Dcument of The World Bank FOR oMCIAL USE ONLY Rert N. 5999 PROJECT PERFORMANCE AUDIT REPORT YUGOSLAVIA - AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO (LOAN 1370-YU) December 26, 1985 Operations Evaluation Department This deemmeN has a srictebd distrbolle amd moy be mad by recilmis ealy la the perfomne of their eMdal due. It omifami may sMeftwwtherie be disleoed withed Wedd Bank amftbbsme. ABBREVIATIONS AEI - Agroeconomic Institute AK - "13 July- Agrokombinat BOAL - Basic Organization of Associated Labor EMENA - Europe, Middle East and North Africa Regional Office of the World Bank CP - FAO/World Bank Cooperative Program ERR - Economic Rate of Return FAO - Food and Agriculture Organization IBT-UB - Investiciona Banka Titograd-Associated Bank ICB - International Competitive Bidding IFC - International Finance Corporation OECD - Organization of Economic Cooperation and Development PCR - Project Completion Report PU - Project Unit PY - Project Year SRM - Socialist Republic of Montenegro UNDP - United Nations Development Program WO - Work Organization FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT YUGOSLAVIA - AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO (LOAN 1370-YU) TABLE OF CONTENTS Page No. Preface ... .................................... . i Basic Data Sheet ............................................. ii Evaluation Summary ........................................... iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT SUMMARY ......................................... I II. AUDIT FINDINGS ......................................... 3 A. General . 3 B. Problems and Constraints ............................ 4 C. Main Issues . 5 D. Sustainability of Benefits .......................... 10 Annex I - Comments Received from Investiciona Banka Titograd .... 11 PROJECT COMPLETION REPORT I. Introduction ............. . . . .. . . 17 II. Project Formulation and Processing ...................... 18 III. Implementation ....... ...................23 IV. Agricultural Impact .................................. 38 V. Financial Re-evaluation .............................. 49 VI. Economic Impact ......................................... 53 VII. Institutional Performance and Development ............... 55 VIII. Conclusions and Recommendations ......................... 58 Annexes 1-12 Charts 1-2 Map - IBRD No. 18663 (PCR) This document has a restricted distribution and may be used by recipients only in the performance of their offacial duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT PERFORMANCE AUDIT REPORT YUGOSLAVIA - AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO (LOAN 1370-YU) PREFACE This is a performance audit of the Agriculture and Agricultural Industries Project in Montenegro, Yugoslavia, for which Loan 1370-YU in the amount of US$26.0 million was approved in February 1977. The loan was closed as scheduled on June 30, 1983. Final disbursement took place on March 27, 1984, and an undisbursed balance of US$15,224 was cancelled on March 30, 1984. The audit report consists of an audit memorandum prepared by the Operations Evaluation Department (OED) and a project completion report (PCR) dated March 13, 1985. The PCR was prepared by the Bank's Europe, Middle East and North Africa Regional Office. Although not required under the Loan Agreement, the investor, 13 July Agrokombinat Titograd, with encouragement from Bank supervision missions, did prepare basic data tables in support of PCR preparation with the assistance of local consultants. An OED mission visited Yugoslavia in May 1985. The mission held discussions with officials of Investiciona Banka Titograd, 13 July Agrokombinat Titograd, and with staff in the field. The information obtained during the mission was used to test the validity of the analysis and conclusions of the PCR. The audit memorandum is based on these discussions, on interviews with Bank staff associated with the project, and on a review of the PCR, the Staff Appraisal Report (No. 1316a-YU) dated January 26, 1977, the President's Report (No. P-1943a-YU) dated February 7, 1977, the Loan Agreement of March 10, 1977, correspondence with the Borrower, and internal Bank memoranda on project issues as contained in relevant Bank files. A copy of the draft report was sent to the Borrower on August 5, 1985 for comments. Comments received from Investiciona Banka Titograd are in Annex I and have been taken into account in finalizing the report. The audit finds the PCR comprehensive and accurate with respect to the project's principal achievements and shortcomings and has no reason to question its conclusions. The audit memorandum primarily deals with problems and constraints related to construction of the project's cold store, to the sour cherries plantation, and the environmental impact. Issues given partic- ular emphasis are the investor's financial situation, and Bank appraisal of the project. - ii - PROJECT PERFO1NANCE AUDIT WEPORT YUGOSLAVIA - AGRICULTURE AND ACRICULTURAL INDUSTRIES PROJECT mnonosurano (LAN 1370-Y8) BASIC DATA SHEffT KEY PROJECT DATA Appraisal Actual or Actual a 2 of Ite Estimate Estimated Actual Appraisal Estimate Total Project Coats CUSS million) 55.6 50.1 90 Loan Amount (BS mtilli) 26.0 24.0 100 - Disbursed CUSS million) 26.0 26.0/a 100/s - Cancelled (USS million) - la Date Board Approval - 02/fl? - Lom Agreemant Date - 03/10/77 - Date Effectiveness 06/30/77 07'-7/77 125 A Date Physical Components Completed 03/81 12182 13 T; Proportion Then Completed (2) 100 100 100 Closing Date 06/30/83 06/30/83 100 /b Economic Rate of Return () 17 Is 88 Financial Rate of Return () - Vineyards and inery 13 5 38 - Orchards and Cold Store i 26 14 Institutional Performance - Satisfactory - Technical Performance - Cod CUWILATIVE DISBURSEMERIS FYi? FY78 FY79 FTSO PYi FY82 FTB3 Appraisal Estimate CUSS million) '1.2 1.4 10.4 17.4 21.9 2A.0 - Actual (USS miLLion) - 0.9 3.5 13.1 18.0 21.7 25.08 Actual as 2 of Appraisal stiante - 26 34 75 82 84 99 Date of Final Disburseent March 27. 1984 MISSION DATA Date No. of Mandays Specializations Performance Types of (mo.jyr.) Persons to Field Represented/c RtaingLd Tread/e Problemsf Identification 11/74 5 70 A. B. D, E. F Preparatton/ 02/76 4 60 A. a. 0. E Appraisal 05/76 6 ISO A. R. C. D. E Sub-cotal 110 Supervision I 04/77 3 12 A, C. D I 2 - Supervision II 09/77 2 6 A, C I 2 - Supervision III 04/78 2 10 A. D 1 3 Supervision IV 09/78 3 15 C. 0. E 2 2 T,F Supervision V 11/79 3 15 A. C, D 2 1 T.F Supervision VI 10/80 1 6 A I 2 - Supervision VIE 03/81 1 6 A 1 2 - Supervision VIII 11/81 1 5 B I 2 - Supervision I 09/82 I 5 A I 2 - Supervision I 05/83 1 9 A. 3 2 2 F Sub-cotal 89 OTHER rROJECT DATA Sorrower Investiciona fanks Titograd-Udrsena Banka Guarantor Socialist Federal Republic of Yugoslavia Executing Agency -13 July' Agrokombinat Fiscal Tear of Borrower January I to December i1 Neme of Currency (Abbreviation) Dinear (Din) Currency Exchange Rate: Appraisal Year Average: USSt.00 - Din 18.0 intervening Years Average: USSI.0 - Din 35.4 Completion Year Average: US5I.00 - Din 124.4 Follov-on Project Rase Montenegro Regional Development Project Loan Number 2467-YU Lan Amount (USS million) 40.0 Date of Board Approval 07/31/84 Is An unused balance of USS3,224 or 0.06Z of the loan amount, wan cancelled on March 30, 1984. 7; Calculated in term of months from date of Board approval. 7c A . Agriculturist; B * Economist: C- Financial Analy*-; D - Irrigation Engineer E - Agroindustry Specialist; and F - Hydrogeologat. /d I - Problem Free or minor problems; 2 - Moderate problems; and 3 - Major problem. 7 I 1 - Improving; 2 - Stationary; and 3 - Deteriorating. 7F T - Technical; F - Financial. 7 / FAO/World Bank Cooperative Program. PROJECT PERFORMANCE AUDIT REPORT YUGOSLAVIA - AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO (LOAN 1370-YU) EVALUATION SUMMARY Introduction The project was the fourth Bank loan for agriculture in Yugo- slavia. It supported the Yugoslav efforts to accelerate development in the less developed regions. The project was prepared following many years of analysis. Its design was technically sound, compact and simple, in that it financed a single investor, the 13 July Agrokombinat (AK), to expand both primary production of irrigated grapes and deciduous fruits (2,000 ha total), and the capacity to process the incremental production into quality wine and fruit products in a fully integrated manner. Objectives The project aimed to help achieve the objectives of the Socialist Republic of Montenegro (SRM) to increase agricultural production both for the domestic market and for exports; to expand agroindustry processing capacity; to improve product quality and stabilize food supply; and to raise produc- tivity and income. The project also aimed at strengthening the organization, appraisal and supervision capacity of the Borrower, Investiciona Banka Tito- grad-Udruzena Banka (IBT-UB). Implementation Experience The project was physically well executed but is in serious finan- cial difficulty. Completion of some of its components slipped beyond the appraisal targets, and the overall completion delay was 43%; nevertheless, major civil works were essentially completed by end-December 1982, in line with the original appraisal estimate. Production from the wine grape vineyards to date has been satis'actory. Quality of the red wine, -Vranac", has been outstanding. Irrigated peach production exceeded the appraisal estimate, whereas sour cherries have produced below expectations due to slow growth and a disease causing premature fruit drop. The IBRD Operations Unit of IBT-UB was strengthened through the timely addition of technical staff, and an improved supervision and monitoring system (PPAM, para. 12; PCR, para. 7.01). The total cost of the project expressed in dinars was 76% above the appraisal ertimate. However, in US dollar terms there was a 10% savings due to the dinar's depreciation against the dollar. - iv - Results The project is experiencing difficulty in achieving several of its main objectives, i.e. to increase exports and income of the investor. The investor's financial situation is precarious (PPAM, paras. 19-28; PCR, paras. 5.09-5.15). The re-estimated financial rate of return dropped to 5% for the vineyard-winery subproject, compared to the appraisal estimate of 13%, but is now calculated at 26% for the orchard-cold store subproject, compared to the appraisal estimate of 18%. The re-estimated economic rate of return is 15%, compared to 17% estimated at appraisal. Several positive actions, with support from the Bank, including training in financial controls and marketing and a review of marketing and commercial operations, are anticipated to help the investor overcome the financial difficulties. Sustainability With the exception of the sour cherries and plums plantations, the project's physical base is sound. However, considerable financial assistance will be needed for the next seven years, or even longer, to overcome the prcject's financial liquidity squeeze. The extent to which this and other problems will be overcome to a large extent depends on the success of the Action Program, expected to be prepared and implemented by AK later in 1985. Findings and Lessons The Project Unit performed well, and was disbanded at completion in a timely fashion (PPAM, para. 11; PCR, paras. 7.03-7.06). Relevant research preceded and was continued under the project, and improvements in project design concerning the irrigation system, the plantations and infrastructure were made during implementation (PPAM, paras. 13-14; PCR, paras. 3.02-3.08 and 3.14-3.15). Poor contractor performance was responsible for completion delays and cost overruns in the construction of a cold store (PPAM, para. 15; PCR, paras. 3.12-3.13 and 4.17), and unsuitable planting material has caused severe production shortfalls in the sour cherries plantation (PPAM, para. 16; PCR, para. 4.06). Although potentially harmful, the project's environmental impact has not received much attention (PPAM, para. 17). Weaknesses in the project's financial structure included excessive debt financing and excessive coverage of local costs through foreign borrow- ing. The World Bank is in the process of incorporating in its own policy framework lessons learned with respect to financial difficulties that can arise as a result of foreign denominated loans under conditions of exchange rate fluctuations (PPAM, para. 22; PCR, para. 3.32). Supervision missions failed to adequately deal with the investor's worsening financial situation (PPAM, paras. 25-26). Shortcomings at project appraisal aggravated difficulties encoun- tered during implementation and subsequently in the project's operating phase (PPAM, paras. 29-30; PCR, para. 7.13). PROJECT PERFORMANCE AUDIT MEMORANDUM YUGOSLAVIA - AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO (LOAN 1370-YU) I. PROJECT SUMMARYl/ 1. The Socialist Republic of Montenegro (SRM) is one of the least developed areas of Yugoslavia, with a per capita income reaching only about 80% of the national average. Its agriculture sector grew at an average annual rate of 1.7% during the 1970s. Only 13% of the total area of the SRM is agricultural land; 85% is highly mountainous terrain. The principal agricultural area is the 19,000 ha Cemovsko Polje plain--mainly growing fruit and vegetables--which is the site for this project. 2. The project was the fourth in Yugoslavia receiving Bank support for agriculture, and the second supporting agro-industries.2/ Identification was based on studies sponsored by OECD and UNDP/FAO between 1971 and 1974, and on a 1975 report by the FAO/IBRD Cooperative Program (CP). Preparation was undertaken by a local team assisted by CF. Appraisal took place in June 1976, and a loan (1360-YU) in the amount of US$26.0 million was approved in February 1977. The estimated project cost was US$55.6 million, with a foreign exchange component of 36%. The loan became effective in July 1977, and was closed in June 1983, as expected. Final disbursement took place on March 27, 1984, and an unused balance of US$15,224 was cancelled. 3. The objectives of the project were to increase agricultural produc- tion for the domestic and export markets, expand agroindustrial processing capacity, improve product quality, and raise productivity and income. The project also aimed at strengthening the organization and the appraisal and supervision capacity of the borrower. Specifically, the project included support for (a) the establishment of a 2,000 ha sprinkler irrigation system; (b) land preparation for and planting of 1,500 ha of vineyard; 500 ha of peaches and sour cherry plantations, and of 60 ha of windbreaks; (c) 14 km of farm roads, support facilities and research; (d) a winery; (e) a cold store; and (f) a collecting and input supply center for individual farmers. Con- struction was expected to be completed by December 1982, and full production to be achieved by 1986. 4. Physical implementation of the project was successful. Irrigation infrastructure for 2,014 ha, comprising a sprinkler system for 1,860 ha and 1/ Adapted from the PCR. 2/ The first such project was the Agricultural Industries Project (Loan 894-YU) in Macedonia. See OED Report No. 4490, dated May 13, 1983. -2- drip irrigation for 154 ha, was installed. The established plantations included 1,306 ha wine grapes, 186 ha table grapes, 214 ha peaches, 282 ha sour cherries and 25 ha Japanese plums, for a total area slightly exceeding appraisal estimates. Two major complementary facilities, a 15 million liter capacity (10 million liter as appraised) winery and a 3,000 ton capacity cold store, also were provided. Eleven kilometers of farm roads were constructed, partly to a higher standard but 3 km less in length than originally pro- posed. Farm centers were constructed as expected. Project related research produced a number of published reports. 5. Project start-up was generally rapid and initial construction prog- ress of the major components rather close to the original schedule. Minor delaying factors included an unexpected land issue arising from the need to site public facilities unrelated to the project, and changes in project design. A major change was the elimination of Skadar lake water as a partial irrigation water source, and a switch to groundwater as the exclusive source for the entire project area. The issue of what type of irrigation to install also took several years to resolve, but approving sub-area systems in steps allowed orderly implementation to go forward. Other minor changes included the planting of 25 ha of plum trees not originally envisaged, and deletion of the 60 ha windbreaks, of a major bridge, and of farmer collection centers; the latter were established but not funded from the project. The only major construction problem, encountered with the cold store, resulted from poor performance of the contractor. Project construction after the first imple- mentation year proceeded behind schedule, although most major components were completed within reasonable periods. However, because of delays with a few components, notably roads and the cold store, the project's overall comple- tion delay was 43%. Actual project cost was US$50.1 million, or 10% less than expected. The reduced cost in dollar terms resulted from rapid devalua- tion of the dinar. In local currency terms, there was a cost overrun of 76% due to high domestic inflation and upgrading of construction specifications for some project items. 6. The production impact is expected to be favorable although full development will be delayed by about two years. Production of grapes is pro- jected to meet appraisal targets, and of peaches to exceed the targets. A serious problem has occurred with sour cherries where tree growth has been stunted and production curtailed because of disease problems. About 80% of the trees are affected, and a solution has not yet been found. Production has been disappointing to the extent that elimination of the plantation may have to be considered. Production from the plum trees also has been dis- appointing. The winery has been operating, together with a previously exist- ing winery, and wine quality from these facilities has been good. 7. Institutionally, some achievements are worth noting. Investiciona Banka Titograd (IBT-UB), the borrower, was strengthened by the expansion of its IBRD Operations Unit and implementation of a supervision and monitoring system. The investor, 13 July Agrokombinat (AK), formed a Project Unit for purposes of implementing this project which was generally effective and which was disbanded in a timely fashion once the construction phase was completed. -3- 8. However, major weaknesses in the AK's structure and operating sys- tem have come to light which have contributed to a serious financial prob- lem. AK's marketing capability, specifically with respect to international sales of wine and fruit, appears to be inadequate, with adverse effect on revenues, particularly foreign exchange. Its accounting system and practices are not amenable to effective cost control. These aspects plus the devalua- tion of the dinar have precipitated a serious liquidity crisis for the enter- prise. AK obtained additional external loans subsequent to approval of the World Bank loan which were partially applied to this project. Special meas- ures, which continue in effect, had to be implemented to prevent the finan- cial collapse of AK. 9. The re-estimated financial rate of return (FRR) to the project's vineyard and winery components is 5% (13% at appraisal). The main reasons for the decline in profitability are a high cost overrun and an input-output price disparity related to a weak market situation for wine. In sharp con- trast to wine production, the re-estimated FRR for orchards and the cold store is 26% (18% at appraisal). This favorable result is due to unantici- pated rental income from the cold store. 10. The re-estimated economic rate of return for the project is 15%, compared with 17% estimated at appraisal; it is 8% for the winery and 28% for the cold store. The employment impact is considered substantial. II. AUDIT FINDINGS A. General 11. Despite the current problems facing 13 July Agrokombinat, the project has a number of attractive features; it has been relatively well executed, and it has the basic ingredients necessary to succeed. Project organization contributed to the favorable performance. A Project Unit (PU) was created early in 1977 and adequately staffed (PCR, para. 7.03). In 1979/80 staff recruitment was accelerated in order to acquire candidates for training as operators of the plantations and processing facilities; this far-sighted personnel policy greatly helped the smooth transition from the construction to the operating phase. That transition was further assisted by the gradual transfer of regular PU staff to Work Organization (WO) Planta- tion, the AK entity responsible for operation. The PU was appropriately disbanded in 1984 after completion of construction under the project. 12. Another feature of an institutional/management nature was the strengthening of Investiciona Banka Titograd. Under the project, IBT-UB's existing IBRD Operations Unit was expanded, improving its expertise in the field of agricultural credit (PCR, para. 7.01). The groundwork also was laid for introducing a suitable monitoring system (in compliance with Section 3.03 of the Loan Agreement). Although performance of that system initially was weak, it has been improving gradually with efforts under more recent Bank- assisted projects. However, a reserved attitude towards monitoring and evaluation still prevails within IBT-UB, and it is important that tangible results of demonstrable value are achieved soon to mitigate that attitude. 13. The project-and also individual farmers in Zone B of Cemovsko Polje--benefited significantly from research undertaken by AK. Research in the early 1960s was purpose-oriented and set on a scientific basis (PCR, para. 3.14). The project provided further support for research activities, and although it is difficult to attribute specific practical outcomes to these activities, there is no doubt that the favorable experience with the project's vineyard is in no small measure a result of extensive research work. It would be interesting to ascertain to what extent the unfavorable experience with sour cherries resulted from a lack of adequate research for this crop. 14. It is no small achievement that the project's irrigation facilities were fully operational in 1983, and the entire area of 2,014 ha was irrigated in 1984. Only a rapid operational start-up can assure that potential bene- fits are realized. Extensive deliberations and planning efforts preceded establishment of the irrigation system (PCR, paras. 3.02-3.08). One issue concerned the source of irrigation water, and adequate investigations demon- strated that groundwater could serve the entire project area instead of being used as a supplement to water from Lake Skadar. The other issue dealt with the type of field equipment to be installed. At the Bank's insistence, vari- ous alternatives were evaluated, and a sprinkler system was found superior and was installed. That system may have to be changed at the end of its useful life due to the labor-intensive nature of that system- and adverse experience with employee management. But the sequence of events regarding establishment of the irrigation system shows diligence on the part of the Bank and the Borrower in striving for optimal technical and economic solutions under the project. B. Problems and Constraints 15. Cold Store Construction. Clearly the most troublesome component was the cold store (PCR, paras. 3.12-3.13 and 4.17). It was completed late, suffered a 61% cost overrun, and spawned court action because of the contrac- tor's deviation from specifications and poor workmanship. The problems started during procurement. Because of what were considered high bids, the contract was re-tendered; the winning bid in the second round was 22% below the average of four bids received in the first. A causal relationship is difficult to prove, but obtaining such a relatively low bid may have presaged substandard execution. The resulting additional cost to the investor is likely to be around 100 million dinar. An open question in this regard is whether cost considerations weren't given too much weight, and other relevant criteria too little, at bid evaluation. There are also indications that supervision of the contractor by the investor was inadequate, and that the investor was too anxious to bring the facility into operation. However, once the defects were discovered the course of action taken by the investor to -5- obtain remedies was entirely appropriate. It will reduce the additional financial burden on the investor and serve as a deterring example to the con- tractor community. Using the facility, rather than awaiting resolution of the legal issue and repair of defects, has helped to minimize economic losses. 16. Sour Cherries Plantation. The most serious technical problems are those encountered in the sour cherries plantation (PCR, para. 4.06). Dis- eased planting stock and bacterial infection are suspected to be causing retarded tree growth and premature "fruit drop". No therapeutic remedy has yet been discovered. In retrospect, two factors are likely to have aggra- vated, if not necessarily caused the problem. Unlike with grape vines, adap- tive research for sour cherries has been minimal in the project area, and pilot work inadequate. The other factor relates to the pressure for timely implementation which has led project authorities to be lax in the selection and prophylactic treatment of seedlings. Similar pressure was responsible for the planting of far more varieties than necessary for staggered harvest- ing - over 20 - of peaches, but the consequence there is mainly one of opera- tional inconvenience rather than impaired production. 17. Environmental Impact. The project is extremely agro-chemical intensive. Plant nutrients have been applied at an annual rate of 718 tons over the 2,014 ha area, i.e., averaging 356 kg/ha. Over 20 different plant protection materials are used in nine applications for grapes and eleven applications for peaches per year. It is clear that sprinkler irrigation and the sandy soils promote quick percolation of chemical residues into the groundwater, the principal source for domestic use in the Titograd area. The audit feels that the environmental implications of usage of these chemicals has not been adequately addressed. 18. Miscellaneous. A minor concern is the deletion of windbreaks. The audit feels that the reason for deleting windbreaks given by the investor did not have an adequate empirical or scientific basis. Only time--and further experimental work--can tell whether the decision was justified. Insufficient explanation also has been given as to why a winery with a 15 million liter capacity was established, with the Bank's concurrence, when only a 10 million liter capacity facility was envisaged at appraisal. This decision is the more questionable in the light of the poor re-estimated financial and eco- nomic rates of return (5% and 8%, respectively) to the vineyard/winery component. C. Main Issues 19. The Investor's Financial Situation. The most important issue aris- ing oct of this project is the financial impact on the investor, 13 July Agrokombinat. The financial performance of the project is poor (PCR, paras. 5.09-5.15). There is inadequate cash generation to service the debt, and liquidity problems are projected into the early 1990s. The problem is less one of financial returns on investment (the average FRR is estimated between 10% and 11%) than of liquidity. The liquidity problem is due mainly to -6- excessive debt financing, implementation delays, local currency cost over- runs, the long gestation period of the investments, and an adverse foreign exchange effect, aggravated by institutional weaknesses on the part of the investor. 20. The cost overrun in terms of local currency was 76%, caused mainly by an increase in quantities (for technical reasons and due to design over- sizing), small contracts, little competition, and high domestic inflation. Unit costs were relatively high, averaging US$18,130 per ha, excluding the winery and cold store. IBT-UB borrowed US$22.0 million from the Bank of America in 1979 and US$1.0 million from the Kuwait Fund in 1981, about US$17.3 million of which was on-lent to the investor; most of these funds were applied to this project. Since the investor carries the foreign ex- change risk on all foreign borrowings, the rapid devaluation of the dinar has increased the investor's debt service burden. When debt service payments for the World Bank loan were due in 1983 it became evident that the investor was unable to meet these obligations, and a rescue package, involving Federal and SRM funds, was conceived. Additional funds were made available in 1984, and the immediate future is still in doubt (PCR, paras. 3.28-3.32).3/ 21. The debt service burden deriving from the over US$43 million in foreign loans certainly is formidable, and cash flow projections leave some doubt as to whether this debt could have been serviced even had the problem of adverse foreign exchange rates not arisen. As it developed, the exchange rate changed from dinar 18 per US dollar at appraisal to about dinar 124 per US dollar at completion and to dinar 260 per US dollar at the time of the audit. There has been no concomitant growth in WO Plantation's operational surplus in dinars that would allow it to acquire the necessary foreign ex- change at prevailing unfavorable exchange rates for meeting scheduled deb. service payments. This is the main reason why Federal and SRM aid to AK became necessary immediately when payments on the World Bank loan were sched- uled to begin. Actually, US$10.83 million had already been repaid to the Bank as of April 30, 1985. At that date, oL the balance of US$15.15 million held by the Bank (as valued at the time of loan commitment), the Borrower's obligation was only US$11.3 million as foreign exchange adjustments (on por- tions of the loan repayable in currencies other than US dollars) had resulted in savings to the Borrower of US$3.85 million. Hence the currency fluctua- tions are producing a mixed effect for the borrower/investor: rising current payments in dinar terms, and savings in dollar terms in the overall loan principal to be repaid. 22. In retrospect, the project's financial structure cannot be consid- ered to have been sound. AK's equity financing amounted only to 2% of total project financing requirements, and 98% constituted loan financing. About 63% of total financing requirements were met from external sources, even though only about 33% represented foreign exchange costs (41% estimated at 3/ Borrower comments focus especially on the wider effects of high domestic inflation and local currency devaluation (Annex I). -7- appraisal, including interest during construction). These figures imply that external financing covered 100% of the foreign exchange cost plus 44% of local costs. The two major high-risk weaknesses in the project's financial structure thus clearly were excessive debt financing and excessive coverage of local costs through foreign borrowing. In view of the undercapitalization of AK, it is questionable whether the Bank was justified in encouraging the borrower to mobilize additional foreign resources during the period 1977-79 (para. 25 below). In retrospect, the Bank overemphasized the technical and physical implementation of the project and paid insufficient attention to analysis of the financial implications of AK's financing decisions. 23. The investor's overall financial position is better than that of the project subaccount, i.e., of WO Vinoprodukt and WO Plantation. In 1983, project assets accounted for 44% of AK's total assets, but project revenues accounted for only 5%.4/ While for the project current liabilities exceeded current assets by 79%, for AK as a whole current liabilities were covered by 157%. An unfavorable current financial ratio in the start-up phase of an enterprise dealing with perennial crops is not unexpected, and indeed was highlighted at appraisal. What is striking is the degree of underestimation of the problem, or conversely, the deviation in an adverse direction from original estimates of the crucial parameters in the picture. 24. The Bank was aware of costly design upgradings (e.g., transformers, length of buried networks, diameter of pipes, etc.), but was unable to assert itself in matters of cost containment. Completion delays, where such occurred, also were closely monitored by the Bank, and due warnings were issued to the Borrower. However, inadequate attention was paid all along to questions of internal efficiency of AK, particularly in the areas of cost accounting and marketing. Although preparation and appraisal recognized the need to strengthen AK's marketing, no technical assistance or training was included under the project. Weaknesses in cost accounting were only recently identified in connection with the appraisal of the Montenegro Regional Development Project (Loan 2467-YU), approved in July 1984, and a special Bank review of AK undertaken in December 1984. 25. Supervision also failed to deal adequately with the investor's financial situation. The second supervision mission, in September 197, reported that the Bank nat! been informed-not by the Borrower, but through IFC--that IBT-UB was seeking cofinancing from external sources to re-finance its own contribution to the project. The Bank reacted by informing the Borrower that it supported additional mobilization of resources, i.e. from external sources, but that it wanted to be kept informed. IBT-UB mentioned to the Bank that they were negotiating a foreign bank loan in a June 1978 request for permission to release the appraisal report and loan agreement to prospective lende:s; no details were disclosed. The Bank had no objection to the release of these documents, and requested only information on the terms 4/ These calcuations include an undetermined but small portion of non-proj- ect elements. of the new loan. There was no formal follow-up on this matter. An informal feedback is recorded in June 1978, when a Bank staff member reported to management that IBT-UB had obtained a loan from the Bank of America, and that they were interested in Bank assistance to obtain additional cofinancing at more favorable terms, partly to refinance the recent, more expensive Bank of America loan. The Borrower at that time had received informal assurance of such assistance but, again, there was no follow-up. 26. In retrospect, the Borrower never informed the Bank of any foreign borrowings related to this project, or of onlending of such funds to the investor, and Bank supervision missions never covered the subject, except the one in September 1977. It was only during the last supervision mission in June 1983 (which also undertook the appraisal of the Montenegro Regional Development Project - Loan 2467-YU) that the investor's financial problems, including the SRM effort to assist, were brought up. The mission merely con- veyed the information from AK to Bank management, without apparently being able during the three days devoted to project supervision to investigate or undertake any analysis. It merely suggested that these matters needed to be followed up by the PCR mission, which at that time was planned for December 1983. The last supervision summary (Form No. 590) shows an almost perfect rating of the project's implementation status, and since operational perform- ance is not one of the reporting requirements the deteriorating financial situation was not adequately reflected. 27. Follow-up and action on an important matter like financing of proj- ect operations should not be deferred to the next routine mission, especially the PCR mission, which in this case took place not six months, as planned, but 17 months later. It should be expected, rather, that swift, project- specific measures be applied. In this case, a more sweeping but time consum- ing approach was followed. The appraisal mission for the Montenegro Regional Development Project, which visited Yugoslavia in June 1983, covered some aspects pertaining to social sector organizations. It identified three major weaknesses in the investing enterprises, namely organizational inefficien- cies, lack of proper financial controls, and inadequate marketing skills. Measures to alleviate these problems were included in that project and rein- forced by the outcome of a Country Implementation Review (CIR) in December 1984. There is no evidence, however, that AK's WO Plantation was singled out for special attention by the appraisal mission. It was only during a Febru- ary 1985 follow-up mission that terms of reference for the whole of AK's ope- rations were agreed upon. Twenty months had thus elapsed between the first reporting of WO Plantation's financial malaise and the decision to undertake investigative action (i.e., a comprehensive review of specific AK practices); remedial action is expected to follow at some future date (currently envis- aged some time following finalization of an "Action Plan", scheduled for end-July 1985). If this turns out to be a workable approach, then it should have immediately followed the June 1983 supervision mission. It should also be mentioned that the Bank made no input in formulating the stablilization - 9 - program that WO Plantation was obliged to prepare by the Federal Government in 1983/84.5/ 28. In conclusion, this is a physically well-executed project in seri- ous financial difficulty.6/ Existing problems in part relate to the country's general economic situation, and in part to the investor's own weaknesses. Experience with the project demonstrates the importance of the general country environment as a determinant of a project's success or fail- ure, and by implication of the Bank's work aimed at analyzing and improving that environment. Of even greater importance, because of the Bank's con- structive influence, is the immediate environment within the enterprise undertaking the project.7/ Experience at hand shows a tendency on the Bank's side to ignore that environment if the enterprise is very large and the project constitutes only a relatively small portion of the enterprise's total operations. A major lesson from this project is that the Bank should insist on a clear separation of project activities/accounts, and should be concerned about the enterprise's policies, organization and management, even when these aspects go beyond the scope of the project. 29. Project Appraisal. A Bank appraisal mission, consisting of six members, visited Yugoslavia in May/June 1976, and Board approval for the loan was obtained about seven months later, in early February 1977. The volumi- nous appraisal report, covering not only this but also a similar project in Macedonia (Loan 1371-YU), therefore was prepared in a relatively short span of time. Since then, some deficiencies in the appraisal have become apparent (PCR, para. 7.13). On the technical side, the previously existing winery was not taken into account in planning the new winery. It also omitted the implications of letting wine mature at least one year, and of the practice to blend wine from the old vineyards with wine from new vineyards in order to obtain a more consistently tasting quality wine. The most serious appraisal shortcoming was the lack of analysis, and of measures to strenghten, AK's marketing capabilities, especially of export marketing as too much reliance was placed on the absorptive capacity of the domestic market. Inadequate expertise in this area has only recently been identified as being in large measure responsible for AK's depressed revenues from sales in general and for 5/ Between the time of the last supervision (6/83) and the PCR mission (10/84), the Bank (IDF Division and the Agriculture III Division) were addressing the problems facing IBT's entire loan portfolio which included some 18 enterprises in arrears of which AK was one. Remedial measures were thereby included in the follow-up Montenegro Regional Development Project. 6/ The Borrower agrees with this assessment (Annex I). 7/ Growing awareness in the Bank of the need to confront the problem of poorly performing enterprises in Yugoslavia is reflected in World Bank Staff Working Paper No. 705, Financial Discipline and Structural Adjust- ment in Yugoslavia, Rehabilitation and Bankruptcy of Loss-Making Enter- prises, Washington, D. C., 1984. - 10 - a shortfall of expected earnings of foreign exchange from exports. The Bank also did not become aware at appraisal that AK's accounting practices are failing to function as an early warning system for impending financial problems. 30. Also on the financial side, project costing was flawed. Base costs of some components were underestimated. For the irrigation system, operation and maintenance costs during the five-year plantation establishment period were not included. The planned investor contribution of 5% of total financ- ing requirements was on the low side, and the projected phasing of revenue generation too optimistic. The implications of AK assuming the foreign exchange risk were not assessed and no contingency measures had been pro- vided in the event serious debt service problems arose from the kind of large, unexpected dinar devaluation that actually occurred (para. 21).8/ All these factors resulted in the large cash flow problems that have been projected at project completion. In retrospect, the decision to appraise two projects within a time period which was shorter than is customarily needed for a single project appraisal created a false sense of appraisal efficiency at the time to the detriment of project quality. Regarding the consequences of appraisal deficiencies, with the exception of cost overruns, supervision missions failed to pay timely and adequate attention to these aspects. It is conceivable that with appropriate measures, such as simplifying design rather than making it more costly, a reduction in scope (particularly of the vine- yard/winery component), aggressive market development, more appropriate financing, etc., the project's impact on the investor's financial situation would have been more favorable. D. Sustainability of Benefits 31. With the exception of the sour cherries and plums plantations, the project's physical base is sound. However, considerable financial assistance will be needed for the next seven years, or even longer, to overcome the project's financial liquidity squeeze. The extent to which this and other problems will be overcome to a large extent depends on the success of the Action Program, expected to be prepared and implemented by AK later in 1985. Having a mixed effect, it is likely that country-external factors, such as currency exchange rates, will follow a more favorable trend than in the past which would ease the debt service problem but reduce the comparative advan- tage of project output in international markets. It also is to be hoped that the parity squeeze in domestic input/output prices has come to a halt and will be partially reversed. Finally, the project impact on groundwater lev- els and quality must be closely monitored in the future. 8/ OPS observe that the risk of foreign denominated loans is a major issue for many larger agricultural enterprises, and comment that "On this basis, much of the recent lending in Yugoslavia will prove to have had an adverse financial impact on the entities concerned. This aspect of our appraisal work has not received enough attention, and the forthcom- ing policy paper on Rural Financial Markets will suggest ways in which this might be rectified." - 11 - Annex I Page 1 Commnts Received from Investiclons Banka Titograd UORLDBANK HS SYSTEM ZCZC MA3P0639 JUS0046 EH183 EMPA3 REF : TCP OMR JUS0046 ZJR409 IN 15/14:31 OUT 15/14:53 61118 YU IBANKA RRT 19.036 15.11 1985 TO INTBAFRAD VASINBTON RE: COMPLETION PROJECTS REPORT FOR AGRICULTURE AND ABRICULTURAL PROJECT IN MONTENEGRO LOAN 1370-YU/ AFTER REVIEMING PROJECT PERFORMANCE AUDIT REPORT AND CPR OF ASRICULTU RE AND AGRICULTURAL INDUSTRIJES PROJCT / MONTENEGRO/ / LOAN 1370-YU/ ME WANT TO UNDERLINE THAT THE ABOVE TUO REPORTS UORKED OUT THORUGH AND QUALITATIVELY ONE VERY COMPLEX ISSUE, HAUING, IN MIND SPECFIEE SPECIFICITY OF THE PROJECT ITSELF, THAT HAS BEEN IMPLEMENTED WITHIN LONGER PERIOD OF TINE INVOLUING A NUMBER OF TECHNOLOGIC SPEFICITIES. THE VERY TASK IN UORKING OUT THIS REPORT MAS ESPECIALLY DIFFICULT DUE TO GREAT EONOMIC DISTRUBANCES IN THE COUNTRY DURING REALIZATION OF INVESTMENTS AND AFTERUARDS, PARTICULARLY TROUGH HIGH INFLATION RATE AND ALTERATION OF EXCANGE RATE OF DIN.UHISH HAD AGREAT NEGATIVE INFLUENCES AT THE PROJECT SUCCES/INESTHENT OUVERRUNS AND INCREASE OF DEBT SERVIE LIABILITIES/. ME FEEL THAT NOT ENOUGH ATTENTION MAS PAID TO THIS ISSUE / INFLATION - DEVALUATION/ IN THIS REPORT. FOR THIS REASON,BASIC CAUSE OF LOVER RATE OF RETUNR WITH COMPONENT VINEYARD/UINARY WAS NIGLECTED COMPARED TO HOU IMPORTAN T INFLUENCE IT HAD ON BUSINESS RESULTS/ OPERATING COSTS,DEBT SERVICES AND CASH FLO/ . THE SAME MAY WAS RRETED THE INFLUNCE OF DELAY IN INVESTMENT COMPLETION TO OPERATIVE PROJECT RESULTS. INTEGRATION OF COMPLETED FACILITIES INTO LO PLANTATIONS HINDERED PROVISION OF RELEVANT DATA FBR CARRYING OUT INDIVUDUAL ANALYSIS OF THIS INVESTMENT EFFECTS,BUT IT UAS NOT RESONOABLE TO ESTABLISH SEPARATE UNIT FOR EXMPOLITING THIS FACILITY IN CEMOVISKO P FIELD7 IN ADDITON TO EXISTING ORGANIZATION DEALING UITH SAME OPERATIONS. - 12 - Annex I Page 2 ORGINALLY,AK USE TO HAVE THIS SEPARATELY AGREEE ORGANIZED / PERIOD 1979/80/ BUT IT TURNED TO BE IRRATIONAL AND THAT SUCH ORGANIZATION REFLECTS MANY NEGATIVE CONSEQUENCES IN SUPPLYING RECYLICING MATERIAL, PROVISION OF LABOUR/ PARTICULARLY QUALIFIED LABOUR AN ENGINEERS/ IN SELOING AND UTILIZATION OF PROCESSING CAPICITIES AND SO ON. COMMON OPINION OF INVESTOR AND BORROUER IS THAT STATEMENT ON DUBLING OF FUNCTIONS OF DOAL 'S AND LOS IS URONS FOR THE FUNCTIONS AND UORK TASKS MENTIONED ARE ONLY ADEQUATELY DEVIDED A UITHIN THE SAME FUNCTIONS. IN THE SECTION VIII RELATED TO CONCLUSIONS AND RECDUNNEEE RECOMMANDATIONS ME HAVE THE FOLLOUING RECCOMANDATION AND VIEUS: 0.02. ME ACCEPT THE FIRST PART OF THIS STATEMENT CONSERING THE ORGANIZATION NOT HAVING DEVELOPET IN DETAILS MARKETING STERETEGY BUT ME CANNOT AGREE UITH FORMULATION ON WEAK FINACE PLANNING AND CONTROL ON THE INVETOR'S PART.UORKING OUT OF MARKETING PROGRAM IS IN PROCESS UHEREBY THIS OMISSON OF THE INVESTOR UILL BE OVERCOME. 0.07. ACCORDING TO APRAISEL, CLASH DETUEEN INCOME AND LIBILITIES OF bEBIT SERVICE IS ENVISAGED TO EXIST UNTIL 1987 UHAT SHOULD BE INCLUDED UNDER THIS POINT- 0.07 AND CONNET EE CONNECTED UITH POINT 8.10. IN ADDITION, DURING CONSTRUCTION PERIOD AND AFTERUARDS. CONDITONS ON THE MARKET HAVE BEEN COSIDERABLY CHANGED AS UELL AS IN FINANCING CONSTRUCTION DUE TO UNFAVOURABLE TERMS OF LOAND PURPOSED FOR COVERING INVESTMENT OVERRUNS.CERTAIN MEAURES THAT HAVE BEEN TAKEN ON VIDER BASIS IN SOLVING PROBLEMS IN THE PERIOD BEFOR 1984 UILL HELP FASTER OVERCOMMING FINANCIAL DIFFICULTIES ON THIS PROJECT. 8.08/1/ AND /II/ SHOULD BE JOINED TO THE OBJECTION IN POINT 8.02. 8.09 THE STATEMENT ON INAPPROPIRATE FINANCIAL CONTROL AND EA UEAK MONTIRING CARRIED OUT BY THE BORRUER CANNOT BE ACCEPTED THE MEASURES HAVE BEEN ALREADY TAKEN BY THE INVESTOR AND THE BORROUER IN UORKING OUT THE STADY FROM POINT 8.08.AND THEY UILL BE ESPACIALLY TAKEN AFTER COMPLETION OF THE STUDY FROM POINT 8.08. 8.10 THA LAST SENTENCE CANNOT BE ACCPTED FOR THE INVESTOR NEU THAT SRM HAD GREAT DIFFICULIES IN PROVIDING FUNDS FOR THESE PORUPOSES AND AS IT IS KNOUN REPUBLIC FULFILLED ONLY A SMALL PART OF IT. - 13 - Annex I Page 3 8.11 WE CONSIDER THIS POINT SHOULD BE OMMITED IN THIS STAGE AND ONSE THE ANALYISS FROM POINT 8.08 IS COMPLETED THIS ISSUE CAN BE BETTER DIEE DEFINED,ON COURSE IF THIS POINT RELATES TO CEMOVSKO POLJE PROJECT,AS WE UNDERSTOOD. UE SUGGEST ONE MORE POINT TO BE ADDED AS FOLLOUS: ACCORDING TO THIS REPORT IT MAY BE STATED THAT THE PROJECT UAS PHISICALLY SUCCESSFULLY IMMPOEE IMMPLEMENTED WITHIN SCHEDULED DEADINES BUT IN ITS REALIZATION AFTER COMPLETION,IT CAME TO FINANCIAL FIEE DIFFICULTIES BECAUSE OF MARKET 315MX DISTRUBANCES, INFLATION AND DEVALAUTION OF DINAR, UNFAVOURABLE LOANS FOR COVERING OVERUN COSTS ON INVESTEMENTS RESULTING IN HIGH FOREIGN EXCHANGE RISKS/ FOR FOREING LOAN UAS USED/INSUFFICIENT SUPPORT BY SRM IN COVERING PLANED DEFICTIT TILL 1987 AS UELL AS CERTAIN INVESrOR'S WEAKNESSES IN THE MARKETING FIELD. THESE COMENTS WERE FORMULATED TOGETHER UITH INVESTOR. VITH BEST REGARDS IBMKA TITOGRAD-UDRUZENA BANKA VESELIN BABIC DEPUTX DIRECTOR OF BANAGING BOARD 61118 YU IBANKA DEPUTY CIRECTOR OF MANAGING BOARD 61118 YU IBANKA =11151544 NNNN  - 15 - YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MDNTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT March 13, 1985 Europe, Middle East and North Africa Region Agriculture III Division -/6- /9/~7( - 17 - 1. INTRODUCtION Agricultural Sector in Montenegro 1.01 The Socialist Republic of Montenegro (SRM) is one of the least developed areas of Yugoslavia, and in the mid-1970s the estimated per capita income was approximately 70% of the national average. In 1982, per capita income was US$2,270, about 80% of the national average. The agricultural population in Montenegro has decreased from 185,000 in 1971 to 158,000 in 1981 (about 30% of the total population). Rapid rural migration has caused serious bottlenecks and labor shortages in certain rural areas of the Republic despite high overall unemployment in Montenegro. During 1971-1981, the Republic's agricultural sector grew annually at about 1.7%. Montenegro accounts for less than 5% of Yugoslavia's total agricultural land, and it contributed only about 1.4% of its agricultural social product during this period. 1.02 The SRK is distinguished by highly mountainous terrain representing about 85% of its land area. Only 13% of the total land area is agricultural land, while forests account for 41% and natural grassland for 24%. Individual farmers own about 94% of the agricultural land, 46% of the grassland and 34% of the forests. The principal agricultural production area, still with a sizeable untapped potential, is the Cemovsko Polje plain--mainly growing fruits and vegetables. It is the project site for the Agriculture and Agricultural Industries Project - Montenegro--the subject of this PCR. 1.03 By 1977, the Bank had made 40 loans to Yugoslavia totalling about US$1,367 million. Bank lending was generally concentrated on infrastructure projects, including transportation (14 loans), power (three loans), telecommunications (one loan), water supply and sewerage (two loans), and five multipurpose projects, which included substantial agricultural components for irrigation and agricultural credit. Ten loans had been made for industry and two for tourism and one for air pollution control. Two loans, totalling US$81.0 million, had also been made for agriculture and agroindustries. 1.04 The Agriculture and Agricultural Industries Project - Montenegro represented the fourth Bank loan for agriculture in Yugoslavia, following the first Agro-Industries Project in Macedonia (Loan 894-YU) in 1973 (primarily involved with the social sector), the first Agriculture Credit Project (Loan 1129-YU) in 1975 (about 30% involved with the individual sector), and the Metohija Multipurpose Project (Loan 1360-YU) in 1976 (primarily involved with the individual sector). The Agriculture and Agricultural Industries Project - Montenegro supported the Yugoslav efforts to accelerate development in the less developed regions. More specifically, it helped to achieve the objectives of the SRM to increase agricultural production both for the domestic market and for exports, to expand agroindustry processing capacity and to improve product quality and to stabilize food supply. The project addressed two major constraints; namely, lack of capital for large investments in land development, irrigation, and food processing in the social sector and lack of market outlets for the individual sector. 1.05 In terms of the agricultural development alternatives available at the time in the SRM, expansion of the social sector's processing and marketing facilities was seen as one of the most important means for expanding agricultural production in general and indirectly increasing the productivity and incomes of the individual sector in particular. Another serious - 18 - constraint to agricultural development, which was recognized at the time; namely, lack of credit for on-farm investments in the individual sector was addressed by other Bank financed projects, as described in the preceding paragraph. II. PROJECT FORMULATION AND PROCESSING A. Background and Setting 2.01 Cemovsko Polje - the site of the project area - is the largest flat area (19,000 ha) within the SRM (Map No. IBRD 18663 (PCR)). The plain, bordered by hilly and mountainous limestone formations, slopes gently from Titograd toward Lake Skadar in a north-south direction. The Moraca river flows southward along the western boundaries of the area and its tributary, the Cijevna river, traverses the upper part of the plain. The Cemovsko Polje is divided into three zones. Zone C (4,200 ha) lies on the upper part of the plain, of which about 3,000 ha is owned by "13 July" Agrokombinat (AK). The project falls within this Zone, and prior to the project it was not farmed. The area is covered by a gravelly fluvio-glacial layer, and the soils are gravelly brown loams. The gravel content of the soil is between 50% and 80% at a depth of 20 cm in about 70% of the area. Therefore, drainage is very good. The phosphoric acid content of the soil is reasonable, while that of potassium is low. The salt content is negligible, and the organic matter content is between 2% and 3%. Zone B (4,500 ha) covers the middle part of the plain and is owded by about 2,500 individual farmers practicing nixed agriculture on fragmented plots with specialization in vegetable growing under irrigation from shallow wells. Zone A (10,000 ha), which is in the lower part of the plain, is periodically inundated by Lake Skadar and is used mainly for seasonal grazing of livestock. 2.02 The climate is Mediterranean with a strong continental influence as shown by the marked variation between summer and winter temperatures. The annual mean temperature is 15.50C, while absolute maximum and minimum temperatures are 41.20C in August and -15.60C in January, respectively. Average annual rainfall is 1,630 mm; however, during the summer growing season (April-September) precipitation only averages 467 mm. The combined influence of high temperature, winds and low relative humidity results in high evapotranspiration in summer, making irrigation essential for agricultural production. 2.03 Surface water is available from three sources as follows: (i) the Cijevna river, which does not ensure enough water for the whole project area; (ii) the Moraca river, which has more than adequate discharge for total project purposes but with high risk of pollution; and (iii) Lake Skadar, which has limitless water and is about 4 km from the project area at its nearest point. As for groundwater, hydrogeological studies carried out in the early 1970s identified two aquifers with probable water interchanges between them. The watertable is widespread under the whole plain at a depth ranging from 20 m to 40 m below the ground level in the upper parts of Zone C, and from 2 m to 3 m in the lower areas of Zone B. Several tube-wells had been drilled into the aquifer, both for water supply (Titograd and small towns) and for irrigation (AK trial plot for vineyards) prior to the project. The well discharge varied from 80 to 166 1/sec for drawdown less than 1.50 m. Laboratory tests confirmed the good water quality for all uses. The safe yield from the upper aquifer was conservatively estimated at 80 million m3 per year. - 19 - B. Origin 2.04 Because the Cemovsko Polje represents one third of Montenegro's total flat cultivable land, it had received the attention of Republic authorities and agriculture investigators and planners for many decades: all of which culminated in a series of feasibility studies and development proposals sponsored by the OECD and UNDP/FAO between 1971 and 1974, for which AK was the counterpart agency. The Bank was kept informed about these studies. Their first mention appears in the project file in December 1972, when the Bank concluded that the OECD financed feasibility study had not defined the subprojects in sufficient detail for financing by an international lending agency. About 18 months later and in response to a request from the Government of the SRM for assistance in financing an agricultural development project on the Cemovsko Polje, a Bank reconnaissance mission visited the area in June 1974. As a result, the Bank asked the FAO/World Bank Cooperative Program (CP) to assist the Montenegrins in the preparation of a project for the Cemovsko Polje. A CP identification mission visited the area in November 1974 to review the project that AK had identified, which was based on slightly modified proposals generated by the earlier OECD and UNDP/FAO studies. AK's project proposal included all three Zones in the Cemovsko Polje. 2.05 The CP Identification Report, which was submitted to the Bank in March 1975, agreed with AK's proposal for Zone C consisting of the establishment of 1,700 ha of vineyards for wine, 300 ha for table grapes, 500 ha of peaches, and 500 ha of sour cherries (total 3,000 ha) plus 100 ha of windbreaks. The orchards and vineyards were to be irrigated by a sprinkler irrigation system drawing water from the rivers and from the ground. For Zone B, the identification mission did not support the proposed collective irrigation project because of the impracticability of achieving the required land consolidation involving some 2,000 individual small landholders. The mission concluded that farming efficiency in Zone B could be better improved by expanding AK's services to the farmers in marketing and improved extension in agricultural production and animal husbandry. The mission also discarded the land reclamation proposal for Zone A, because of its high investment cost. The mission did, however, concur with the proposal for processing facilities involving a winery with an annual capacity of 16.7 million liters and a packing and cold store plant for peaches, grapes, tomatoes and green peppers. It also identified a component to strengthen applied research and a marketing intelligence and monitoring service. However, in view of the marginal rate of return (between 4% and 8%), based on economic prices and the heavy emphasis on food processing, the Report did not recommend proceeding further with project preparation until the results of a comprehensive marketing study being conducted by consultants under Agricultural Industries Project - Macedonia (Loan 894-YU) were known, so as to clarify some of the market and price issues. Because of the low rate of return, the CP proposed an alternative use for Zone C based on milk, wheat and tangerine production with estimated rates of return varying from 9% to 13%. 2.06 The Bank supported the conclusions of the CP and in late March 1975 the Bank notified the Secretary of Agriculture of SRM that, although additional time was needed by the Bank to review the project in more detail, it seemed unlikely that the project would qualify as a Bank irrigation project. Subsequently, in response to an immediate reply from the Secretary of Agriculture, in which the Secretary expressed reservations about the - 20 - validity of the analysis presented in the CP Identification Report, the CP at the request of the Bank visited Titograd again in June 1975 to review the Report with the Montenegrins. This was a crucial point in the project processing cycle, since as a result of this joint review the following was agreed: (i) due to the soil conditions the annual crop alternatives, as suggested by the CP, were not suitable for Zone C and that fruit trees and vineyards, as originally proposed, were more appropriate; (ii) based on new evidence from AK's plot trials it seemed reasonable to expect higher grape yields (18 t/ha at full development) than previously forecast (13 t/ha); (iii) the crucial factor governing the economic viability of a vineyard/wine production subproject in Lone C was the quality of the "Vranac" wine and the price at which it could be uold; and (iv) the CP would engage a wine marketing specialist to assess "Vranac" wine. 2.07 The report of the wine consultant, which visited Titograd for two weeks in July 1975, confirmed a number of important aspects, such as: (i) the soil, climate and "Vranac" grape variety appeared to be well suited to each other, and to the production of quality wine; (ii) the "Vranac" grape, indigenous to the area, was very good raw material for making wine in Montenegro, of a type seldom found elsewhere; and (iii) "Vranac" wine, because of its special characteristics, should find a place on the world markets, as well as within Yugoslavia at a premium price, particularly after it was granted the "appellation controlAe", which was expected in 1976. 1/ In conclusion, the results of this study suggested more favorable aspects for an economically vizble project than previously envisaged. With this additional supportive information, the Bank on October 13, 1975 gave the green light to the Montenegrins to continue with project preparation, and requested the CP to assist in this effort. C. Preparation 2.08 A CP preparation mission visited Titograd in February 1976 to review the work of the local preparation team, which was under the direction of the Agroeconomic Institute (AEI) of AK. The result was the preparation of a project, as presented in a two-volume report dated April 22, 1976, to be implemented by AK consisting of the following: (i) establishment of 2,000 ha (1st alternative) or 3,000 ha (2nd alternative) of irrigated grapes and deciduous fruits in Zone C using a combination of ground water and Lake Skadar as a source of water. The Moraca river was eliminated as a source of water because of pollution threat and the cool temperature of the water, which could adversely affect plant growth; (ii) provision of extension and marketing services to individual farmers in Zone B; (iii) construction of a wine processing plant (10 million liters annually for the 1st alternative and 15 million liters annually for the second alternative), a fruit packing station (4,700 tons annually), cold store for fresh products (1,100 tons annually) and for frozen products (4,000 tons annually), and processing lines for frozen cherries and for green peppers and carrots in frozen and canned forms (7,600 tons total annually); (iv) research on new varieties of fruit trees on 30 ha; and (v) provision for necessary staff for project management. 1/ It was subsequently granted in 1976. - 21 - D. Appraisal 2.09 Appraisal of the project was carried out by the Bank in May/June 1976 in conjunction with the appraisal of Agriculture and Agro-industries II Project - Macedonia (Loan 1371-YU). The basis for appraisal of the Montenegrin project was thL two-volume report mentioned in para 2.08. Project size was an issue. The Montenegrins desired a project comprising 3,000 ha of sprinkler irrigated plantations of grapes and deciduous fruits. However, in view of possible market limitations, particularly for wine, a smaller project including 2,000 ha of irrigated plantations, of which 1,300 ha was for wine grapes, and accordingly reduced capacities for the winery and other processing facilities was considered as being a viable alternative by the appraisal mission. Nevertheless, in view of limited loan funds originally allocated to the project (US$15 million) and the Bank's policy of only financing the foreign exchange costs, the appraisal mission further reduced the project's plantation component to 1,300 ha of wine grapes only, in spite of strong resistance by the proposed investor (AK). As a result of a revision of the FY77 lending program, it was possible to allocate additional Bank financing for the project, and Bank management approved an increase back up to the 2,000 ha alternative, which appraisal had found to be fully justified on technical and economic grounds. An increase in the amount of the proposed Bank loan to US$20 million was deemed fully justified on the basis of covering the full foreign exchange costs for a project size of 2,000 ha. Because of both the short maturity and grace period of the proposed Bank loan (term of 15 years including a three year grace period) relative to the project's gestation period and the method of loan amortization (level repayments of principal), financing of interest during construction was added, which increased the final amount of the loan to US$26 million. 2.10 After reviewing the preliminary drawings for the irrigation system, the appraisal mission suggested modifications for a simpler and less capital-intensive design, whereby, water from lake Skadar would be pumped into a reservoir from where it would serve the distribution system by gravity, instead of being pumped directly to the sprinkler network from the lake. Also, the distribution equipment would consist of portable aluminum pipes and sprinklers, instead of heavy "boom-o-rain" equipment. 2.11 The appropriate formula for establishing the on-lending interest rates under the project was an issue within the Bank. The appraisal mission in the issues Paper dated June 16, 1976 recommended a uniform on-lending interest rate, which would apply both to on-leading of Bank funds, as well as of local funds: a procedure which had been applied in an earlier Bank project in Yugoslavia - the First Agro-Industries Project in Macedonia (Loan No. 894-YU, dated May 25, 1973). On the other hand, the Decision Memorandum, dated July 16, 1976, expressed the vie, chat the precedent established in the more recently approved First Agricultural Credit Project (Loan 1129-YU, dated June 20, 1975) and three Industrial Credit Projects approved in FYs 74, 75 and 76 (Loans 1012-YU, 1013-YU, and 1277-YU) should be applied, id which an appropriate rate would be stipulated only for the on-lending of Bank funds. In effect, this results in a multiple rate system, since the on-lending rates for Bank and local funds are different. The two varying Bank views centered around the subject of the role of interest rates in the allocation of resources in Yugoslavia's economic system. At a special meeting of the Loan Committee on August 3, 1976, it was decided to postpone the final decision pending the findings of the study on the role of interest rates in agriculture that was undertaken by Yugoslav consultants under the First Agricultural - 22 - Credit Project (Loan 1129-YU), and which was to be available by October 15, 1976 (postponed from June 20, 1976). When it became apparent that submission of this study was going to be further delayed, it was decided to proceed on the basis of a multiple interest rate system for this project, in accordance with the then current Yugoslav practice. During the same August 3, 1976 meeting, the Loan Committee also ruled that there would be two loan agreements, two guarantee agreements and a single appraisal and President's Report for the Montenegro and Macedonia projects, which previously had been carried along together for processing (para 2.09). E. Negotiations 2.12 Negotiations started on December 6, 1976 and were completed on December 10, 1976. The main issues were on-lending interest rate and financing plan. Concerning the interest rate, the Bank's position was to stipulate an appropriate rate only for the on-lending of Bank funds and to set this rate at a Level which would approximate current market costs of foreign borrowings to Yugoslav investors including loans from IFC, and which would also provide an adequate spread for the Borrower. Therefore, the Bank recommended an interest rate of 12% on Bank funds, or a lower rate, if the Borrower would provide assurances that part of their costs would be covered by the spread on the interest rates charged on their local funds. Since the Borrower intended to charge a spread of one percent on its funds received from the Federal Fund for Less-Developed Republics and 0.25 percent spread on its own bank funds, a rate of 11 percent on Bank funds was considered sufficient. The Montenegrin delegation, on the grounds that their project was not a line of credit (all Bank funds going to a single sub-borrower - AK) made strong arguments that the large spread, which was well above the maximum allowable under their policy of lending to a single sub-borrower, was not acceptable. However, they did finally agree to a proposal to achieve an effective rate of 11Z by charging an on-lending interest rate of nine percent on Bank funds plus an additional fee of two percent per annum for guarantee and other operations performed by the Borrower (Loan Agreement, Schedule 4, para 3B). 2.13 To ensure adequate availability of financing for completing the project and meeting obligations including debt service, the Bank obtained an assurance from the SRM to provide the necessary funds to AK, through the Borrower, in order to cover any financial deficits that may occur, since it was apparent that AK would confrcnt a tight financial squeeze during the initial years of project operation due to the long gestation period of the investments involved and, therefore, a slow cash flow build-up (Loan Agreement Recital C and Section 7.01 d). During negotiations a significant improvement in the terms of the local financing was also obtained, whereby, the Borrower agreed to on-lend local funds on the basis of a "staggered" maturity and grace periods; that is, counting the full grace period and maturity period from the time of disbursement (Loan Agreement, Schedule 4, para 3C). F. Board Presentation and Effectiveness 2.14 The Board approved a loan of US$26 million on February 22, 1977 without discussion, and loan documents were signed on March 10, 1977. Special conditions of effectiveness included the following: (i) establishment of a Project Unit within AK; (ii) ratification of a Project Agreement by AK; (iii) execution and ratification of a Subsidiary Loan Agreement between AK and IBT; and (iv) decision by SRM to undertake the financing obligation for the project. Evidence of fulfillment of these conditions precedent to effectiveness of the loan was received about one month beyond the stipulated period, and the loan was declared effective on July 27, 1977. - 23 - G. Project Objectives and Description 2.15 The project was designed to help achieve the Republic's agricultural development objectives to: (i) increase agricultural production for the domestic market and exports; (ii) expand agroindustrial processing capacity; (iii) improve product quality; and (iv) stabilize food supply and raise productivity and income. The project also aimed at strengthening the organization, appraisal and supervision capacity of the Borrower. The project provided forz (i) the establishment of a 2,000 ha sprinkler irrigation system in Zone C of the Cemovsko Polje plain, owned by AK and located south of Titograd, using groundwater and Lake Skadar water; (ii) land preparation for and planting of 1,300 ha of vineyards with wine grapes and 200 ha of vineyards with table grapes, 200 ha of peach and 300 ha of sour cherry plantations, and 60 ha of windbreaks; (iii) 14 km of farm roads, equipment sheds and supporting facilities and experimental research on new fruit tree varieties (30 ha); (iv) a winery with an annual capacity of 10 million liters, including byproduct processing facilities; (v) a 3,000 ton cold store with blast freezing, grading and packing facilities for fruits and vegetables; and (vi) a collecting and input supply center for individual farmers with a total of 500 m2 of collecting and storage space in the neighboring area of Zone B. III. IMPLEMENTATION A. Start-up 3.01 Legal establishment of the Project Unit (PU) and appointment of its Director occurred prior to loan signing in January 1977. This was followed by the expedient hiring of the required number of specialists in diverse fields, which resulted in a rapid project start-up. AK, with Bank approval, contracted the services of an experienced Yugoslav consulting firm in March 1977 to assist in project planning, management, and monitoring, and procurement. Preparation of the detailed designs and technical specifications related to the irrigation works was entrusted to another Yugoslav firm contracted by AK in June 1977 with Bank approval. The firm had wide international as well as local experience in large and small scale irrigation projects. The first supervision mission (April 1977) reported that progress in establishing the organization for carrying out the project was satisfactory and in accordance with the established implementation schedule. Physical implementation of the project also began on schedule with delivery of the first 170 HP tractor in March 1977, thus enabling land preparation to commence the following month for the first 200 ha of vineyards, which were scheduled to be established between late 1977 and early 1978. Just about the time the project became effective in July 1977, a question arose concerning the exact boundaries of the project area because of the Municipality of Titograd's interest in claiming a sizeable portion of land in Zone C (the project area) for constructing a new railroad station and warehouses. This caused some delay in finalizing the preliminary design of the irrigation system. However, by early 1978 agreement was reached whereby only 180 ha was claimed by Titograd, and a comparable tract of land was transferred to AK from the adjacent Zone B. - 24 - B. Revisions Irrigation System 3.02 As a result of hydrological studies carried out in 1971 in the Cemovsko Polje plain under the OECD project, appraisal had limited the use of groundwater to 0.6 m3/sec on 700 ha in order to leave sufficient safety margin against possible conflicts with the existing water demands, in view of some uncertainty as to the total quantity of groundwater available. Appraisal had recommended pumping watIr from nearby Lake Skadar to meet the balance requirements of about 0.8 m /sec on the remaining 1,300 ha. However, upon the completion of the first two wells for the first 200 ha of vineyards in April 1978, it became apparent that the wells exhibited excellent hydrodynamic features. In addition, the good characteristics of the Cemovsko "nlje aquifer were confirmed, thereby indicating the favorable prospects for tapping the groundwater potential in the rest of the project area. Consequently, the Borrower requested that the proposed facilities for pumping water from Lake Skadar be eliminated from the project. A detailed study was conducted by the consul:ant involving 14 man-months of reviewing and analyzing more than 20 hydrological studies, drilling reports and pump tests. Based on this additional information, not available at the time of appraisal, it was concluded that sufficient groundwater was, in fact, available to sprinkle irrigate the total project area of 2,000 ha. Based on the Bank's review of the consultant's report and with the concurrence of the Montenegrin Water Management Authority on June 25, 1979, the Bank agreed on July 23, 1979 to accept the consultant's recommendation of relying exclusively on groundwater for the total project requirement of 1.4 m3/sec. 3.03 Although appraisal concluded that a portable sprinkler irrigation system was the most suitable method for the project, the Loan Agreement (Schedule 2, Part A) indicates that other irrigation equipment could be accepted if the Bank agreed. During appraisal, the boom-type sprinkler system was found to be uneconomical and unsuitable for the project, therefore, the portable sprinkler system was selected as the best solution. As early as 1977, AK had begun conducting small scale field trials in existing plantations on three types of irrigation methods - portable sprinkler, boom-type sprinkler, and drip irrigation. In September 1977, AK informed the Bank that the consultant and AK were considering boom-type sprinkler and drip irrigation as alternatives to portable sprinklers in arriving at the final design for the project area, in view of the cumbersome and labor intensive task of moving the lateral sprinkler lines in trellised vineyards. In reply, the Bank informed AK that unless there was additional information to justify a boom-type system, the final choice would have to be between portable sprinkler and drip irrigation systems. In addition, the Bank advised AK and IBT-UB to carry out a technical, as well as financial and economic analyses to compare sprinkler and drip systems before recommending its case to the Bank. It provided the investor with a detailed outline for th study. In the meantime, the Bank approved the portable irrigation system for another 500 ha. 3.04 The consultants were commissioned to conduct the detailed study, which was not submitted to the Bank until February 1979, followed by a request from AK and IBT-UB in April 1979 proposing to install the drip system on the remaining project area of 1,260 ha, provided the Bank would finance the increased cost of the drip system over sprinkler (82% more expensive). In reviewing the study, the Bank found it to be inconclusive, as the economic analysis, yield assumptions, and rate of return calculations were not - 25 - included. Also, it was noted that the installation cost of the drip system was not included in the investment costs and that the O&M costs seemed to be underestimated. Consequently, the Bank did not agree with the request to install drip irrigation on 1,260 ha. Instead, it approved the sprinkler system for the next tranche of 700 ha and advised the Borrower that the drip system should not be considered even for the remaining 560 ha unless: (1) it could be proven that the drip system was economically attractive, and (2) the Borrower was willing to invest additional high capital costs from its own resources. In July 1979 and in response to a request from the Borrower, the Bank agreed to the installation of drip irrigation, on a pilot basis, on 150 ha of the project area provided the sprinkler method was used on the remainder of the project area. Subsequently, in the fall of 1980 the Bank agreed to alter the specifications for the 150 ha drip irrigation to serve 130 ha of fruit trees with a modified drip system consisting of microjet sprinklers and 20 ha of vineyards with standard drip irrigation. Plantations 3.05 About 25 ha of plum trees, comprising seven different varieties, were included as an additional fruit species to the peaches and sour cherries originally envisioned by appraisal, in order to compensate for a shortage of sour cherry seedlings due to frost damage in the supplying nurseries and also for the purpose of experimentation. The Bank approved this slight modification in plantation design. 3.06 At the request of IBT-UB and AK, the Bank on February 11, 1982 approved the deletion of the 60 ha of windbreaks from the project. By late 1981, AK found that non-project vineyards in their third and fourth year of growth were doing equally well in unprotected areas as those planted in areas with pilot windbreaks, which had been established before the start of the project. The strongest winds occur in winter when the vines have no vegetation. Neither had any surface erosion been noted which might otherwise cause physical damage to foliage and fruit during the growing season. Also, the appropriate seedlings were reported as scarce and expensive. In addition, the inclusion of windbreaks takes land away from the plantation. In the final analysis, their inclusion was not considered to be cost effective. Infrastructure 3.07 Construction of a bridge on the Cijevna river, which transects the project area, was originally included in the project (Loan Agreement, Schedule 2, Part C). When the project was prepared and appraised, the Republic authorities had not yet elaborated a zoning plan or road network scheme for the Cemovsko PoIje region. In mid-1979, AK indicated to the Bank that it was delaying a decision on bridge construction pending official notification of plans for upgrading the total road network in the region. Eventually in 1982, the General Assembly of Titograd approved a road improvement program that did not include any new roads on the right bank of the Cijevna River, and therefore the bridge was rendered pointless. Communication and ease of transport of produce in the project area has been enhanced by the improved road network since project appraisal. The Bank approved deletion of the bridge on May 13, 1983. 3.08 The project also provided for the construction of a collecting center of about 500 m2 for the collection and packing of fresh vegetables produced by individual farmers in Zone B of Cemovsko Polje and for supplying farm - 26 - inputs to farmers (Loan Agreement, Schedule 2, Part F). In late 1979, the Bank concurred with AK to delay construction of 'this center pending the results of the activities of the newly formed Work Organization (WO) Cooperation in July 1979. The need for the center diminished since WO Cooperation constructed five collection centers during 1980 in Zone B, with a total capacity of 2,100 m2 using its own resources. The WO Cooperation comprises four Basic Organizations of Cooperative Farmers, two of which are in Zone B (para 7.09). By 1982, the centers in Zone B were handling 1,750 tons of fresh vegetables, 8,500 hi of milk, and 160 tons of medicinal herbs. Consequently, the Bank formally agreed to the Borrower's request to delete this component from the project on January 18, 1983. C. Physical Implementation 3.09 Physical implementation of the project is shown graphically in Chart 1, in which actual performance is compared to appraisal's schedule for each major component. The overall project works were successfully completed by the originally established date of December 31, 1982. Details by project component are described in the following paragraphs. Irrigation System, Land Development and Plantations 3.10 As mentioned in para 3.02, the Bank agreed to a major change in the design of the irrigation system, whereby, the source of water for the total 2,000 ha was exclusively from groundwater rather than dividing the source between groundwater and Lake Skadar. On this basis, the works for drilling wells and installing the pipe network were divided into five phases, including improvements on two existing wells, with the following completion dates: Well Construction No. of Phase Wells Ha Completion Date I /1 3 201 April 23, 1978 II 5 518 May 15, 1979 III 7 784 May 25, 1980 IV 3 329 December 20, 1980 V /2 2 182 December 20, 1980 Total 20 2,014 /1 Includes one existing well covering 40 ha. /2 Includes one existing well covering 28 ha. Final construction of 130 ha of micro-jet and 20 ha of drip irrigation was completed by end-1980, about three months behind the appraisal estimate for completion of the irrigation system as originally designed. Details on the characteristics of the 20 wells are given in Annex 1. Land development was accomplished on schedule, and the vineyards and orchards were established as shown in Annex 2 and summarized below. Plantation Establishment - Accumulative Total by Years 1977 1978 1979 1980 1981 1982 ------------ - -------ha-- -------------- Appraisal - 200 700 1,400 2,000 - Actual 40 240 688 1,287 1,960 2,014 - 27 - In July 1977, the Bank approved the request of AK to include 40 ha of vineyards in the project, which had been established prior to the project between late 1976 and early 1977 and were irrigated from an existing well of AK. In accordance with the Loan Agreement (Schedule 1, para 4), the Bank approved retroactive financing only for the purchase of rootstocks for these 40 ha and not the other expenses incurred in establishing the pre-project vineyards. As can be seen from the above summary, the actual planting schedule very closely followed the appraisal targets for each year, although establishment of the final 54 ha of vineyards carried over to early 1982. All of the required trellising for the vineyards was completed on schedule. Infrastructure 3.11 The infrastructure component, after the revisions referred to in paras 3.07 and 3.08, consisted of farm roads and farm centers. The construction of farm roads experienced delays. The project provided financing for 14 km of farm roads. The main reason for delay in farm road construction was due to prolonged discussions between AK and the Communal Road Department over the sharing of expenses for asphalting a portion of the roads. When these negotiations broke down in early-1982, AK proceeded to implement a revised plan for asphalting two shorter streches of road (1 km total) leading to the central farm yard. In addition, construction and reconstruction of hard packed gravel-surfaced farm roads (10 km total) were completed by end-December 1982, with the use of the same heavy machinery used previously for land preparation. The construction of the farm centers also experienced delays, particularly the main center, as explained in para 3.20. Although the main center (41,000 m2) was not finally completed until June 1982, the machinery sheds, workshop, barracks and cafeteria were completed by end-1979 and served their useful function in a timely manner, as did the smaller farm centers (about 8,000 m2 each) which were completed by end-1982. Winery and Cold Store 3.12 Construction of the winery was achieved just 20 months after signing the turnkey contract; the plant was inaugurated in September 1980 and operated on a trial basis during the fall of the same year. During 1981, major attention was given to adjustments in the automated bottling line, which were fully completed in time for the 1981 season. The adjacent winery administration building was completed in mid-1982. 3.13 The most difficult contract proved to be the cold store. The initial target completion date of September 1980 was not achieved because, according to the contractor, there was a serious shortage of labor, cement and steel due to the priority for rehabilitation works in the Republic as a result of the 1979 earthquake and flood. Although equipment for the plant was on site by early 1981, delays in civil works persisted, necessitating serious consideration by the investor of bringing legal action against the contractor. Eventually, the two parties reached agreement and the facility was completed in August 1982. However, the facilities still have not been officially received by the investor due to some construction defects, which the contractor has refused to rectify. The case is under review by the courts, and a decision is expected in early 1985. The most serious defects are as follows: () the roof is flat therefore rain water cannot drain off properly and consequently it seeps through the roof and into the interior of the chambers; (ii) the panels are not well joined resulting in poor insulation - 28 - and inefficient use of energy; (iii) the pallets used to hold the stored material are poorly constructed and cannot be stacked properly causing under-utilization of the available space; and (iv) the packing/processing line does not have a calibrator for cherries so they must be frozen with stones, which reduces selling price by more than 50%. Despite these difficulties the cold store has been operating partially since 1982 (para 4.17). Research 3.14 As early as the late 1960s, AK had begun field trials in Cemovsko Polje through joint programs with Yugoslav and foreign scientific institutions. The project supported an expanded research effort on about 30 ha. The first report of this activity was submitted to the Bank in March 1981. The program included four main aspects which are summarized as follows: (i) determining the best irrigation methods and practices for vineyards and orchards; (ii) testing and selecting the most suitable varieties and rootstocks of table and win. grapes; (iii) ascertaining the possibilities of growing Japanese plums; (iv) determining the optimum fertilization and methods of fertilizer application on grapes; and (v) testing the use of herbicides on vineyards. 3.15 In 1983 and 1984 the research program was expanded to include more elaborate studies on: (i) weed conrol in orchards and vineyards; (ii) foliar application of macro and micro elements on "Vranac" wine grape; and (iii) methods and rates of applying irrigation water. Research progress is summarized in annual reports, and the more significant results are published in Yugoslav journals and presented at scientific meetings. Information generated by the research program not only provides AK with the most appropriate technology for its own use, but it also is the basis for recommendations to farmers by the advisory service of WO Cooperation. Field demonstrations and periodic seminars between researchers and advisors help to achieve this last objective. D. Quality of Project Works 3.16 From the beginning, supervision missions reported favorably on the quality of land preparation, well construction, pipe network installation and plantation establishment. On several occasions it was necessary to impress upon the PU and the irrigation consultants to give special attention to the field supervision of works. Vineyards and orchards were reported as being in a healthy and vigorous condition by all supervision missions, except for some varieties of sour cherries and plums. Construction quality of the winery was very good and that of the cold store was less than satisfactory, as described in para 3.13. AK has been satisfied with the installed equipment in both of these processing facilities with the exception of the line for sour cherries (para 3.13). - 29 - E. Irrigation Water Demand and Quality 3.17 The water requirements were calculated by means of the Blaney-Criddle methods as modified in the FAO Irrigation and Drainage Paper No. 24 "Crop Water Requirements". Based on the analysis of crop water requirements, irrigation was deemed necessary in general from June to August. However, it was anticipated that in particularly dry years water applications would start in May. It was estimated that the peak requirement would occur in July with a demand of 0.61 I/sec/ha, which has proven to be the case. However, since the system would operate 20 hours per day, it was sized for a capacity of 0.73 1/sec/ha. To meet the gross crop water requirements at full development, the irrigation system was designed to supply the annual average water requirement of 4,230 m3 per net hectare (for 75% overall efficiency), including a peak demand of 0.73 1/sec/ha for a daily operation of 20 hours. The actual plantation cropping pattern has closely followed appraisal's estimate and the water demand anticipated at appraisal is expected to materialize at full plantation development in 1988-89. Laboratory tests confirmed the good water quality for all uses, the total dissolved solids being about 230 ppm. From May to September the temperature of the groundwater ranges between 15oC and 180C. The Cemosko Polje ground water has proven to be a reliable source of water, both in terms of quantity of flow and quality. No problems are anticipated regarding water availability and supply capacity. F. Procurement 3.18 All procurement was carried out in accordance with Schedule 1 of the Project Agreement. The winery and cold store were procured under international competitive bidding (ICB) procedures and constructed through turnkey contracts, since the civil works needed to be closely integrated with the electrical-mechanical equipment. Both contracts were won by Yugoslav firms, and the supply of the equipment for the winery was sub-contracted to an Italian company. The equipment and civil works for the irrigation system and civil works for the infrastructure investments (farm centers and roads) were procured following local competitive bidding procedures (LCB), for which the Bank reviewed the preliminary designs, contracts and bid evaluation reports. Procurement of the drip and micro-jet irrigation equipment was through ICB at the Bank's request. Items for plantation establishment, such as agricultural equipment, fertilizer and planting materials costing less than US$50,000 were procured directly through negotiated purchases. Such items exceeding US$50,000 were procured through LCB procedures for which the Bank reviewed the technical specifications before bids were invited. The Bank received two conformed copies of all the executed contracts, regardless of their value as summarized below: - 30 - Procurement Summary No. of Component Contracts Type of Procurement Winery 1 ICB Turnkey Cold Store 1 ICB Turnkey Drip and Micro-Jet Irrig. 1 ICB Irrigation System 26 LCB Plantations 38 LCB and DNP /1 Infrastructure and Research 25 LCB Agricultural Equipment 15 LCB and DNP /1 11 DNP means direct negotiated purchase. 3.19 The bid evaluation for the cold store revealed that all four bids were considerably above (average of 40%) the appraisal estimates. Consequently, AK proposed and the Bank accepted to reject all bids; redesign the project, which according to AK's consultants could reduce the cost by about 20%; and invite the same bidders, on the basis of limited tendering. By following this procedure, the lowest evaluated bidder quoted a price just nine percent above appraisal's estimate. 3.20 The project made no provision for housing of seasonal labor, because AK had planned on hiring local labor, particularly during the planting season. With the first 200 ha of vineyards in the 1977/78 season AK was obliged to employ 150 people from neighbouring Serbia for the planting season. Housing became a serious problem. Consequently, after a review of the estimated seasonal labor requirements for the project over time and of the design and cost estimates, the Bank financed the construction of five simple barracks and sanitary and cooking facilities for 500 seasonal laborers under Schedule 2, Part C of the Loan Agreement. Construction of the main farm center experienced difficulties because of repeated delays in construction. Finally, AK severed its contract with the original contractor in accordance with local legal procedures. Subsequently, in March 1981, the Bank approved AK's rebidding for the completion of the remaining works, which included the construction of the administration building and fuel depot. 3.21 All of the required agricultural equipment was acquired on schedule and in accordance with the needs of the project. Annex 3 compares the equipment actually acquired with the appraisal estimate of requirement. The Bank reviewed AK's requests for the addition of equipment not envisioned by appraisal, and upon Bank's approval the following main additional items were purchased: mobile workshop (at Bank's suggestion); two buses for transporting field workers; van for food distribution to field workers; and a machine for harvesting grapes. G. Project Costs 3.22 The following table compares the appraisal mission's cost estimate with the actual costs. Breakdown by component and year is presented in Annex 4, Tables 1 through 5. - 31 - Total Project Cost Z of Total % of Total Appraisal Estimated Actual Cost Component Estimate /1 Project Cost Actual Project Cost Overrun "'51Din" 'T0-1oo -n Irrigation System 157,427.5 16 192,615 11 22 Plantations 439,487.7 44 939,586 53 114 Agricultural Equipment 31,317.2 3 45,769 3 46 Infrastructure 34,213.0 3 107,537 6 214 Winery 251,820.0 25 339,665 19 35 Cold Store 86,949.0 9 140,029 8 61 Total 1,001,214.4 100 1,765,201 100 76 US$ Equivalent ('000s) /2 55,600 50,100 (-10) /1 Cost estimate of each component includes physical and price contingencies; working capital; and engineering, supervision, administration and overhead expenses. /2 Appraisal Exchange Rate was US$1 = 18 Din. The actual average rates during project implementation were as follows: US$1 to Dinars 1977 18.28 1978 18.49 1979 19.06 1980 23.22 1981 33.19 1982 47.43 1983 90.84 1984 124.39 - 32 - 3.23 The total project cost in current Dinars increased by 76% compared to the appraisal estimate. However, in US dollars there was a 10% savings due to the Dinar's depreciation/devaluation during the eight years of project implementation. The reasons for such a large cost overrun in local terms are primarily the high rate of domestic inflation during the period after 1980; unforeseen additional procurements; and changes in the design of a given component. A cost overrun of 114% for the plantation establishment component was particularly significant since this component accounted for the single largest proportion of total project cost (53%). One reason for the large discrepancy with the appraisal estimate is the appraisal's inadvertent omission of irrigation operation and maintenance costs during the five year plantation establishment period, which was intended to be included. I/ Another reason was the necessity for higher quantities of fertilizer and pesticides than were anticipated at appraisal. The infrastructure component (6% of total project cost) had an overrun of 214% because much of the work was carried out in later years when domestic inflation was particularly severe. Construction of the cold storage also experienced problems as described in para 3.13 which caused delays, and ultimately a 61% cost overrun. The winery had the second lowest cost overrun because 75% of the construction was completed by 1981 (before the more rapid rise in inflation) and because there were only minor changes in the design of the winery. 3.24 At appraisal, it was projected that the implementation rate during the first three years (actually two and a half) would be 65% of total investment costs, while the actual investment rate was only 20% for the same time period as seen in the following table. 1/ It is difficult to estimate the precise cost attributed to irrigation O&M during those five years because the WO Plantation accounting system does not separate the O&M costs from total investment costs for plantation establishment. - 33 - Comparative Investment and inflation Rates 1977 1978 1979 1980 1981 1982 1983 1984 Investment Percent of Total Annual Investment Planned at APR 3.5 22.2 38.7 19.9 15.4 0.3 0 0 Percent of Total Annual Investment Realized 1.3 3.8 14.7 26.0 20.0 15.2 10.6 8.4 Inflation Actual Domestic Inflation % 1/ 15.9 12.5 20.0 31.5 42.1 31.5 40.8 53.8 Estimated Domestic Inflation at the Time of Appraisal 12.0 12.0 12.0 10.0 10.0 10.0 10.0 10.0 Actual International Inflation 2/ 8.2 17.6 11.2 8.3 (4.2) (1.8) (3.0) 3.5 Estimated International Inflation at the Time of Appraisal 10.0 10.0 10.0 8.5 8.5 8.5 8.5 8.5 1/ Cost of Living index 2/ EPD price forecasts: July 1984, MUV Index The slower implementation rate in the first three years was due to delays in beginning construction of the winery and cold store, as well as the irrigat.,n system because of a fundamental change in its design. The period from 1980 to 1982 represents 60% of total actual investment costs and coincides with three consecutive years of rapid domestic inflation. The cost overruns, which occurred particularly during the heaviest investment period (1980-1982), significantly altered the original financing plan. H. Financial Sources Financing Plan 3.25 The original financing plan is more complicated than it initially appears, because the project's estimated financial cash flow was very sensitive to even minor cost/revenue changes. For this reason, the financing plan received considerable attention in both the appraisal report and the loan documents. The cash flow prepared at the time of appraisal showed that AK would not be able to service its debts during the early years of the project even with interest during construction of US$5.9 million included in the Bank loan, and three years grace period with interest capitalized during those three years. - 34 - 3.26 The appraisal report pointed out that a deficit in funds for debt repayment of US$18 million was projected for the years 1982-1987. The appraisal report made clear that AK would require additional financing with terms similar to those for Federal Funds (which were the most concessionary of all sources: 5.0% interest and 20 years repayment including three years grace). Provision was thus included in the Loan Agreement pursuant to which IBT-UB would obtain from SRM sufficient funds to enable AK to meet its financial obligations-under terms satisfactory to the Bank and Borrower (Loan Agreement Recital C ot Preamble, Section 5.01b, 6.01d, and 7.01d). 3.27 The following table compares the original plan to the actual plan for financing project costs. Finenciml Plan Apprasal Entimte Actul Total Iterest Total Project Pr=tat Total Total Project Pecntag Projecit Drin Financing Biare at Total Projet ahrimg Pinmeing 9lre of Total _omt ~ostuctin Rweiremet camid eurdj G CnD=utim b r~an ~n Reire Dinar Million 1,001.3 138.6 1,139.4 100 Din l Ilion 1,765.2 247.9 2,013.1 I Us$ million ( <55.6) (7.7) (63.3) Us$ million * (50.1) (7.0) (57.1) 2. ftdj%ngSour, 2. FundI g=~e (Dn~ illiens) (0 i * (i) 1im> 361.8 106.2 468.u 41 (i) ImED 757.3 163.6 920.9 46 (i) 18S 352.8 32.4 385.2 3(ii IBM- 389.7 86.3 474.0 - (iii) FedralF da 232.2 - 232.2 20 (Cot m erru .)cr. 305.3 - 305.3 - (iv) ÅK July 13 Y4.0 - 54.0 5 (it hnd) 45.3 - 45.3 - 1OMM 1,0WJ 13.6 1,1ff 1-4 IMW u6tA/ / - 63 - YUGOSLAVIA ANNEX 1 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-VU PROJECT COMPLBTION REPORT List of Wells and Characteristics Well Construction Well Net Area Depth Diameter Discharge Completion Phase No. he in 1m 1/sec Date I - 40 64.5 600 128 /1 Existing 1 6 87 75.5 600 85 4/23/78 I 7 74 79.3 600 85 4/23/78 11 2 97 68.8 500 85 5/15/79 11 3 90 69.0 500 85 5/15/79 II 8 113 77.0 600 85 5/15/79 11 9 103 68.5 500 85 5/15/79 II 10 115 71.2 500 85 5/15/79 III 14 119 63.0 500 85 8/06/79 III 15 112 74.5 500 85 5/?SI80 III 17 97 60.5 500 85 5/25/80 III 18 124 64.5 500 85 5/25/80 111 12 104 70.5 500 85 5/25/80 LII 11 110 70.5 500 85 5/25/80 111 13 118 66.5 500 85 5/25/80 IV 4 118 64.5 500 85 12/20/80 IV 16 83 60.5 500 85 12/20/80 IV 19 128 75.5 500 85 12/20/80 V - 26 - - - Existing V 21 154 74.5 500 85 12/20/80 Total 20 2.014 /1 Of which 28 I/sec is used for 40 ha. - 64 - ANNEX 2 YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Comparison of Actual Plantation Establishment with Appraisal Estimates 1977 1978 1979 1980 1981 1982 Total -------------------------ha-------------------------- Wine Grapes Appraisal - 200.0 300.0 400.0 400.0 - 1,300.0 Actual 40.0 /1 200.0 302.0 412.0 298.6 54.0 1,306.6 Table Grapes Appraisal 100.0 100.0 - 200.0 Actual 51.0 135.0 - 186.0 Peaches Appraisal 100.0 100.0 - - 200.0 Actual 97.0 39.0 78.3 - 214.3 Sour Cherries Appraisal 100.0 100.0 100.0 - 300.0 Actual 31.0 97.0 153.8 - 281.8 Japanese Plums /2 Appraisal - - - - Actual 18.0 - 7.3 25.3 Total Rer Year Appraisal - 200.0 500.0 700.0 600.0 - 2,000.0 Actual 40.0 200.0 448.0 599.0 673.0 54.0 2,014.0 Accumulative Total Appraisal - 200.0 700.0 1,400.0 2,000.0 - 2,000.0 Actual 40.0 240.0 688.0 1,287.0 1,960.0 2,014.0 2,014.0 /1 At the request of AK, the Bank approved inclusion in the project area of 40 ha of grapes, which were established in early 1977, prior to loan effectiveness. /2 Pilot planting of seven plum varieties to substitute, in part, for lack of cherry seedlings in 1979 due to frost damage, and also for experimental purposes. t 11 h p * n as sa s s ses§ n s - 66 - ANNEX 4 YUGOSLAVIA Table 1 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Investment Costs: Appraisal vs Actual Irrigation Facilities Appraisal /1 Actual /2 ------'000 Dia--- Head Works Well drilling and casing 4,081.9 18,184.0 Civil works 26,750.9 15,069.0 Pump units and hydro-mechanical equipment 14,425.7 18,862.0 Transformers and electrical equipment 10,399.1 16,254.0 Power lines 4,201.8 35,434.0 Subtotal 59,859.4 103,803.0 Main Pressure and Distribution Lines ripes and fittings 44,083.7 44,649.0 Hydraulic equipment 4,625.8 4,953.0 Subtotal 48,709.5 49,602.0 Irrigation Equipment 7,042.4 26,139.0 Subtotal 115,611.3 179,544.0 Engineering - Admin. - Superv. 11,674.9 13,071.0 Working Capital 30,141.3 - /3 Total 157,427.5 192,615.0 /1 Based on irrigating 700 ha from groundwater and 1,300 ha from Lake Skadar. /2 Based on revised design irrigating entire area from groundwater. /3 Included under vineyard and orchard investment costs. - 67 - ANNEX 4 YUGOSLAVIA Tble2 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Investment Costs: Appraisal vs Actual /1 Appraisal Actual ------ '000 Din----- Vineyards /2 Fertilizer 15,211.9 64,239.6 Plant protection 2,130.9 42,569.1 Animal manure 17,475.5 31,123.1 Seeds for green manure 3,433.8 - Planting material 76,181.3 72,218.4 Trellis 93,074.2 158,130.4 Machinery and equipment 16,372.2 148,784.3 Labor 48,622.5 172,804.0 Subtotal 272,512.3 689,868.9 Administration-supervision 12,133.7 34,054.9 Working capital 75,733.1 221500.0 Total Vineyards 360,379.1 746,423.8 Orchards /2 kertilizer 5,074.1 22,220.7 Plant protection 710.4 14,806.0 Animal manure 5,825.4 10,824.9 Seeds for green manure 1,144.6 - Planting material 15,398.8 17,614.8 Machinery and equipment 5,457.6 51,748.5 Labor 16,208.0 602102.7 Subtotal 49,818.9 1772317.6 Administration-supervision 4,044.7 11,844.6 Working capital 25,245.0 4,000.0 Total Orchards 79,108.6 193,162.3 Grand Total Plantations 439,487.7 939,586.0 /1 Investment costs cover a period of two Project Years, including the year of establishment. Also, the SAR (Annex 5, Table) states that O&M costs for the first five years have been treated as investment costs; however, the investment cost tables in the SAR do not include these costs, presumably due to an oversight. The actual investment costs do include these 06M costs. /2 Vineyards: Appraisal = 1,500 ha; Actual = 1,492.6 ha Orchards : Appraisal - 500 ha; Actual 521.4 ha Total : Appraisal = 2,000 ha; Actual 2,014.0 ha - 68 - YUGOSLAVIA ANNEX 4 Tabfe 3 AGRICULTURE AND AGROINDUSTRIES PROJECT MONTENEGRO LOAN 1360-YU PROJECT COMPLETION REPORT Investment Costs : Appraisal vs Actual I. Cold Store Appraisal Actual --- 000 Dinars- Building and Civil Works 27,702.0 37,761.8 Installations 16,389.3 55,345.3 Imported Equipment 15,606.5 23,390.0 Transport Vehicles 1,223.6 2,216.9 Engineering 5,975.6 14,84L.0 Collection Center 2,868.3 - Import Duties 5,559.1 6,474.0 Working Capital 11,624.6 - TOTAL 86,949.0 140,029.0 II. Winery Building and Civil Works 56,598.0 48,998.0 Installations 7,818.0 100,201.0 Foreign Equipment 110,071.0 126,364.0 Domestic Equipment 3,822.0 13,855.0 Engineering 17,830.0 21,615.0 Import Costs 25,603.0 28,632.0 Working Capital 30,078.0 - TOTAL 251,820.0 339,665.0 - 69 - ANNEX 4 YUGOSLAVIA Table 4 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Investment Cost: Appraisal vs Actual Appraisa1 Actual Infrastructure --- '000 Din--- Road System Macadam roads 6,053.4 41,316.1 Bridge on river Cjierna /1 8,315.0 - Subtotal 14,368.4 41,316.1 Farm Centers Buildings 4,822.7 36,316.1 Sheds 12,487.6 20,212.2 Equipment /2 5 ,434.3 Subtotal 17,310.3 61,962.6 Admin.-Supervision 2,534.3 4,258.3 Total 34,213.0 107,537.0 /1 At the request of the Investor, the Bank agreed to delete construction of tnis bridge from the project on May 13, 1983. /2 Equipment for canteen and workshop. - 70 - ANNEX 4 Table 5 YUDSLAVIA AGRICUURE AD AGRICuZURAL DISRIES PRW ILON 1370-W PIRE=E CCMPIEII RPO Investnent Costs 1977 1978 1979 1980 1981 1982 1983 1984 Total '000 Din Irrigation Facilities 1,772 18,914 51,529 71,233 32,456 6,292 6,439 3,980 192,615 Plantations A 20,916 41,951 89,695 166,292 214,414 205,648 170,420 76,019 985,355 Infrastructure 62 4,654 5,239 1,261 33,095 15,046 4,650 43,530 107,537 Winery 277 1,344 86,799 166,276 35,938 23,230 3,985 21,816 339,665 Cold Store 125 395 25,734 54,159 35,755 18,487 2,434 2.940 140,029 Total - Actual 23,152 67,258 258,996 459,221 351,658 268,703 187,928 148,285 1,765,201 Percent of Total Realized Each Year 1.3 3.8 14.7 26.0 20.0 15.2 10.6 8.4 100 Total - Appraisal 33,111 221,889 388,443 199,051 153,937 2,783 0 0 1,001,214 Percent of Total Planned Each Year at APR 3.5 22.2 38.7 19.9 15.4 0.3 0 0 100 /I Includes agricultural and transportation equipment and OlM cos:s during the first five years.. YUOILAVIA AGRIULTURE AN AGREUUIRAL LUlUES PIUJTC MIDN 1370-YU PIDJEL7 00PEfION REPUEr ldir Tens Appraisal Estbnate Accual Interest Interest Repaynmnc* Grace Interest During Repaymmnt Grace Interest ding Source Period Period Rate Construction Source Period Period Rate Construction (i) LORD 15 3 91.0 Capitalized (i) lBRD 15 3 9.0 Capitalized (ii) Eff-UB 5** 3 8.0 Not Capitalized (ii) 18T-UB 8 3 8.0 Capitalised (Wi) Federal Funds 20 3 5.0 First Year Cost oerrun credit* 7 2.5 LIKR1.25** Not Capitalized Kuwait Fsnd* 4.5 3 LIB0R+1.25* Not Capitalized * Including grace period (Lii) Federal Funds 20 3 5.0 Capitalixed The appraisal assumed 8 year repaynent Additional funds 12 3 5.0 Capitalized bitt according to AK July 13, Ifr-UB (iv) Suppliers Credit 3.5 - 12.0 Not Capitalized did not agree to 8 year repayent Credit to Reprogran period umtil L981. (v) Debt paymnts 5 - 8.0 - * AK July 13 had to absorb the foreign exchage risk an these lons aid the - Dinar devalued 5 fold since 12/81. * .25% above LIBOR works out to. 5/81-17.7%; 11/81-20.5%; 12/82-15.4Z; 12/83-11.252; 10/84-11.5%; forecast - 16%. - 72 - ANNEX 5 Table 2 YUGOSLAVIA AGRICULTURE AND AGROINDUSTRIES PROJECT MONTENEGRO LOAN 1360-YU PROJECT COMPLETION REPORT Financing of Debt Rescheduling and Working Capital Loans as of October 1984 1. Debt Amount Interest Rescheduling Dinars Repayment Grace Interest during Sources Million Period Period Rate Construction 1. IBT-UB (1983) 1/ 400 Semiannual - 8Z - 2. Federal Funds 11983) 100 12 Months 3 Years 5% Capitalized 3. Reprogramming 2/ Credit (1983) 300 5 Months - 8% - II. Working Capital 600 Within - 25% 4/ - Loans (9/84) 3/ 6 Months 1/ Foreign Exchange Risk borne by AK 13 July. 2/ Includes Federal, Republic and Earthquake Funds 3/ Includes 9 se,,arate loans from the past 8 months from 5 different local banks or financing institucions. 41 Weighted average for the 9 loans. ANNEX 6 TUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-TU PROJECT COMPLETION REPORT Actual and Appraisal Cumulative Disbursements Actual Appraisal IBRD Fiscal Year Disbursements Estimate and Quarter - 'US$,O00 FT 1977 3 n-Mar -o- 100 4th Apr-Jun -o- 200 PY1978 1st Jul-Sept 100 316 2rd Oct-Dec 200 839 3rd Jan-Mar 500 2,101 4th Lpr-Jun 900 3,363 FY 1979 1st Jul-Sept 1,300 4,626 2nd Oct-Dec 1,600 5,890 3rd Jan-Mar 1,800 8,165 4th Apr-Jun 3,500 10,440 FY 1980 1st Jul-Sept 5,600 12,715 2nd Oct-Dec 7,400 14,990 3rd Jan-Mar 10,200 16,195 4th Apr-Jun 13,100 17,400 FY 1981 1st Jul-Sept 15,300 18,605 2nd Oct-Dec 16,200 19,811 3rd Jan-Mar 17,300 20,862 4th Apr-Jun 18,000 21,913 FY 1982 1st Jul-Sept 18,800 22,964 2nd Oct-Dec 18,900 24,016 3rd Jan-Mar 21,500 24,885 4th Apr-Jun 21,700 26,000 FY 1983 1st Jul-Sept 22,700 - 2nd Oct-Dec 23,400 - 3rd Jan-Mar 23,400 - 4th Apr-Jun 23,400 FY 1986 1st Jul-Sept 24,960 - 2nd Oct-Dec 24,960 - 3rd Jan-Mar 25,980 A - /1 An undisbursed balance of US$0.02 was cancelled on March 30. 1984. Pi p aa-s . 4i '' 151 * I * "I5 *l 1 liii-i a Ilt~ «! E- a- a *! e 11 . . . . . .. . . . .~.. iIler ll Il - E5 -1 CWÞt4 MJtIRAVIA MRELLtM AM AMIL1U AL LE4RIES PIaW ILI 1370-Wl PRghECr GMMlS IUMW Amual Productim from Vineyards and Odhards 1977 1978 1979 1980 1981 1982 1983 1984 1965 1986 1987 1988 1989 1990 1991-95 Luons- Wine Grapes Appraisal /I - - - 1,200 3,600 7,300 11,900 14,700 16,600 17,800 13,200 18,200 18,200 18,200 18,200 Actual - - 170 972 2 40 7.2W0 11.530 9,837 /2 1RM7 17.824 18.230 18,230 18.230 18230 %ofappraisal - - - 81 67 99 97 67 96 100 100 100 10 100 100 Table Grapes Appraisal / - - - - - 600 1,600 2,500 3,100 3,200 3,200 3,200 3,200 3,200 3.200 Actual - - - - - 35 527 724 200400 2 0655 320 32002 2.925 200 2.925 Zof ppraisal - - - - - 6 33 29 77 83 91 91 91 91 91 Pea ie s Appraisal /1 - - - - 300 900 1,600 2,600 3,200 3,200 3,200 3,200 3,200 3,200 3,200 Actual - - - - 532 1 300 158 2 425 3 600 4030 4 114 4,0 4.387 4387 4387 of appraisal - - - '1231 Sour Cherries Appraisal /I - - - - 200 700 1,500 2,500 3,300 3,900 3,900 3,900 3,900 3,900 3,900 Actual - - - - - 18 52 204 800 1 192 2.056 2,2 3,1IN 3,444 3.444 2 of appraisal - - - - -0 -3 -3 24 53 67 82 88 :"-'B- Japse Plums Appraisal /I - - - - - - - - - - - - - - - Actual - - - - - 11 18 23 35 42 56 56 56 56 56 /1 Amex 5, Table 14 SAR. T2 The PU eatinated a production of 14,880 t just prior to the rain damge. ANNEX 7 - 76 - Table 3 YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Comparison of Actual Yields with Appraisal Estimates Age of Grape Vines and Fruit Trees in Years 3 4 5 6 7 8 Wine Grapes Appraisal /1 6.0 9.0 11.0 13.0 14.0 14.0 Actua' 1979 4.2 - - - - - 1980 3.2 8.5 - - - - 1951 3.4 5.4 7.2 - - - 1982 5.3 9.2 9.0 10.5 - 1983 5.2 8.9 11.2 12.2 12.9 - 1984 3.0 5.6 7.4 8.7 9.7 9.5 Average 4.0 7.5 8.7 10.5 11.3 9.5 Table Grapes Appraisal /1 6.0 10.0 15.0 16.0 16.0 16.0 Actual 1982 u.7 - - - - - 1983 2.0 5.0 - - - - 1984 - 3.8 4.2 - - - Average 1.4 4.4 4.2 - - - Peaches Appraisal /1 3.0 6.0 10.0 16.0 16.0 16.0 Actual 1981 5.5 - - - - - 1982 2.6 L2.4 - - - - 1983 2.6 8.U 11.0 - - - 1984 - 3.0 LU.0 18.6 - Average 3.6 7.8 10.5 18.6 - - Sour Cherries Appraisal /l 2.0 5.0 8.0 12.0 13.0 13.0 Actual 1982 - 0.6 - - - - 1983 - - 1.7 - - - 1984 L.1 3.0 -- Average - 0.6 1.4 3.0 - Japanese Plums /2 Actual 1982 - U.6 - - - 1983 - - 1.0 - - - 1984 - 0.7 - 1.0 - Average - 0.7 1.0 1.0 - /l Assuming establishment in OY 1. /2 Pilot planting of seven varieties. - 77 - YUBAVIA ANNEX 7 Table 4 AGICIta AID AGRICULMAL INDUSEIE PW R ILON 1370-U PIRlOC CCRATION Rm 1otal Fertiliser use by Years - Total Available therient &eis 1977 1978 1979 1980 1981 1982 1983 19w* 1985 1986 armed LuLa kg Vingyards N 1010 7,560 23,274 54,729 95,445 34,612 160,995 166,266 168,394 168,664 25 9,640 51,440 92,982 160,045 194,601 139,036 126,554 109,0fW 91,716 89,556 J20 14,480 77,280 139,724 240,450 292,349 208.797 189,858 163.596 137,574 134,334 Peache N - - 7,857 13,635 21,030 23,144 23,629 23,824 23,824 23,824 P205 - - 23,280 19,060 32,392 21,43D 17,550 15,990 15,990 15,990 K20 - - 34,920 28,590 48,588 32,145 26,325 23,965 23,985 23,985 Swu Cherries am Plus N - - 3,969 11,826 26,198 28,817 33,412 33,897 33,897 33,897 P205 - - 11,760 32,980 53,264 30,710 28,750 24,870 24,8 ) 24,870 an - - 17A640 49.470 79,6 46.065 43.125 3 37,30533 Total by years N 1,080 7,560 35,100 80,190 142,673 186,573 218,036 223,987 226,115 226,385 P205 9,640 51,440 128,022 212,085 280,257 191,176 172,854 149,035 132,576 130,416 K20 14,48D 77,280 192,284 318,510 420,833 287,007 259,308 224,886 198,864 195,624 - 78 - ANNEX 8 YUGOSLAVIA Tal 1 AGRICULTURE AND AGROINDUSTRIES PEOJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Wine - Production and Sales in Yugoslavia (In 000 hi) 1977 1978 1979 1980 1981 1982 1983 1. Total Production 6,297 5,880 6,742 8,173 6,887 8,576 7,877 2. Industrial Production 1,612 2,323 2,968 3,761 3,122 4,429 - 3. Private Sector Production 4,685 3,557 3,775 4,412 3,765 4,147 - 4. Net Foreign Trade (733) (756) (989) (1,064) (1,326) - - - Export 777 824 1,071 1,124 1,326 1,534 1,407 - Import 44 68 82 60 0 - - 5. Apparent Domestic Consumption 5,790 5,560 5,786 6,030 5,850 6,330 - 1 hi - 100 liters. Source: Statistical Annual Yearbook of Yugoslavia for 1975-1984 and the Industrial-Statistical Bulletin for 1975-1984. -79 -I VMOSLAVIA ANNEX 8 AGNICULTURE AND AGROINDUSTRIES PROJECT Table 2 MONTENEGRO LOAN 1370-YU PROJECT COSPLETION REPORT Fruit Export from Yugoslavia - Quantities and Destinations (In tons) 1975 1/ 1976 k/ 1977 1978 1979 1980 1981 Peach 232 390 220 651 3-545 Austria 232 107 120 24 127 Czechoslovakia - 283 100 606 3,410 Greece - - - - - German Federal Republic - - - - - France - - - 13 - Saudi Arabia - - - 8 - Switzerland - - - - 8 Frozen Sour Cherry 3124 3.891 5863 7,904 23577 Austria 344 416 717 813 1,302 Belgium and Luxemburg 122 - 40 246 238 France 39 112 20 130 42 Netherlands 630 692 1,232 1,308 1,903 Italy 90 284 165 353 687 German Federal Republic 1,052 1,973 3,123 4,186 11,271 Spain - - - - - Great Britain 846 355 462 615 1,386 Switzerland - 58 60 81 63 Greece 20 - - - - Czechoslovakia - - 18 - - Denmark - - 20 19 6 Sweden - - 5 - 40 German Democratic Republic - - - 130 127 Norway - - - 24 11 USSR - - - - 6,304 Lichtenstein - - - - 197 Fresh Grapes 5.738 5A9 5.375 4.017 5.000 105 7.586 Austria 3,882 2,552 2,123 2,168 2,410 3,298 3,098 Czechoslovakia 1,168 1,370 2,219 1,293 1,800 7,893 4,426 Denmark 17 - - - - - - France 14 - - - - - - Hungary 243 99 290 108 - - - Norway 18 - - - - - - Poland 261 1,459 415 315 673 384 - Sweden 102 - 49 54 1 16 27 Cyprus 32 - - - - - - German Federal Republic - 17 55 65 84 30 36 Netherlands - - 224 15 17 - - Greece - - - - 14 - - Bulgaria - - - - - 26 - German Democratic Republic - - - - - 410 - Source: Foreign Trade Statistics of Yugoslavia, 1983. 1/ No data available for peaches and frozen sour cherries for the years 1975 and 1976. HIODSIAVIA AGRIC11E AID MRICflU11AL DUSIRIES PIE= IMN 137--U PIRWECr COPIMMON RM FINCIAL AN) EOOllffC INUM PRICES Constant 1984 Dinars/ton 1/ Fertilier 1978 1979 1980 1981 1982 1983 196 (100% active ingredient) FINANCIA fWU C FINANCIA EQMMIC FI1mCIA EOWNIC FImICIA EB D(IC FINMICIAL E1INMIC FIlWICIAI E ilO C FImICIAL 3EmC, Nitrogen (N) 53,OUU 46,3t6 53,353 49,745 59,261 58,99W 79,800 61,139 78,808 46,280 64,953 41,144 50,810 50,180 Phosohate (P205) 100,769 35,380 103,823 44,465 91,087 55,422 113,857 46,174 106,383 42,445 115,384 43,422 93,500 45,071 Potash (K20) 67,154 17,565 69,235 20,428 60,739 26,858 75,914 27,287 70,915 21,190 76,923 16,886 62,330 21,905 Pesticides 156,923 - 152,647 - 117,782 - 207,229 - 158,681 - 367,692 - 360,220 - Herbicides - - - - - 233,617 - 261,538 - 296,710 - 1/ Finucial prices have been deflated by the Producer's Price Index fran Section 112-2, 1983 Statistical Yearbook of Yugomlavia. Econmic Prices hme been converted to Dinars by the prevailing dollar exchange rate in 1984 and deflated by the MN Index of the bi-amwal EFD Primy omAities Price Forecast, Wbrld Bank, July 1984. - 81 - *NIm 9 TöAbI 2 IN 137D-W LMXMSrlC AM EWir OlOUr PRMŒS Consant 19% Dina 11 L981 192 1983 L984 1985 Dstic 2 Dhnstic ~ tic Dw=stic Domtic z i. imy 1. igi Quality vrnac 189.4 - 163.5 151.4 142.6 121.2 167.9 182 168 172 2. Quality Wanac - 65.6 7?.9 65.5 77.5 36.6 53.0 - 53 - 3. Mite Wine - - - - 101.8 - 93.4 126 94 1M.0 4. Lama 430.0 - 377 - 265 - 218.5 - 220 - II. 0old Store 1. Table Grapes - - 62.1 27.3 57.0 38.2 70.0 40 70 40 2. Peachs 66.3 38.3 56.4 48.8 52.0 50.5 55 73 55 73 3. Fra Sour Cherries - - - 165.2 - 76.3 71.0 - 71 - 4.Plum - - 85.1 - 63 - 483.0 - 48 - 1/ Output prices usd in che finencial, amlysis are a Ueied average of the dammstic and ext prices coerted to 194 contant Dinerm. 2 Export prices are based en the dollar equivalent comverted to 1964 costant Dimars. Far purpose of tho- ecaxie amlysis, ecommi prices for those it. and years ~whera rnual ex-factory ecport border prices are not avuilable, are calculated by applyng the consmption comoerin factor to die finacial prices. De etandAi conversim faetor ima 0.9 fram 1977-1980, and 0.7 in 1981, and 0.75 in 1982. The cc~verion factors will ned to be revi~d and uiir view of the harp m at in ech~ne rates during 1983 ad 1986. 名症,騙口】) 禺會‘伯s關I 伯“鳥,”以·,認胞•個- 亂歸11一0名”•胎唱吃I•’乙開’畸C’觔C&&t 515闖1審101 1儲‘目O’•·0乙”5騙,.,言•·OC’轄忽,9必」〕口囉彎1, 1觔C&Ct一C馴’g,中’中L申”I,I‘•LO.魷I&C」】O開1開〕 幼乙”伯‘一編乙‘0口.,O己‘口必’唱01嗚L必”鳥J】口關禹開l勺 名開’比OC叩C&,CS&CO必’個總’blt鴛j劉州訪開l’• .…•.…•..…•…,,.,…,&....一•二,,二,.,,•.一•,t,二t,., 】,網他】n1豔唱肌響矗網訕15 瀾寫二口蔔他3d口口I目11開S】奮51•日“甲 .……,■,.•…••.,…• 名Cll•S】n】以0開11011開5 審C申’5』〕纏開1〕開’開 ,.•,二•二,.t,二唱二,.•■,.,…,二屆,,二•.• 個目購j為5為馴JO開“”雙州必0•.勵物I黝‘•跑•I 申5:口皂屹劇‘奮I‘自甲目馴唱 .,二口口.&.,•“,.•,二‘••昌.……,t.•..……•二t,二•.…■•,二•...……•••.&.••跑.•…口.…,•二t.…,&.t二 O&Cl龍魷O’記J亂必O&tt騷I亂O&C,.·必’I亂輪個·t頂嘔開此·必’開口綢電·電•日觔鳥tt·t&C開屹,·t&LC誠口t·唱‘0“亂Cl·必’細魷個·亂l煙1啊騙儿〕闢 0奮C乙C儲•’O乙l鑰也O&001唱為,O開CIO言O’個I合Cg中“I申•喘弘【‘鳥C開ICI’乙啊魷鳥··-·〕國魯開11•么01 0‘〔I留申I。朋個中唱0中Cb〔10•。CC自•’•C唱【鳥必“日開1•’•,01名.&IL乙申•’0•唱l···目I么朋I總1啊才fs〕言響么 0&I昌騷嘔‘藝0〔!亂唱唱唱0,t細n珍辟’‘申開口【0’的調個t嗚’I嗚‘•中C名’‘蘊廖申魷個’•乙.C蘊I口’C必C辭--·St騙闖開l么留目勵do O開編唱勵’朋‘•名I唱’•CC鳥中C&&CC•C魷症‘唱。騙C It•名C申開t騙‘開•l〔I名‘切魷•515悶么開細LS3艙11•么01 O&Cl申ICI’弱•參編唱’C唱O叩他乙’以C開【O’唱胎館•瞭’購弘IC藝‘0伯C6邑亂O儲t口‘念115夠輯 O•LC嘔邊“C••昌CO“•必臼‘’畸個觔C名”中●鳥關I•“乙已申己唱’O申t色g么開魷購l劉0滷 StS悶1喝】闖15】品開l •••--一•-一•.■-.一••.--一••一•.-一■•---一■。•••••一•一•••••一••。.•一••••••••■一•-一口一•-一•--一••■一■.•一••一••-一•••一•一•一•---.-一••••一•••-.••-一•-----一•一••••一•- I闢C·•..1乙口勵It留露I鑰露跑屹•I啊唱I乙龍昌It唱I開t鳥韶口l•名籐I‘必6基 ••--一•-一•••■•--.一瞥-一••-一•自。---一■•一•.一••一•----.•。••••--一•--一•••一■■-一•一•■••.一••一•-一•.-.•一•一••...一••細•一••-一•.■---一••一••••.一•一••••-.•.■■••••■••• 屆他細為啊11】ld州認101闖州 &15矗1馴個】口I讓織m寫』·鳥口細ts酒禹開I騙I為寫開 私·O必『I朧口1以口1啊A關闔 ••■• ..--一•一■-一•••--.--一•••-一••一•一•••-.■■•-一•. j斗瀾r個細5】I口名開口k亂1,.館名1間I•購•開“11問I口• C aT妒工叩兀::二叩 言蒲論霹’&&,,鯽 一之8- .d一~ 、 !開開tl,’視編 闢口I劍亂I驢龍•口開個開亂曆個朋亂l口劇,l購也怔嗚,閱視C奮 …•••-----一•...一•一•--.-.•-一•••..一•••-.---.•. 哺闖It開t編開t口闕tl,•·!口 弱他•馬I馴U開I馴t,l颼開留·fl目開Cl自I開目I奮唱I, .--二•.…■--一。-.-一•••甲•--.---.-.-.•.•二•--- n劇權化It個磚t煙I讓一離,開I ..-.----一■•一••一•----.---一■.....-.-一•-.•-一‘。•一•二•一•一■---一參.&.-..---一■--.一。-一■一•.••--二•-.---一•--二•-.---二•.。---.一•一•.----.一‘-.--..-一•一, I口,,l•,•露•常•I開0唱個•,奮t•才,,•jl個•煙也奮.,1朋個l騙fl個開·,闢I 二•--一,。一。--.一•‘•一•■---二•--一•一••••一■--一•。一••一•.-一自•j•-.--一•.-一自•妒•••.•一。,。‘.。-.•••.•---.-.•…。-.-.一••.■--.•。-一■--.中-一•.--一••-一■〞■--二 I&,C弓•‘.1闢顫騙零唱網.言.鴉,亂,奮,,開常.,蠶.馴」亂•,,唱14觀,11他‘•f.•矓開闢磚.,唱,..t. U,權“11闢閱顫t···二寫個蠶.•l萬I劇總,騙n口劊匯1言111鈴.tt藝萬認•.•才,勵勵讓數.奮•,,誠•當•】】才t• I自日煙,•電t&I開tl&fl個·…t口磚.•編弱.1•蠶,蠶.,體I唱.•開個,.●韶藝嗚.•騙擊,二總•,.• h闐t擊l閱中曉·…屆,關勵.言唱唱j•轉,才唱蠶壇口•.才開飼開.••l•才唱,。•t實•l•屆二I協唱闢•.•,言t編騙二 &.•.矓仔11·!開磚.f·jn開.•·l嗚,開1.1·留開司n.•·I•忽•”嗚.煙·唱“弓才一I螂l,,.才讓.&,二開朋,才.•.’】•才•二唱留鰓f:●唱馴司11.• 二••,••.••.•…,.•••.•二•二,.,••二••.一•,•.•…,.……,一,…,•二••-…,•.…,,•.•.••.•.,.•.,.一•二,,,• J“馴編,曾職唱開唱I亂鵠 I •一自.,閱•細l弱編f黝t頃.嗚f黝t,t,•.口唱中 ,二•••.,‘•••.••••,•••.,,••二,.…,二t,.唱滷 口颼IC朧l壇唱.侮唱tl 開11個l開留口亂矓,自寫•館 ••••.••.•••.•,•.••一•••• 劇悶圈口l屆日t開跚t中I開悶膩l口l闢總 、•靦頗審已皂朧頗I朧中胡開 •,,認,.“日寫•,•-.••二,,,.…,…,.-.•二•,.,•,•,,,.-二,•.•, ••口朧鹹l‘寫,關,.留•1.編徑.開,.劇喝·騙·職唱I! CI口留觀l論鼠11,,“•。綢纏.憫口.認l開.屆寥奮 C開IC朧l劇陽.弱磚.關煙.號總.開口.唱壇唱I•.鈴t CI自口C鈴,弱.個•f.闢•.•l執相才.嗚,才.•館.權朋 嗡騙唱日他CO唱奮t•。開鳥劇細,開留.個磚,.才•1.認開.41t .•一•••---.一••■•.•.■••••••-一•。•-…•.•一•一■.-..-一••---一•.•一• 關,•唱言寫,唱。偶亂調弓., 盧叩,,:總 觀關,糒:.論’j自‘ H屆閱 0 IX 令屆曉 - 84 - YUGOSLAVIA ANNEX 9 Yab 1e 5 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Balance Sheet WO *%jnoprodukt and WO Plantation tuxuars IWO) 1977 1980 1981 1982 1/ 1983 1/ A. Assets Liquid Assets 55 1,162 12,217 290,868 338,264 Inventories 3 2,512 23,129 305,790 527,282 Other S-T' Assets 20 1,575 1,885 198,342 138,782 Current Assets 78 5,249 37,231 795,000 1,004,328 Long-Term Receivables 7,955 187,678 227,312 308,986 330,971 Met Fixed Assets 17R994 828,793 1,372,968 2,497,167 490161314 Common Consumption and other Assets 151 657 1,008 46,431 68,294 Total Assets 26.L178 IjO22 37 7 1,638,519 3,647,584 5,419,907 B. Liabilities Short-term Loans 4,127 4,127 462,678 503,243 Trade Payables - - 2,900 26,617 60,019 Other Short-term Liabilities 2,945 171,145 305,290 725,051 1,231,593 Current Liabilities I.L 175,272 312,317 1,214,346 1,794,855 Long-Term Loans 23,082 832,713 1,297,096 1,798,250 2,321.075 Business & Reserve Funds (Equity) - 13,735 28,098 551,788 1,170,262 Common Consumption Funds 151 657 1,008 82,199 133,714 Total Liabilities 26LI78 IL022j377 1,638,519 3,646,583 5,419,907 ANALYSIS_ (a) Current Ratio, Assets/Liabilities .02:1 .03:1 .11:1 .65:1 .55:1 (b) Total Debt as Z of Total Assets 88% 81% 79% 62Z 52% c) Debt/Equity 0 61:1 46:1 4:1 2:1 L/ CombLued for WO Vinoprodukt and WO FLantation for 1982 and 1983 For the years 1977, 19UO, 1981, WO Vinoprodukt only. - 85 - YUGOSLAVIA ANNEX 9 Table 6 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Income and Expense Statement WO Vinoprodukt and WO Plantation (Dinars '000) 1977 1980 1981 1982 V 1983-2/ A. Income Revenues 1,654 22,904 72,388 526,488 666,762 Subsidies - - - - - Total Revenues 1,654 22,904 72,388 526,488 666,762 B. Costs Operating Costs 352 8,069 33,458 275,633 293,589 Depreciation 161 4,305 10,590 23,283 101,572 Taxes & Contribution 75 850 10,034 93,053 77,050 Interests - - - 11,694 23,505 Gross Salaries 1/ 1,066 9,640 18,120 98,752 136,777 Total Costs 1,654 22864 72,202 502,415 632,493 A-B 0 40 186 24,073 34,269 C. Funds Business Fund - - - 15,213 19,824 Reserve Fund - 40 186 8,859 14,443 Analysis (a) Gross Margin 78% 64% 54% 47% 55% (revenue-operating costs) revenue (b) Net Margin 0 0.1% 0.2% 4.5% 5.1% (revenue-all costs) revenue 1/ Including funds allocated for common consumption. 1 The years 1977, 1980, 1981 are for Vinoprodukt only; 1982 and 1983 combine WO Vinoprodukt with WO Plantation. ApIaLCE Mn PICLILtAIL IUMTIE5 IC TWORMfiIA WCTEX9O LOM 1370-YU FIlkAt CA. R U 5'000959ll95 1977 1919 1979 5990 1995 5992 1983 1994 l95 1906 5997 598 599 5990 1991 1992 i993 154 M- - - 60544.0 221069.0 323715.0 93900.0 102904?.0 1291213.0 53929.0 1 159902.0 1679902.0 19902.0 1679902.0 167902.0 1679902.0 6792.0 m6i n1l0$ - - 17570.0 2940.0 279.0 1283.0 - 659.0 • • - - - - - - INI LOM 3232,0 2&936.0 109175.0 2052.0 07543.0 17827.0 183152.0 127422.0 - - - - - • nr LOM 20249.0 47065.0 f7411.0 97819.0 5166.0 . 1219.0 - - - - - • • - 195 LM 1 67231.0 96ö.0 69723.0 §3341.0 9621.0 6990.0 - 152 19lE. - - • 4590.0 410.0 - lit 11 - - - 234003.0 509.0 3820.0 150 - - 1I L0M 111 (KMITI- - . - - 4210.0 41039.0 r 11P5IA CII- - . 4976.0 7399.0 - " W.OMEN1 W IUiD • • • - • - 400000 - - - - - n0 ~M 11Ti5L0M - - -. 224255.0 29245.0 75165.0 760183.0 675435.0 - - .C LOMS - - - - 31029.0 - I395.0 • - M1il@ T1115 Lffi5• • 31917.0 51775.0 167553.0 205474.0 276142.0 - I.S - - 3.0 - II90.0 - 0&. CS INFtOW 23401,0 74001.0 271307.0 5863.0 774243.0 1500435.0 1612551.0 2549424.0 1 92.0 1291213.0 15929.0 167902.0 1679902.0 I1902.0 1A9902.0 1 ~9902.0 167E2.0 1~ 42.0 IRSTE I SI 23152.0 6250.0 250996.0 459225.0 351650.0 2703.0 1~729.0 1462.0 - OMT1450 migs - - 11821.0 67961.0 2095.0 371033.0 594193.0 604215.0 7M0617.0 77695. 00652.0 811M 8195764.0 615764.0 015744.0 15764.0 9V44. TAM9 . . 41..0 2002.0 5570 1768..0 2245,.0 22225 30 ~ . ..0 nM 235.0 2=.0 27280.0 212.0 37.0 Z=.# 2~ WTOT. . 2352.0 67250.0 ;6.0 47537 0 42072.0 555235,0 5«4.0 7~2.0 62 .0 72~4m M485.0 OM . MI. SY4M M492.9 1 .0 a . aff-å L0M ATIEFiS . • - 31394.0 69973.0 1262.0 2119.0 706.0 3922.0 019340.0 1037836.0 M 99.0 90756.0 715196.0 ^ 9.0 2 N.0 11 4.0 3121.0 AINiT iO 1 EILIM - - . - 117545.0 S7153.0 03100.0 4 43500.0 • - - • • • 1 WI-tGA - - - 31394.0 197511.0 34632.0 822719.0 992076.0 124A2.0 819348.0 1037536.0 I5S9.0 960716.0 49.0 ~6606.0 31 .0 119134.0 31231.0 InIT LmB EM Lom 329.0 6743.0 12391.0 ~5023.0 6913.0 105909 4.90 34 .0 500320.0 573729.0 49323.0 M7100.0 2 15 .0 54411.0 D9253.0 110.0 54912.0 amA IffiffM l MY 13E L6 . • • 393.0 2769.0 379.0 2747.0 53107.0 91223.0 1053.0 111623.0 113520 i545n.0 554523.0 5145.. 1123.0 23.0 514123.0 14123.0 IUMEST Mi5 9? E IRLS - - - - 19.70.0 194072.0 15157.0 24011.0 7335.0 - • • - - - - W0T1K 329.0 6743.0 1231,0 6546.0 177292.0 226360.0 35906.0 52344,0 7487.0 6052.0 6406.0 4Of42ä.0 37302.0 2534.0 203376.0 149266.0 12900.0 lm. ITA Cm Em uL 23401.0 74WI5 2713f7.0 5637.0 7~15.0 142223.0 1767026.0 2200049.0 265M.0 22250.0 2442177.0 242479.0 2163184.0 1902.0 1799734.0 136954.0 1061. 993 I.0 00. 1.1 - - - -12709.0 -11281.0 -371.0 -154475.0 24f5.0 •957544.0 -9 43.0 -90520.0 -749560.0 -4322.0 .22320.0 -29=2.0 30.0 592241.0 60624.0 OMMSU »AS FLN - • -1209.0 -21997.0 -615.0 -216310.0 2265.0 -64079.0 -157522.0 -2100770.0 -34503 .0 -39~3620.0 -4356940.0 -4156772.0 -64.0 -326513.8 -257^.0 fL na. taga glav amaly4e ta oualp tndieasivt. I1 la i curram& $aten matI 1944 and then In constant term after 1984 becaus i iWUld be tao difficult ta fsiemagå boch at efftccs of inflation am Ink= and oprating tomta and åha Effecta of förelgn exchage devalumationa Da o h ropaxmbn of formip åauo. The camb nfnlowe U aid 3 foreign loams 180 U3$26 wJ$Ucce which. ~hen coaverted to Dinare. averagad out to a machaogp rate af Dinara 35 U311; l? (rarlgsp Crdit) US10.1 million. ,echafge rata of 10.7 lnaralus$S; and Kiult renad U5s1.0 millun. Gitkag att of 41.5 p t t . th exchonge Caco hag d frunr~ 19o8us91 ta ctobar ~ (aha et the 9cm) to Dinar 2101&U$1. by March 1I^1. - 87 - ANNEX 9 Table 7 AICULTME ND ARICULTUA. INMUTRIES PROJECT Page 2 ----- ---- ---- ----age 2 MONIEERGRO LGAN 1370-YU FINANCiML CASH FLOM <'000 BINARD) 1995 1996 1997 1999 1999 2000 2001 CASH IFLOU RCTURN 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 OfiF S - - - - - - - IBRD L - - - - - - FiP LM - - - - - - - IRT LM I - - - - - - - Siz ROm DEL. - - - - - - - IBT LOM II - - - - - - - IDT LOM iII (KUWAIT) - - - - - - - COMERCIAL CREDIT - - - - - - - GOERMENT ØF MTEN - - - - - - - REPM,M GF TIE LOMS - - - - - - - AK LiWS - - - - - - - tMIPAiN AUUITIES LOAS - - - - - - - INTERT NC - - - - - - - TOTAL CASH IhfLm 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 1679902.0 CASH mTFLal INMESTET CUSTS - - - - - - - PERTATING COSTS 815764.0 815764.0 815764.0 815764.0 915764.0 815764.0 815764.0 TmES 23728.0 23728.0 23728.0 23729.0 23729.0 23728.0 23728.0 SUB-TOTAL 839492.0 839492.0 839492.0 939492.0 83J492.0 839492.0 839492.0 LOAM LOA# REPATHENTS 27913.0 29438.0 30127.0 28728.0 11028.0 4-97.0 274.0 REPAWNT PAID BY RESCHIELIN6 - - - - - - - SUR-TOTAL 27913.0 29438.0 30127.0 29728.0 11028.0 4297.0 274.0 INTEREST PAENTS INTEREST LOM TERN LOANS 6696.0 5171.0 3561.0 1934.0 603.0 128.0 7.0 INTERST SmRT TERN LOM 114123.0 114123.0 114123.0 114123.0 114123.0 114123.0 114123.0 INTERST PAID BT RESCHMELINB - - - - - - - Sus-TOTAL 120819.0 119294.0 117684.0 1057.0 114726.0 114251.0 114130.0 TOTAL CASH GUTFLU 998224.0 999224.0 987303.0 984277.0 965246.0 959040.0 953896.0 ANIAL CASH FLOW 691678.0 691678.0 692599.0 695625.0 714656.0 721862.0 72006.0 CIMLATIUE CASH FLOM -1883181.0 -1191503.0 -498904.0 196721.0 911377.0 1633239.0 2359245.0 - 88 - YUGOSLAVIA ANNEX 9 MRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT Table 8 MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Balance Sheet "July 13" Agrokombinat (Dinare '000) 1977 1980 1981 1982 1983 Assets Cash 61,064 301,439 332,186 388,642 420,726 Receivables 47,609 260,098 671,083 826,661 1,074,567 Inveatories 240,608 576,401 1,004,637 1,378,228 2,146,784 Investments 79,994 982,980 1,473,278 2.155,872 2,897,187 Current Assets 429,275 2,120,918 3,521,184 4,749,403 6,539,164 Fixed Assets 854,307 1,685,857 2,571,755 3,489,802 5,226,805 Common Consumption 43,361 184,635 196,857 281,275 403.060 Other Assets 34.122 265,252 585,331 782,111 1.244.584 Sub Total 931,790 2,135,744 3,353,943 4,553,188 6,874,449 Total Assets 11361,065 4,256,662 6,875,127 9.302.591 13,413,613 Liabilities Short Term Loans 141,351 668,629 1,512,121 1,948,461 2,372,264 Supplier's Credit 101,780 622,098 671,652 974,700 1,796,740 Other Short Term Liabilities - - - - 1,879 Current Liabilities 243,131 1,290,727 2,183,773 2,923,161 4,170,883 Medium & Long- term Loans 347,510 1,494,684 2,267,040 3,069,587 4,091,260 Business and Reserve Funds (Equity) 546,324 997,653 1,549,993 2,209,078 3,397,499 Common Consumption Fund 53,861 160,407 246,501 352,253 488,418 Other Funds 246 76,291 12L,329 Other Resources 169,993 313,191 627,820 672,131 1,144,224 Sub Total 770,424 1,471,251 2,424,314 3,309,753 5,151,470 Total Liabilities 1a361L065 4.256,662 6,875,127 9302L591 13,413,613 ANALYSIS Current Ratio 1.76:1 1.64:1 1.61:1 1.62:1 1.56:1 Total Debt/Equity 0.89:1 1.96:1 2.43:1 2.27:1 1.9:1 Long Ters Debt Equity 0.64;1 1.5:1 1.46:1 1.39:1 1.20:1 1 - 89 - ANNEX 9 YUGOSLAVIA Table 9 AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Income and Expense Statements "13 July" Agrokombinat (Dinars 000) 1977 1980 1981 1982 1983 A. Income Revenue 1,694,582 5,020,462 7,533,350 9,648,603 13,482,138 Subsidies 442 - 1,208 - 761 Total Income 1,695,024 5,020,462 7,534,558 9,648,603 13,482,899 B. Expenses Operating Costs 1,385,727 4,217,167 6,458,622 8,177,318 11,550,927 Amortization 27,276 62,426 82,581 112,113 157,568 Taxes & Contributions 29,263 148,668 200,035 284,106 361,807 Interest 26,712 66,728 111,011 179,883 319,685 Gross Salary 1/ 207,059 488,797 616,707 834,488 1,037,712 Total Cost 1,676,037 4,986,386 7,468,956 9,587,908 13,427,699 C. A-B + 18,987 + 34,076 + 65,602 + 60,695 + 55,200 Allocated to Funds 21,266 69,504 105,751 139,717 146,090 Business Fund 18,2Q9 50,367 82,190 106,713 90,674 Reserve Fund 2,967 19,137 23,561 33,004 55,416 I/ Includes common consumption fund -90 - ANNEX 10 YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO LOAN 1370-YU PROJECT COMPLETION REPORT Summary of Stabilization Program for WO Plantation (WO Vinoprodukt) A. Non-Financial Measures 1. Improve capacity utilization by increasing sales and decreasing stocks. 2. Increase productivity of workers, i.e. control sick leave, improve internal transport; carry out strong penalties for unexcused absences from work, use soldiers during the harvest period. 3. Improve quality of products to conform to export demand. 4. Increase the variety of production depending on market demand; i.e. introduce cognac and new types of wine such as Merlot. 5. Market more actively by sending marketing representatives abroad to promote sales, employ the necessary staff and train existing staff. B. Financial Rehabilitation 1. Improve collection rates, particularly for late payments from clients. 2. Change short-term loans to long-term loans and obtain a lower interest rate. 3. Have penalty interest rates to IBT-UB for obligations not settled during the 1980-1983 period written off. 4. Possibly have a portion of the short-term loans' interest rates (amounting to 50-70 million Dinars) written off due to operational losses. Specific employees have been assigned to oversee the implementation of the different measures. The mission was given one small section of the report, but the over-all report was confidential. - 91 - ANNEX 11 Page 1 TERMS OF REFERENCE FOR A REVIEW OF "13 JULY" AGROKOMBINAT'S OPERATION I. Introduction 1. During the recent Country Implementation Review (CIR) conducted by the World Bank in Montenegro during the month of December 1984, it was agreed that "13 July" Agrokombinat (AK) would take primary responsibility for carrying out a comprehensive review of its existing marketing and financial practices and develop an Action Plan to revitalize its operation. This undertaking would be done with the close collaboration of Investiciona Banka Titograd-Udruzena Banka (IBT-UB) and its relevant Basic Banks. II. Objective 2. To review and devel.- a restructuring plan to improve and strengthen the operations of AK, including production, technical, marketing and financial with an objective to render it competitive and economically and financially viable (See Section III). III. Areas of Review and Investigation 3. Raw Material Supply (i) Identify current planned sources of raw material supply (breakdown between social and individual sector), reliability of supply and its quality, procurement arrangements from within and outside the Republic and prices of raw material. (ii) Identify constraints in obtaining adequate raw materials to meet enterprise requirements. A brief quantitative description of problems encountered in procurement, pricing, competition, capability of farmers to expand production, joint ventures with other Republics, enterprise capability of raw material. (iii) Develop alternative policies and practices to ensure stable and adequate raw material supply at competitive prices. 4. Marketing of Products (i) Review current marketing policy and plans, and specific arrangements for domestic and export sales. Identify sources of market information, methods of forecasting market demand, determining market prices and delivering products. Identify areas in which administered prices adversely affect profitability. (ii) Review current arrangements with export marketing organizations and effectiveness of marketing services (new market information, market research, export financing, etc.) provided by these organizations. ANNEX 11 - 92 - Page 2 (iii) Identify current practices for new product development and new market development. (iv) Analyze the effectiveness of marketing strategy, response capacity of marketing management to changes in market place and their ability to estimate and control marketing costs (transportation, packaging, advertising, commissions). (v) Develop alternative strategies, policies and practices to ensure adequate market outlets to fully utilize plant capacities through effective domestic and export marketing. 5. Production (i) Review current production organization and management, scheduling and planning, standards and quality maintenance and capacity utilization. Identify any bottlenecks affecting capacity utilization. (ii) Identify management and technological problem affecting the production system and develop alternative policies and practices. (iii) Analyze cost effectiveness of production with reference to capacity utilization, optimizing productivity and yield, energy conservation and minimizing unit overhead costs. 6. Financial Planning, Analysis and Operations (i) Review current financial policies and practices and their impact on the following: Structure on financing Mobilization of short-term and long-term funds Sources of funds and interest rate policy Return on assets and net income (ii) Review role of enterprise management in preparing annual financial plans derived from data provided from production, marketing and manpower planning functions. Analyze their effectiveness and recommend improvements. (iii) Review and modify, as necessary, arrangements for accounting, costing and financial analysis of current operations, product costing, analysis of product profitability. (iv) Review systems and procedures for preparing operating and financial reports to management and develop proposals for their improvement. 7. Organization and Management (i) Examine the manner in which the above functions are organized and managed to achieve enterprise objectives. ANNEX 11 - 93 - Page 3 (ii) Assess the responsiveness of management and planning systems to meet the needs of emerging internal and external situations. (iii) Review the management decision-making process, delegation of authority and control functions. (iv) Review the management and technical training and human resource development practices. (v) Review existing practices of performance review and reward/incentive systems for both management and staff. (vi) Develop policies and procedures to improve management efficiency, including employment practices. IV. Preparations of Action Plan 8. Based on this Review, prepare a detailed Action Plan to strengthen the following. (A) Planning - Setting and achieving enterprise objectives at various management levels. (B) Production - Availability and procurement of raw material at competitive prices. - Capacity utilization, including extension of production period, number of shifts, identification of bottlenecks. - Maintenance, including spare parts. (C) Marketing - Domestic - External - Market research and intelligence - Joint-venture, both domestic and foreign - New product development - Quality control - Packaging, etc. (D) Financial - Financial planning and controls - Cost accounting - Sources and costs of funds - Profitability analysis (return on investment) - Inventory control system (F) organization and Management - Responsiveness of management to meet changing external and domestic conditions - Monitoring and evaluation of total operations - Manpower development and training - Effective management information syr-em ANNEX L Page 4 FINANCIAL AND MARKETING REVIEW OF "13 JULY" AGROKOMBINAT Steps and Action Date 1. The World Bank (WB) sent the draft Terms of January 15, 1985 Reference (TOR) to AK 2. AK reviewed the TOR February 15, 1985 3. Finalization of TOR in consultation with WB February 28, 1985 4. Formation of the teams and recruitment of specialists March 1, 1985 5. Start of the teams' work March 8, 1985 6. Review of the teams' work 11 April 15, 1985 7. Completion of the teams' reports July 15, 1985 8. Review and acceptance of the full Report's recommen- July 30, 1985 dations (Action Plan) 1/ 9. Implementation of the Action Plan Dates to be deter-- mined 1/ WB will participate in discussions to provide guidance. AGRICULTURE AND AMICULTURAL IMMSTRIES ROECT IGSLA'JIA MONTEERGRO LOAN 1370-YU ECONIOC MAYSIS 1977 1978 1979 1980 1981 1982 1983 1994 1985 1916 M19 I18-2001 ----------------------------------------------------------------------------- -------..- -.......- CASH INFLOU TOtAL IFLOW - - - - 134851.9 236461.5 422613.6 1018793.0 997730.0 12961640 1485290.0 162054.0 CASH UTIFLON INUESTMENT COSTS 64014.0 151322. 5031004 748091.2 448292.8 290685.5 236172,8 148295,0 - - - * OPERATING COSTS - - 36703,5 131604.9 340427.4 545933.8 62191.0 606582.0 702278,0 77539.0 313546.0 TOTAL OUTFLOW 64014.0 151322.2 503100,4 784794.7 579997.7 631312.9 792106.6 711176.0 606502.0 702279.0 773990 813546.0 NET CASH FLOW -64014.0 -151322.2 -503100.4 -794794.7 -445045.8 -394851.4 -35949310 3076170 391149o0 593896.0 707751.0 814509,0 a--zzxz Cr :: uz---X-xxxzzz: f32223u23 zxxazzz:: 5E332mzzz xazzzu 28288hM 888=x=z mmaagam 888882azz 888826=8 .. .............................................................................. . ... ....... ..... ......- December 19# 2995 10142 Internal Rates of Return of Net Streas NEI 15.282 SUITCHING VALUES AT 12Z APPRAISAL SUITCHING PERCENTAGE STREM VALUE VALUE CHANGE B,TOT 5005,225.80 4.543,087,53 -11.012 C.INV 1,579778.32 2#141,916.60 35.582 C.OPT 2963930920 3P525.447,48 18972 TOTAL COSTS 4M543,067.53 5.105,225.80 12.37% Net Pesent Value at 0CC 12 a 562,138.3 Internal Rate of Return z 15.31 Coupon Eauivalent Rate of Return a 13.92 論 叢 鑼 - 鬱 潘 蔥 I S 念 I 言 }。! !-! 革B蔥 ,};l YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT MONTENEGRO Loan 1370-YU Project Complellan Repo" l 3 July" Agrokombinat: Organkallon Chad ck:;A. 13 Agfe4,~ al MD Hc .r~QIK I sngr4n0 BOA, RA CO~. cg #ret ý!j4 c) ~cx> ri ser-"$ WýVN, YUGOSLAVIA AGRICULTURE AND AGRICULTURAL INDUSTRIES PROJECT S E R B# l MONTENEGRO LOAN-1370YU RELIEF Altitude in Meters 0-400 400 -1500 SOr.. MIN 1500-3000 Boundaries oF Republics and > Kosovo Autonomous Provinces So0 o v ointernaonal Boudories E 0 20 40 60 80 100 KILOMETERS 0 10 20 30 40 50 ar MILES AUSTRIA 20 6. CP 'N. . HUNrAR -7 RON ANIA ty~ A cek ~ ~ 0 N I p É %~ z%. SI A -ve- > ,v. s ...-. HEZEOVI SiE cIA 0 7HIS PMOJECTæCMPLE TION AEPAuA -42MC0N THE ftLEf HAS SUN CHA4NGE, 1Q 2 R