Romania - Otelinox Special Steel Project

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The project would comprise: (a) engineering and construction of a cold rolling mill complex designed to produce about 30,000 tons per year of stainless steel sheet and strip from hot-rolled coils; (b) engineering and construction of a rod and bar rolling mill complex designed to produce about 120,000 tons per year of alloy steel rod and bar products from billets; (c) training of staff in the application of special production processes and techniques and in plant management and operation; and (d) studies on the end uses of Otelinox's products, on the feasibility of the establishment of intermediate warehouse facilities and steel service centers, and on the export potential for Romanian special steel products.
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CIRCULATING COPY . ... t... u MTO BE RETURNED TO REPORTS DEF1 DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1 4O0a-R.Q REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXCECUTIVE DIRECTORS ON A PROPOSED LOAN To THE INVESTMENT BANK, ROMANIA WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE OTELINOX SPECIAL STEEL PROJECT June 24, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy pr completeness of the report. CURRENCY EQUIVAlENTS 1,. Official Rate lei 4b97 = US$1.00 lei 1 = US$0.20 2. Tourist Rate lei 14.38 US$1.00 lei 1 = US$0.07 Conversion Rate for Traded Goods lei 20 = US$1.00 lei 1 = US$0.05 Fiscal Year -- January 1 - December 31 INTERNATIONAL BA\K FOR RECONSTRUTCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INVESTMENT BANK, ROMANIA, WITH THE GUARANTEE OF THE SOCIALIST REPUBLIC OF ROMANIA FOR THE OTELINOX SPECIAL STEEL PROJECT 1. I submit the following report and recommendation on a proposed loan to the Investment Bank, Romania, with guarantee of the Socialist Republic of Romania, for the equivalent of US$70 million to help finance the foreign ex- change cost of a special steel project. The loan would have a term of 15 years, including 5 years of grace, with interest at 7-1/4 percent per annum. The Otelinox enterprise would be the beneficiary of the Bank loan, and the cost of the loan to the enterprise would be 9 percent per annum including a guarantee fee of 1-3/4 percent per annum. PART I - THE ECONOMYf 2. Romania joined the Bank on December 15, 1972. The first economic mission visited the country in March/April 1973 and its report, entitled The Economy of Romania (R73-274), was issued to the Executive Directors on Novem- ber 30, 1973. An updating mission just returned from Romania and will complete its report later this year. The first basic mission is scheduled for 1976. Social and economic country data are given in Annex I. 3. Since the founding of the People's Republic of Romania in 1948, which in 1965 was reconstituted as the Socialist Republic of Romania, eco- nomic management has been organized along socialist principles which have included state and cooperative ownership of almost all productive resources, and the absence of private enterprise. Economic activity is directed by means of administrative development planning, coordinated by the central authorities. Productive enterprises operate within the framework of the development plan which defines the scope of their activity, the outlines of their production and investment goals and their targets for operating efficiency. The Plan is elaborated within a five-year time frame, each year having a separate Annual Plan. The country is presently in the fourth year of its Five-Year Plan for the period 1971-1975. 4. The technical and functional Ministries are the State's chief agents for the administration of economic activity. They are assisted by subordinate units known as Centrals, which coordinate and supervise activities within a common branch or industry without being directly engaged in production. Sub- ordinate to the Centrals are the productive enterprises whose principal task is meeting production targets. Production enterprises generally are not au- thorized to engage directly in foreign trade. For this purpose they use spe- cial foreign trade enterprises. -2- 5. Economic development is of paramount concern to the Romanian Govern- ment. Rapid industrialization is a major objective with priority being given tc heavy industry including steel, machine tools and chemicals. To achieve their growth objectives the Romanian authorities have made considerable efforts to mobilize domestic resources for development and to maintain a high rate of capital formation. In the present Five-Year Plan planned and actual investment rates of around 30 percent of GNP have been the norm. As a consequence, con- sumption has been restrained, and the development of the consumer goods indus- try has been less strongly emphasized than that of heavy industry. In 1972, heavy industry (led by machine tools, chemicals and ferrous metallurgy) ac- counted for about 70 percent of industrial production. 6. As a result of this strategy, a marked change has been achieved in the structure of Romania's economy. Rapid industrial growth, which over the last decade has averaged more than 13 percent per annum, has expanded the share of the labor force employed in industry including power and construc- tion to 35 percent in 1972, from about 14 percent in 1950. During the same period, agricultural output almost tripled while the share of the labor force engaged in agriculture declined from 74 percent to around 45 percent. 7. Romania's population growth is around 1.0 percent per annum. Thus, the impact of rapid economic growth on per capita incomes has not been substan- tially diluted by the population increase. In the last decade, GNP growth has been 9.0 percent per annum on average, implying a growth of about 8.0 percent per annum of per capita GNP. The latest World Bank Atlas estimates GNP per capita for 1971 at $740. 8. The organizatior. of production in both the urban sector and in agri- culture is such that all labor is actively employed and there is no open un- employment. There is, however, some labor surplus. Income distribution is also relatively equal. In 1972, average monthly wages were 1,498 lei (about $75 equivalent). Almost 80 percent of all monthly wages were within the range of 900-2000 lei and less than 6 percent were under 900 lei. Minimum wages are guaranteed by the State; they were raised to 1,000 lei per month for full-time workers in September 1972. Prices for essential consumer goods and services such as basic foodstuffs, rents and urban transport are relatively low and most social services, notably education and health care, are provided with- out charge. Continuous efforts are made to increase the standard of living. Romania also pursues a positive regional policy which has sought to bring a balanced development of both human and natural resources to all parts of the country. 9. The official exchange rate of lei 4.97 per US$1.00 is used only for accounting purposes. The rate used for invisible and capital transac- tions is lei 14,38 per US$1. Under a newi system introduced in January, 1974, the prices of all traded goods are converted at a uniform rate of lei 20 per US$1.00, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domes- tic lei price is found by adding to the converted foreign price a tariff rate which varies for different types of goods. The rate of lei 20 per US$1.00 has also been used to convert national income statistics from lei to dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Recent Developments 10. Since the National Party Conference of 1967, which set the stage for major qualitative advances in Romania's economic and social development, there have been important new emphases in Romania's economic management. Measures were taken to improve the institutional basis of planning (e.g. by creating the Centrals to assist in plan administration), to increase the ef- ficiency of economic management and to improve upon the quality of production in industry. In agriculture efforts were made to raise productivity and sta- bilize growth through irrigation, mechanization and the expanded use of chem- ical fertilizers. To expand upon the growth of foreign trade and technical- economic cooperation the Romanian Government has concluded trade and coopera- tion agreements with a wide range of countries. In this context also, Romania has made positive efforts to expand its multilateral external relations and to pursue full cooperation with the international agencies, including UN, UNCTAD, UNESCO, FAO, UNIDO and GATT. 11. One result of these efforts is that foreign trade has expanded quite rapidly in recent years both in volume and in regional diversity. There has also been a tendency to move away from trade on a bilateral barter basis to- wards trade involving multilateral payments. During the period 1965-72, total foreign trade grew at about 12 percent per annum in current prices. In 1972, imports and exports each totalled about $2.6 billion, about 45 percent of which represented trade with non-socialist countries. Overall trade deficits have generally remained small. During 1968-72 the total annual trade deficit aver- aged about $75 million, i.e. less than 8 percent of average exports. However, the results varied as between different trade regions. Imports from East European Socialist countries were slightly lower than Romania's exports to that region. In Romania's trade with Western industrialized countries, on the other hand, exports were much less than imports. These deficits have sometimes been increased by deficits on the invisibles account with Western countries. 12. The Romanian economy has not escaped the impact of recent world de- velopments affecting the energy sector, even though the country depends only marginally on imported fuels. At present Romania is a net importer of crude oil and a net exporter of petroleum derivatives. In 1973 Romania imported about 4.0 million tons of crude oil valued at around $80 million, out of a total crude consumption of around 17 million tons. Valued at 1974 prices, this volume of imports will cost over $200 million which represents a sig- nificant increase in required foreign exchange. These imports, however, are used mainly as chemical feedstock. Exports of derivatives in 1973 were aDoul 5.0 million tons valued at about $140 million. To the extent petroleum deriva- tive prices rise in response to recent changes in crude oil prices, there will be gains in export earnings to offset the rise in the oil import bill. The extent to which this will occur, however, is still uncertain. In November 1973, the Romanians embarked on a stringent program of economy in the use of fuels, which included rationing of gasoline and fuel oil, in order both to minimize the import drain and maximize the supply available for export; ration- ing ended in March 1974 following an increase in the selling prices of these fuels. -4- External Assistance 13. The expansion of Romania's trade with the non-socialist industrial countries has led to an increased need to obtain convertible currencies to pay for imports from those countries. Romania has met this need both by borrowing abroad and by mounting a major effort to expand exports and tourism. Gross inflows of convertible currency capital were US$542 million in 1973, hav- ing grown from US$276 million in 1967. Romania's access to convertible finance, however, has been almost exclusively confined to financial and suppliers' cred- its with relatively short repayment periods. The net inflow of convertible capital in 1973, therefore, was only US$238 million. 14. As part of its effort to expand its foreign trade and cooperation relationships, Romania has also taken active steps to attract long-term pri- vate capital. A regulation passed in 1972 defines the conditions under which foreign firms can establish joint ventures with domestic enterprises, prefer- ably in foreign exchange earning/saving industries. Romania has also estab- lished two joint banks, one in France and the other in the United Kingdom, in an effort to expand the availability of credit from European countries. Prospects 15. The current Five-Year Plan (1971-75), whose original targets in most sectors appear likely to be exceeded, reflects Romania's continued strategy of rapid growth. The targets contained in the Annual Plan for 1974, for example, include a 16.7 percent growth in industrial production, 14.6 percent growth in national income, an investment rate equal to 35 percent of national income and a 41 percent expansion of foreign trade. The Plan also lays stress on a range of qualitative aspects of development including technical improvements and diversification in industry and foreign trade, improvements in capacity utilization, development of the nation's human resource potential and a con- tinued emphasis on regional development. 16. Romania has good potential for further economic growth. Endowed with important natural resources - fuels, some minerals, timber, rich soils and a favorable climate both for agriculture and tourism - and located con- veniently with respect to its major international markets in the East and West, the country has built a broad industrial infrastructure (power, metal- lurgy, chemicals) which will serve as a base for the expansion of secondary manufacturing sectors such as machine building and consumer durables. Above all, Romania has a hard-working and increasingly skilled population devoted to the achievement of the country's development objectives. 17. Economic growth and structural change call for the introduction of new industrial technologies, improvements in the quality of products, more economic use of materials and factor inputs, and reductions in production costs. The increasing diversity and complexity of Romania's economic struc- ture require continuing improvements in the efficiency of economic planning and coordination and further refinements in industrial management. To keep up with these changes and requirements large programs of education and man- power training have been mounted, and efforts are being made to strengthen technical cooperation with industrialized countries and international organ- izations. -5 - Creditworthiness 18. At the end of 1973 Romania's total medium and long-term external debt amounted to $1,519 million. Most of these debts ($1,404 million) were denominated in convertible currencies, the major creditor countries being Germany, France, UK and Italy. While the total debt does not appear exces- sive in relation to the volume and growth of external trade, average maturi- ties are relatively short and convertible debt service payments are estimated to be in the order of $340 million a year during 1974-75. The convertible debt service ratio was approximately 19 percent in 1973, reflecting the unfavorable terms of foreign credits available to the country. 19. The organization of economic activity in Romania and the pursuit of a development strategy involving high investment/saving rates and rapid income growth ensure the ava-lability of domestic resources sufficient to service reasonable amounts of foreign debt. Moreover, the country's major efforts to expand exports (particularly to convertible currency areas), to attract private joint venture capital and to seek other forms of bilateral converti- ble currency financing are increasing the foreign exchange available for debt service. Convertible earnings rose from $585 million in 1967 to $1,902 mil- lion in 1973. The preferential trade status accorded to Romania by the EEC in June 1973 should facilitate the further expansion of such exports as could the granting of most favored nation status by the U.S. Last year, the Govern- ment also restricted the use of short-term credit facilities from western sup- pliers in an effort to improve the structure of the country's external debt. Assuming a continuation of present export and debt management policies it can be expected that the debt service ratio will gradually decline during the sec- ond half of the 1970's. The country's present outward-looking posture, the success of both its domestic growth and foreign trade policies, and its po- tential for continued development, all support the judgment that Romania is creditworthy for substantial Bank lending. 20. When Romania joined the Bank, most pre-war foreign debts of the country had been settled. The only settlements which were still under dis- cussion at that time concerned claims in the United Kingdom and in the United States. The Romanian authorities have repeatedly assured the Bank of their intention to settle these old claims, and have from time to time advised the Bank staff of progress towards settlement. As far as the US claims are concerned, there have been several meetings between both parties. The most recent meetings between a Romanian delegation led by the Deputy Minister of Finance and representatives of the US bondholders took place on June 10, 11 and 20 in Washington; the next meeting is planned for early July during which both sides expect to agree on procedures for formal registration and validation of outstanding bonds. The Romanian authorities have ex- pressed confidence that final agreement on a compensation formula will be completed no later than August 1974. The UK claims are larger and more complicated. The most recent meetings were held in London on June 6 and in Bucharest on June 18. Both sides aim to exchange specific proposals during the next few weeks, and the Romanian authorities have expressed confidence that final agreement will be reached by September. -6- PART II - BANK GROUP OPERATIONS IN ROMANIA 21. Documents for the first loan to Romania, the Tecuci Fertilizer Project, were distributed recently to the Executive Directors. In addi- tion to the proposed project, documents are also now distributed for the proposed Turceni Thermal Power Project. 22. It will take time to build up detailed knowledge of the economy which would allow a sharper focus on the outstanding development problems. At present, foreign exchange, especially in convertible currencies, appears to be a major constraint. During the early phase in the Bank's relations with Romania, therefore, one of the major objectives of Bank lending will be to help alleviate the country's shortage of foreign exchange by provid- ing long-term external capital and by financing projects which will expand foreign exchange earnings or savings. Bank lending will also aim at support- ing the Government's efforts to introduce new industrial technologies, to im- prove the quality of products, to make more economic use of materials and factor inputs and to reduce production costs. Market aspects and marketing, especially for export goods, will also be emphasized. Special attention is also being given to agriculture where productivity levels are still relative- ly low. The Government is aware of this situation and has stepped up efforts to develop the agricultural sector as evidenced by the rapid expansion of ir- rigation, the increasing use of fertilizer and the continuing pursuit of in- stitutional improvements in this sector. The Bank will assist the Government in implementing plans in this field. 23. In furtherance of these objectives of Bank lending, loans for an irrigation project in the area of Giurgiu-Razmiresti and an agricultural credit operation to develop agricultural production within the recently com- pleted Sadova-Corabia irrigation system are envisaged within the next year. Also being proposed for Bank consideration is a multi-purpose power and irri- gation project on the Lower Olt River and a pulp and paper project. 24. In addition to significant help with the preparation of projects for Bank financing, the Bank (through EDI) has assisted in establishing a
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