.1 65.5 64.1 62.1 65.1 65 YRS. AND ABOVE 6.7 8.6 10.0 7.1 11.4 POPULATION GROWTH RATE (PERCENT) t TOTAL 1.2 1.0 0.9 1.4 0.7 JRBAN 3.8 2.8 2.5 2.9 1.3 CRUDE BIRTH RATE (PER THOUSAND) 20.0 20.0 19.0 18.2 13.8 CRUDE DEATH RATE (PER THOUSAND) 9.0 10.0 9.0 7.1 9.1 GROSS REPRODUCTION RATE 1.2 1.3 1.2 1.3 0.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF KARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OP FOOD PRODUCTION PER CAPITA (1969-71-100) 89.0 89.0 152.0 108.5 110.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 108.0 115.0 130.0 113.7 131.6 PROTEINS (GRAMS PER DAY) 86.0 90.0 103.0 75.1 98.0 OF WHICH ANIMAL AND PULSE 30.0 34.0 43.0 28.6 62.1 CHIILD (ACES 1-4) MORTALITY RATE 3.0 2.4 1.0 1.1 0.8 HEALTH LIFE EEPECTANCY AT BIRT$ (YEARS) 66.0 68.0 70.0 70.1 73.5 INFANT MORTALITY RATE (PER THOUSAND) 75.7 49.4 31.0 22.4 13.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. POPULATION PER PHYSICIAN 780.O/c 840.Od 734.0 2070.8 624.8 POPULATION PER NURSING PERSON 620/c .. 638.0 240.1 218.9 POPULATION PER HOSPITAL BED TOTAL 130.O0c 1M0.0 109.0 96.7 121.2 URBAN 50.0/c SO.0 60.0 RURAL 620.0/c 770.0 730.0 ADMISSIONS PER HOSPITAL BED .. 23.0 .. .. 17.0 HOUS ING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 3.2/e URBAN .. 2.8/e RURAL *- 3.4 * AVERAGE NUBER OF PERSONS PER ROOM TOTAL .. 1.4e . URBAN 1.3je RURAL 1.4/e . ACCESS TO ELECTRICITY (PERCENT OF DWELLLINGS) TOTAL *- 49.0e . URBAN .. 86.0 i .. RURAL .. 27.0 a - 22 - ANNEX I Page 2 of 5 pages ROMANIA - SOCIAL INDICATORS DATA SHEET RQtANIA REFERENCE GROUPS (WEIGHTED AVERCES - MOST RECENT ESTIMATF) MOST RECENT CENTRALLY PLANNED INhDUSTRIALIZED 1960 7b 1970 /b ESTIMATE /b ECONOMIES COUNTRIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRLMARY: TOTAL 98.0 113.0 102.0 118.7 100.1 MALE 101.0 112.0 102.0 117.5 102.2 FEMALE 95.0' 114.0 101.0 120.0 102.3 SECONDARY: TOTAL 24.0 45.0 77.0 100.2 87.1 MALE 27.0 51.0 81.0 101.9 84.4 FEMALE 22.0 38.0 73.0 97.8 84.3 VOCATIONAL ENROL. (i OF SECONDARY) 54.0 58.0 70.0 47.4 19.0 PUPIL-TEACHER RATIO PRIIMaY 25.0 21.0 21.0 16.2 21.3 SECONDARY 16.0 18.0 19.0 13.0 16.4 ADULT LITERACY RATE (PERCENT) .. .. 98.0 .. 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION .. 2.2 .. .. 339.9 RADIO RECEIVERS PER THOUSAND POPULATION 120.0 152.0 146.0 403.5 932.9 TV RECEIVERS PER THOUSAND POPULATION 3.0 73.0 139.0 200.5 354.8 NEWSPAPER ("DAILY GENERAL IhTEREST") CIRCULATION PER TBOUSAND POPULATION 147.0 169.0 129.0 354.3 327.4 CINElA AhNUAL ATTENDANCE PER CAPITA 9.0 9.8 8.7 14.4 3.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10509.5 11408.2 12015.8 FEYALE (PERCENT) 44.9 14Id.5 445.0 50.2 36.6 AGRICULTURE (PERCENT) 64.5 4T7.O 33.0 30.2 7.8 INDUSTRY (PERCENT) 20.5 26.3 33.2 30.8 38.8 PARTICIPATION RATE (PERCENT) TOTAL 57.1 56.0 55.9 47.3 44.6 MALE 64.5 63.3 62.8 57.1 58.1 FEbALE 50.1 49.0 49.1 37.0 31.7 ECONOMIC DEPENDENCY RATIO 0.7 0.7 0.7 0.7 0.8 INCu'E DISTRIBUTION PERCENI OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. LCWESI 20 PERCENT OF HOUSEHOLDS .. .. LOWEST 40 PERCENT OF HOUSEHOLDS .. .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. RURAL .. .. ESTIXATED LELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 394.0 RURAL .. .. 394.0 ESTLhATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. RURAL .. .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on avallability of data and is not uniform. /b Unleas otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Moat Recent Estimate, between 1974 and 1978. /c 1962; L WHO estimates; /e 1966. April. 1980 - 23 - ANNEX T Page 3 of 5 page2: 1WVIWITIPe ItOt tWiAi. ttwptrATtf Knee.: AlttAch the data seI draw t. en.er.. tene.e.. tie. y exatott ienrla. t_`_ I " E ehsdea ontdta hy net IO atr tlInx. ...... ..'.. I.,in v H-.Id.)-t,,..ro.et. .....n.t ne:, -tl.i,, Iddn.e Ittc1, at th a'.) .rc o,,ono I ecept or .I ...t . ho o . trntr a-rbre'tJ) n.i.Not -rt ndPOI.tc fatio-outceol at lnttlesl n the to.. tort Sort Actsthe atetaca ate cltctirn aIltot atIL.. t.toetansltditact Indcat thandshone onl ottas e date rid tn.t 7.7lIon., caution b I1: 1 too te.'c.so It,1 11" re .ent, .eeae atoeInf stst .ooh .r To ....ee I. ternly a tat tetpatogLthe naI-e axstt.(hsade"a xaa n e eceia ossis 11. note St peSnftOt P- 10.1-r ct-I sose ra ncot ntItc ee sd eee etre toa,us--c.' plairiecol n nscan .51 CUP PtR CAP.iTA LS)) - CH? p.e ocntte e-tt .. tee trrs t ts t plitt a. a-.ta.so..AI 1144b the- ir, elict tat nt topital hede Oalettd- I ......... otteto ect -d en Ats 197n-78 baste); i9h0O . totab hbepbloed ort-ate ttnoled ecctlte hI ytt t 19)0, s.f 1916 dais. ~~~~~~~~~~~~~~~bablIttistli tanne .. ..o.p.t. ea. Iit:ht)rot persnotl_ ecefe DitiC CO%IL).'MTTIIyPC CAPITA- A-InnstnntLntootnerii. hrnhnattce ntptetan xtt iteet enoni dint,nttic "'t"Iroestedt.1 and lantte potrlotte sat.eal sa en hydno- n Ios and otootteeal ala- retr tt -resotln aratIdb brphnetnta tbct hn a edinal.. eestatnt teitap)in blogaea f oal entnlenn, par Laia 90 90 n 91nra st o. ohtnh ftfe t-ptto snrfdatioo ad pronde data. ttate rater o ct. aiiit tesa eu!peo tibebop tLe lolde tIthe ptntipsI --ner - n oteud bnttl.daretra.L POPiLAUTIO. A.ND VITAL STATISTICS cospitels to-d -eectr h-setnl a-ed erdctel -nd -t...nt,rtt rettt.1 Tetl Pechen on.0)-Year tet1linne -aof July 1: 1960, 1970, end I971 ..e.tn o- tonrItal ted - Inne nio- ut edleoet rdlssthtga dse tEes hsapittle dt,,ided by tie eccbee ot beds. leban Ponlale feeon tt! -. fato of urban no total potiltte asog oon 19s; S0. 1970, and 1978 data. Aoenlc ftnieod oroepebAeod tonal. -b.rbe. end rral- Poewticl-n It nse001 - ratppltn rjotoesehtde . n ibti vein sslt. ALnndrn ldger tap or hop tolhati~tgtdt it tanl ppuor on e ta ndc--en Iaroralin-so ..rnttrd e. r.d nthnrcldfo taricin Ipipoee Peeeoio pers..t -o enlc ce dpelse ofi threw le-lseAn Ana...en-,h-r f pesoa, e O -total u(bnen..ff A- doeag. leg I Ca apacisop enbirthinoxea:t!ma slob onon- y paIar I n-on en of p-ron per eI-t Ill .Il cre,od rune oruidctono -twean for (smt tyi, rso alto heir three lee-1asulc decline IrI An...tApi,d paEt. ad ts-t.t11 trano foPouoncn ..ooe. ot tOWo, tabsa, cad eurelf-- .E dellogtp,etJLn-p. eseeos hia. O 'it sthi-nd only aftor fertilityrtcdcit t bttndOrlantIno the _ple-steo er ttnintepouto at ic... eac aencin Poaysho oa,tl n eaaOoetnl acad dsale cetiated o the baalp of the projectd ohsrectwIlelc of tha populatIon priasnytoo-esPoplnon;ntn piyoeludea Lhthldteoeatd b-I in Cha.ea 2000,. ad tba Iacf d-li-t of-Ieilltysna te Iepla years...Itd tund top dlf to...nn lncthcs ot pniworyedu . t.. tot-!f. sian baa baa, rtaohcd. tints~~~~~tti-y. ... o ...pApils t OIn ra",bnnoici sicl aAO Par n. h. a ot.olrpe l.tIsyd P- Cnae naE silont . nor eriu--ine tend p-nudd.... . i I-L h t1l,!_ t .. P" Pc_ .---b- fon.ho.1 -t 1. tn-non L 12t~..~0.tndne 'n-order C- h'Iuc- Cl-li pedro) iutntaa(15 in c 0rntcl.44tn l ccl-t r.ynogta= n-zO dporet indap letn 90 90. cd1975 dat. Ptlnebreoo n-r, n eonnv-Ttleudoeatuld ?o~uaniu Croch fns (nrc~7.I,,,~ne1 Sooal gnon rate. of tEsl. aId- peliary en 1-odsy en dtn,ided by nuebeec s1t ...utb..a it bs pswppitosfoe 1950-h0, 960O-70. end 1970-78.oeepodglyl. Pentsaoto fGroth fete (na-c-no -u-oo aoal hren -teo atohePta Adult. lit.teoanyrs (p.enne.t) -Itnaran adults fablls en read vole.) -aler o 19)0-h0, 1960-dI, ad 1970-78. stpcro..tttss sOtots1 adult Vpapluriu aged 11 psute ant wea. Ceada limb Can freeI thousanId) - Aou1.l ins birthe Par abaussad sfM dpe PapulattotI 190 - 1970,an1978 dsn. Cnntt-t Cr.ado Pear' Lan (per thoAsand'd) - duoattin P doat b per .th au ft aId-panePa..tneer C-o f no ehooxand pop.letio)- P.eena oaeneyia pustn;1960. 1970 and 19.dn.cntcc.. itaco ib pa-ton; ..ttludt eabuaso.... hea... n..at boo cone oapreu.nite- period tiaeef ecne rstysoee fntr 'c p,ntt, ro- CnnyfAllca)nC Itypet of r-ee- fr , totrdb cttcrce, tulccAo-on-d.r:rn 960cvc..1b0 -hd 7.-- uc4 nn ;.. - connn;dIu:c L-FcXycci~~~~~.'~ -Fm rea;w-e 1.- ~~~~~ .o4,eee00~~~~~~~~do0.,0 - -- ~~~~~~~~~~ *UV~ Q L .fl~~~~~~~~~~etr0WwsWe0lOmnmwA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -