Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 2676a-RO

Public Disclosure Authorized STAFF APPRAISALREPORT

DANUBE-BLACKSEA CANALPROJECT

ROMANIA Public Disclosure Authorized

December 20, 1979 Public Disclosure Authorized

Projects Department Europe, Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS

Currency Unit: Leu (plural lei)

1. Official Rate

Lei 4.47 = US$1.00 Leu 1.00 = US$0.22

2. Tourist Rate

Lei 12.00 = US$1.00 Leu 1.00 = US$0.08

3. Conversion Rate for Traded Goods

Lei 18.00 - US$1.00 Leu 1.00 = US$0.06

The Official Exchange Rate of lei 4.47 per US$1 is used only for accounting purposes. The rate used for tourist transactions is lei 12 per US$1, having been revalued from a rate of lei 14.38 per US$1 in October 1974. Beginning in March 1978 a trading rate of lei 18 per US$1 has been used to convert the priceq of all traded goods; this rate is considered representative of the average cost of convertible foreign exchange.

WEIGHTS AND MEASURES

1 meter (m) = 3.2808 feet (ft) 1 kilometer (km) 0.6214 mile (mi) 1 square kilometer (km2) = 0.3861 square mile (mi2) 1 hectare (ha) = 2.47105 acres (ac) 1 liter (1) = 0.2642 gallon (gal) 1 liter per second (1/sec) = 0.0353 cubic foot per second (ft3/sec) 1 cubic meter per second (m3/sec) (m3/sec) = 35.3147 cubic feet per second (ft3/sec) 1 kilowatt (kw) = 1.3410 horsepower (hp) 1 kilogram (kg) = 2.2046 pounds (lb) 1 metric ton (ton) = 2,204.6225 pounds (lb)

ACRONYMS AND ABBREVIATIONS

bt Barge tons DBSCC Danube-Black Sea Canal Central cmt Cargo metric tons CONTRANSIMEX State Company for Foreign Trade DWT Department of Water Transport dwt Deadweight tons IB Romanian Investment Bank ICH Hydrotechnical Research Institute IPTANA Road, Water and Aerian Design Institute ISP,IF Land Reclamation Design and Research Institute ITFG Enterprise for River Navigation LDN Lower Danube Navigation mlTc Ministry of Transport and Telecommunications SPC State Planning Committee The Administration Danube-Black Sea Canal Administration (the canal operating enterprise) ROMANIAN FISCAL YEAR January 1 to December 31 FOR OFFICIALUSE ONLY

STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Table of Contents Page No.

I. THE TRANSPORT SECTOR ...... 1

A. The Transport System ...... 1 B. Transportation Policy, Planning and Coordination .... 2 C. The Subsector ...... 3 D. The River Danube Navigation System ...... 4 E. Bank Group Transport Sector Operations in Romania ... 5

Annex 1.1 Freight and Passenger Movements - Growth and Modal Breakdown ...... 6

II. THE DANUBE-BLACK SEA CANAL ADMINISTRATION AND THE BORROWER ...... 7

A. Organization and Management of the Canal ...... 7 B. The Borrower ...... 8 C. International Traffic ...... 8

Annex 2.1 Translation of the Decree Creating the Administration ...... 9 Annex 2.2 Provisional Organization Chart, Canal Administration ...... 11

III. THE INVESTMENT PLAN AND THE PROJECT ...... 12

A. Inland Waterway Subsector Investment Program ...... 12 B. Project Objectives, Dimensions and Timing ...... 12 C. Project Description ...... 13 D. Project Design ...... 15 E. Soil Conditions ...... 15 F. Project Construction ...... 16 G. Supervision and Technical Assistance ...... 16 H. Construction Schedule ...... 16 I. Project Cost ...... 17 J. Project Financing ...... 18

This report is based on the findings of appraisal missions to Romania in February, March and July 1979 consisting of Mr. N.C. Yucel (Economist) and Messrs. A.H. Clark, A.A. Fateen and Y. Latizeau (Consultants).

This documenthas a restricteddistribution and maybe usedby recipientsonly in the performance of theiromcial duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. Table of Contents (Cont'd) Page No.

K. Procurement and Bank Involvement ...... 19 L. Project Monitoring and Reporting ...... 21 M. Employment, Ecology and Regional Development ...... 22

Annex 3.1 Other Essential Investments ...... 23 Annex 3.2 Project Description - Further Details and Information ...... 25 Annex 3.3 Summary of Studies and Design Work for the Canal ...... 27 Annex 3.4 Implementation Schedule and Critical Path. 28 Annex 3.5 Project Cost Estimate ...... 29 Annex 3.6 Foreign Exchange Component ...... 30 Annex 3.7 Equipment to be Incorporated in the Project and Suitable for Bank Financing 31 Annex 3.8 Construction Equipment Recommended for Bank Financing ...... 32 Annex 3.9 Estimated Schedule of Loan Disbursement 33

IV. ECONOMIC EVALUATION ...... 34

A. General ...... 34 B. Traffic Analysis and Forecast ...... 35 C. Least-cost Analysis ...... 37 D. Project Benefits ...... 39 E. Economic Costs of the Project ...... 43 F. Economic Return and Sensitivity Analysis ...... 44

Annex 4.1 Information on Traffic Forecasts ...... 46

V. FINANCIAL AND TARIFF ANALYSIS - DANUBE-BLACK SEA CANAL ADMINISTRATION ...... 49

A. General Principles ...... 49 B. Canal Dues ...... 50 C. Costs to be Covered by Dues ...... 51 D. Financial Forecasts and Tariff Analysis ...... 53 E. Cash Flow Statements and Balance Sheets ...... 55 F. Accounts and Audit ...... 55

Annex 5.1 Danube-Black Sea Canal Administration - Capitalization of Canal Operations ...... 56 Annex 5.2 Danube-Black Sea Canal Administration - Pro Forma Financial Statement, Analysis of Canal Barge Transit Dues and Cash Flow Statement ...... 57 Annex 5.3 Cash Flow Statement - Ministry of Trans- port and Telecommunications ...... 58

VI. AGREEMENTS REACHED AND RECOMMENDATIONS ...... 59

Annex - Documents in Project File ...... 60

Maps - IBRD 14312, IBRD 14313R STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

I. THE TRANSPORT SECTOR

A. The Transport System (Map IBRD 14312)

1.01 The Socialist Republic of Romania has an area of 237,500 square kilometers. It is bordered by Bulgaria to the south, Hungary and Yugoslavia to the west, and to the north and northeast by the USSR. The Black Sea lies to the east providing Romania with a 245 kilometer-long coastline. Along much of its southern border flows the Danube, the most important navigable river in southeast Europe.

1.02 Romania's topography consists of three principal relief zones of approximately equal size. In the middle of the country lie the Carpathian mountains rising to over 2500 meters. Around this mountain range there are hills and tablelands ranging in height from 500 to 200 meters. The third relief zone consists of the lowlands located in the western and southern regions of the country.

1.03 Despite the existence of extensive mountainous areas, Romania has a fairly well developed and evenly distributed transport network. The principal mode of the system is railways with 11,000 route-km. The rail network is evenly distributed throughout the country and has stations in 1441 locations providing easy access to rail transport from almost all production and population centers. The road system is 78,000 km long, about two-thirds of which is gravel and earth surfaced. There is only one expressway of 100 km and 264 km of four-lane highways.

1.04 The Danube River flows through and along the borders of Romania over a distance of 1075 km. It offers great potential for complementing the country's transport network by providing energy-efficient transportation for low value bulk commodities. The deep-sea port of Constanta on the Black Sea is the country's main outlet for its seagoing trade, handling about 90% of the total. It is an important element in the transportation system since, with rapid industrialization and economic development, foreign trade has become a vital element in sustaining the growth of the economy.

1.05 No data have been available on "own transport" services (owned only by State enterprises) to determine their extent although they are relatively minor. Ignoring these services and movement by private cars, rail is the most important mode of inland transport in Romania. In 1977 it accounted for 81% of the total ton-km. Road transport is the next important mode--12% of the total ton-km--and during recent years it has been slowly increasing its share. Inland waterways and pipelines account for 3% and 5% of ton-km respectively. Air transport is relatively unimportant for freight transport. In passenger - 2 - transportation railways are again the dominant mode, accounting for about 53.4% of passenger-km. Public buses are the next important mode for intercity passenger trips, accounting for 46.3% of total passenger-km. Growth and modal breakdown of freight and passenger movements are shown in Annex 1.1.

B. Transportation Policy, Planning and Coordination

1.06 Responsibility for all transport mocdes, with the exception of air transport and pipelines, is vested in the Ministry of Transport and Tele- communications (MTTc). Aviation has a separate department subordinated to the Council of Ministers and pipelines are the responsibility of the Ministry of Mines, Petroleum and Geology. The functions of the Ministry's headquarters are planning, coordination, design, administration and budgeting. Actual transport operations and construction of transport facilities are largely delegated to centrals and the enterprises within them. Separate departments exist within MTTc for railways, sea and river transport. For road transport there is a Directorate of Highways responsible for the supervision of enter- prises for highway construction and maintenance works.

1.07 The planning process in the transport sector follows the basic approach used for all sectors as well as for the overall economy. Transporta- tion projects included in the plan originate both at the micro level through the enterprises and judets (especially for roads) and at the macro level through the State Planning Committee (SPC). The demands for transport of the economic enterprises and sectors are reconciled with the existing capacities and expansion plans of transport enterprises. The latter are determined after a review of all expansion plans and the setting up of priorities within the allocated investment budget. Review and coordination of new investment proposals are the responsibility of MTTc which submits its program to the SPC. The program is further reviewed and modified through the same interactive process used for all sectors.

1.08 Romanian transport strategy, in broad terms, has been to view the national transportation network as a unitary system in which each trans- port mode complements the rest and does not compete with each other. The Government's declared objective has been and is today to combine and to coordinate different modes so as to provide the needed transport services at the minimum cost to society and with the least energy consumption. Within this general policy, investments in transport facilities have followed rather than preceded the investments in other sectors, as has been the case in many developing countries of the world. Development of industrial capacity rather than extension of transport facilities has been perceived by the Romanians as the main spearhead of economic development. This policy has had the effect of freeing resources for use elsewhere in the economy and of forcing transport enterprises to maximize services with the capacity available. However, it has also led to creation of congestion in heavily used corridors, such as the one linking the main production centers with the country's main port at Constanta. At present, there is little surplus capacity in the system and as a result no - 3 -

flexibility is available to adjust to seasonal variations as well as to long- term increases in demand resulting from economic growth, which will require substantial additions to the available capacity in the near future.

1.09 Transport coordination is achieved through discretionary controls within the framework of the comprehensive transport planning process discussed above. Each user of transport services is required to specify both his transport needs and the mode he desires about a year in advance. His specifi- cations are reviewed by the authorities and often accepted. Users are allowed to revise their demands downward, without penalty, if the request is made 10 days before the service is required. Monthly reviews are made of transport requirements and modal allocations are revised according to departures from the plan. However, although the choice of mode is made initially by transport users, in practice the allocation of traffic to different transport modes is determined by the overall transport investment program. No extensive data are available at present to determine the nature of the relationship between transport prices and the cost of providing them, but in interpreting transport demands for investment requirements, the Romanian authorities base decisions on general cost characteristics of alternative modes as well as types of commodities and haul lengths involved. As a result, there is little evidence suggesting serious distortions in modal allocation of traffic.

C. The Subsector

(i) Organization and Operations

1.10 Water-borne traffic of Romania is operated by the following economic (i.e., commercial-type) enterprises and Government agencies, each of which has its own clearly defined area or areas of responsibility.

(a) The enterprise for operating the Romanian Maritime Fleet (IEFM), also known as ROMTRANS. Headquarters at Constanta. Subordinated to the Department of Water Transport (DWT) in MTTc.

(b) The Constanta Port Enterprise (IEPC). Subordinated to DWT.

(c) The Administration of Sulina Free Port (APLS). An eco- nomic enterprise subordinated to the Ministry of Foreign Trade and International and Economic Cooperation, and responsible for "free port" activities at the seaport of Sulina.

(d) The Enterprise for River Navigation (ITFG), also known as Navrom Galati, with headquarters at Galati and subordinated to DWT. It is responsible for: -4-

(i) operating the three river ports for oceangoing ships at Tulcea, Galati and Braila, and for normal cargo operations at Sulina;

(ii) stevedoring, shore-handling and loading and unloading of river barges at those four ports and at all upriver ports in Romania;

(iii) owning and operating the barge fleet of Romania and the tug fleets for river transportation (no industrial enterprises own their own barges); and

(iv) passenger river transportation.

(e) The River Administration of the Lower Danube (AFDJ). This is a Government Agency of DWT, responsible for operating and maintaining the ship canal between Sulina and Tulcea (the Sulina Canal) and for providing pilotage as well as for operating the Lower Danube Navigation (LDN) between Sulina and Braila.

1.11 The above, with the exception of (e), are economic enterprises with separate legal status, established by decree. There is a comprehensive tariff structure covering all the above, excluding ocean and river freight rates, published by the MTTc, General Direction of Civil Navigation in 1971. Indivi- dual tariff charges are also fixed by law; the charges normally remain in force for five years when they may be reviewed and changed, either to allow for inflation or perhaps for other reasons, such as the earning of excess profits. This is in line with the general principle of strict control of prices. To date, only minor changes have been made in the tariff rates. To enable tariffs to be collected in foreign currencies, they are denominated in gold francs. In the absence of agreements, payment is to be made in US dollars, pounds sterling, Swiss francs or other freely convertible currency. The gold franc contains 0.29032258 grams of fine gold, the value of which, on November 24, 1978, was US$0.3941055. At the trading rate, or internal conver- sion coefficient, of lei 18 = US$1, the gold franc is equivalent to lei 7.09 which is the value used in this report.

D. The River Danube Navigation System

1.12 Historically, the River Danube has served as an important transporta- tion facility for all its riparian countries, which continue to use it for imports and exports as well as local traffic. In particular, in Romania there has been and still is a strong tendency to locate industrial enterprises needing large volumes of bulk raw materials on or close to the river. There are about 25 river ports to serve the traffic. At present, barges of up to about 1000 dwt capacity are used, but with some improvements in depth and curvatures, the river could accommodate convoys of six barges each of 3000-ton capacity, thus providing the possibility of highly cost-effective transporta- tion. Unfortunately, this is obstructed by the physical conditions of the - 5 - delta (some 5000 sq. km) through which the Danube flows into the Black Sea. The 61-km long Sulina Ship Canal, which traverses the delta from Sulina (on the Black Sea) to Tulcea, and was constructed about 100 years ago, enables oceangoing ships, drawing a maximum of 7.0 m over the Sulina Bar, to navigate up river about 175 km to Galati and Braila, where cargoes are transshipped to barges. In recent years, with the rapid growth in cargo volumes, particularly dry bulk, the draft restriction at the Sulina Bar has inhibited the use of large bulk carriers, thus imposing heavy uneconomic transportation costs. Despite the rapid growth in cargo volumes, particularly dry bulk, the role of the Danubian waterway system in Romania is at present limited to about 3% of the total ton-km of total cargo movements.

1.13 Because of the extended shallow berm created by siltation from the Danube and the effect of the southerly flow of the littoral drift, it is not practicable or economical to relieve the situation by constructing a deep- water port at Sulina for the accommodation of large bulk carriers. Initial investment costs would be extremely high while substantial recurring costs would be incurred in maintaining adequate water depths. Such a possible alternative was therefore discarded. On the other hand the deep-sea port of Constanta on the Black Sea is beyond the influence of the delta and can be expanded southward. Romania has for some years therefore been planning to construct a barge canal from the Danube at Cernavoda to new deep-water facili- ties at Constanta (South Constanta-Agigea) so as to bypass the now uneconomic LDN. Work started in 1976 on the project. The linkage provided by the project will enable Romania to avoid the heavy uneconomic transport costs that are increasingly hindering its industrial development. The elimination of the limitations on the use of the LDN system will also open the river for growth in international transit traffic, which is at present inhibited from using this sea access. Romania has requested the Bank to assist in financing the project, both directly and through co-financing.

E. Bank Group Transport Sector Operations in Romania

1.14 The proposed loan would be the first Bank Group operation in the transport sector in Romania. A clearly defined Bank strategy has not as yet emerged because of the present lack of detailed and comprehensive knowledge of the sector within the Bank. However, the project has provided the Bank with an introduction to the sector and the principal issues facing it, and, in the future, the Bank could make significant contributions toward sound and rational transport policies and investment programs and implementation of those programs. Indeed, the Bank has already contributed to the more efficient implementation of the present project (para 3.07). On a broader aspect, the proposed loan would help to develop further Romania's access to international capital markets, through co-financing, already successful in Bank projects in other sectors. -6- ~~~~~~~AN1NEX1. 1

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II. THE DANUBE-BLACK SEA CANAL ADMINISTRATION AND THE BORROWER

A. Organization and Management of the Canal

2.01 The canal project is unique to Romania, unprecedented in its size and nature. Because of the extremely large investment and substantial eco- nomic benefits of the project and its long economic life, the Government decided that it should be entrusted to a new separate entity that will operate the canal on an economically and financially viable basis. The Bank agrees with this general approach. By Decree of the Council of State, No. 180-1979, signed by the President May 12, 1979, the Danube-Black Sea Canal Administration (the Administration) was created, subordinated to DWT of MTTc. The Administra- tion has legal status and is to be organized according to the principle of financial self-sufficiency and operated pursuant to legal provisions for the organization and operation of State enterprises. An English translation of the Decree is given in Annex 2.1. Mr. Niculai Zeicu was appointed Director on July 18, 1979. He formerly was Director of the Constanta Port Enterprise (IEPC).

2.02 Pending the creation of the Administration, since by law there has to be a "beneficiary" of an investment that has certain duties and obligations during the construction period, the IEPC was named as the provisional bene- ficiary and entered into the construction contract for the canal. IEPC crea- ted a special unit to carry out those duties and obligations which include:

(i) maintenance of records of project expenditure;

(ii) supervising construction;

(iii) purchasing equipment for operations and maintenance;

(iv) staff recruitment and training;

(v) preparing operating, navigational and staff regulations; and

(vi) generally to ensure that the whole organization is complete and ready to take over operations as soon as the canal is open to traffic.

The Administration has now taken over responsibility for the construction contract as the beneficiary, together with the special unit mentioned above.

2.03 Until commencement of operations on the canal the Administration is expected to comprise four main divisions:

(i) Investment. Responsible for planning, control and super- vision of construction; - 8 -

(ii) Supply. Responsible for contracts for lock installations and other equipment to be incorporated in the project; also port cranes and equipment for the canal ports, etc.;

(iii) Personnel and Training; and

(iv) Finance.

2.04 It has not yet been decided whether the canal ports (included in the project) will be operated by the Administration or be handed over to other existing enterprises, e.g., Navrom Galati and IEPC. An organization chart for canal operations is given in Annex 2.2. In any event the accounting records of the ports would be kept separate from those of the canal operations.

B. The Borrower

2.05 The proposed loan would be made to the Investment Bank (IB) and guaranteed by the Republic of Romania. The IB is the specialized agency, under the Ministry of Finance, for investment projects in all sectors of the economy except agriculture (including water resources) and food processing. It has a large technical and economic staff with branch offices in all dis- tricts of the country. The IB's involvement in investment projects commences in the preparation phase of a project; its staff appraises all major invest- ment projects technically and financially and recommends approval or otherwise of their financing to the Government. When a particular project and its financial plan have been approved by the Council of State, all major funds are channeled through the IB in accordance with the approved financial plan. All payments for the execution of a project have to be authorized by the IB which keeps separate accounts for each category in the financial plan for every enterprise. It is the IB's obligation to ensure that a project: is executed according to the financial and technical data included in the final technical and economic study approved by the Council of State. Its inspectors check whether the project is proceeding according to the schedule approved in the plan.

C. International Traffic

2.06 International traffic on the River Danube is regulated by the Danube Commission, under the Convention of 1948, which subjects the Danube to a particular regime including non-discriminatory passage. Under the Conven- tion Romania has the responsibility to maintain the navigability of the river, within its jurisdiction, and including the LDN, at present levels. The Romanian Government states that the canal will be a national waterway and not be subject to the Danube Commission. However, it is the Government's inten- tion that it will be open to navigation by traffic of all countries on a non-discriminatory basis, and the Government has given the Bank a letter to this effect. - 9 - ANNEX 2.1

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Translation of the Decree Creating the Administration

DECREE regarding the establishment of the Danube-Black Sea Canal Administration

The State Council of the Socialist Republic of Romania enacts:

Article 1: On May 1, 1979, the Danube-Black Sea Canal Administra- tion is hereby established, located in Agigea, Constanta Municipality, sub- ordinated to the Ministry of Transport and Telecommunications, Water Transport Department, for the purpose of operating and maintaining the canal.

The Danube-Black Sea Canal Administration shall be organized accord- ing to the principle of financial self-sufficiency, with legal status and shall be operated pursuant to legal provisions for the organization and operation of state enterprises.

Article 2: The Danube-Black Sea Canal Administration has the following ain duties:

(a) contracts the machines, installations and equipment required for operation and ensures their reception;

(b) contracts ships for maintenance and operation, and the port cranes;

(c) contracts design documentations, verifies and approves the execution designs, approves payment of the works;

(d) carries out quality control and reception of the construction- erection works;

(e) participates in the technological tests of the fixed assets that are going to be part of the Administration's endowment;

(f) draws up operation and maintenance norms for the navigable Danube-Black Sea Canal; supervises the operation of the machines, equipment and buildings;

(g) ensures recruitment and training of personnel required for maintenance and operation of the canal; - 10 - ANNEX 2.1 Page 2

(h) draws up regulations and technical instructions for opera- tion and maintenance personnel;

(i) manages and coordinates water consumption required for navigation, irrigation, industrial and potable water supply;

(j) secures control and guiding of navigation on the canal;

(k) operates and ensures maintenance of telecommunications, automation, dispatching and signaling installations, as well as installations for information feed-back that con- tribute to the safety of navigation and water management on the canal;

(1) ensures all operation and maintenance activity.

Article 3: During the period up to the commissioning, the average number of technical, economic, administrative and other skills is of 30 jobs in 1979, 50 in 1980 and 80 in 1981 and 1982. The Danube-Black Sea Canal Administration is placed within the I-st grade of organization, Group IV of branches.

Article 4: Expenditures for the operation of the Danube-Black Sea Canal Administration, including the training up to the commissioning of the canal are covered from the investment cost of the project.

Article 5: Workers shall be employed within the operational depart- ments of the Administration taking into account the remuneration indicators approved by the Ministry of Transport and Telecommunications for the transpor- tation sector.

Article 6: The personnel of the Administration having the duties of site surveyors will have the remuneration approved by Decree 109/1975 for the workers of the Danube-Black Sea Canal Central and the other rights up to the completion of the works.

PRESIDENT NICOLAE CEAUSESCU

Bucharest, May 12, 1979 No. 180 STAFF APPRAISAL REPORT

OANtSIE-BLACK SEA CANAL PROJECT

ROMANIA

Danube-Black Se. Canal Administration

Provisional Organization Chart

I WORKING PEOPLE'S COUNCIL

EXECUTIVE BOARD

G E N E R A L M A N A G E R

OPERATION DIRECTION I tnvePtmnt Devopment

and Labor | Central Dispatching Organization of the Cnal Protection Dept.

| Operation and Water |Personnel Remouneration_ ManS ameolt De artmPtenI I

Hydroterhmical Junctions Office Operation DePartrent I Juridic

Electronic Sign. nd Telecot. PRODUC T V E U N I T S |_Installation 0perntion Det. Administratlion Dept and Techoicna_ | Pleet. Equipment & | Canal Cernavoda Agigea Sign, Protoco. Dept. Tras. M asOEat oD . Op-rtinJunctinJtioion- Telecom Mainrerance Operation and Operation and Installation Hydrographica- 1 Maintenance Maintenance i Mnintenance - Chief Pilot M.Se ring Section Section Section Section- - edgidia No. 1 No Agigen MAINTENANCE, SCHEDULING AND _ SUPERVISION DIRECTION CHIEF ACCOUNTANT

aals M=inten nce and c =iS c u 0 0 Fina ncng drographic Measprig Dept. u. |4 44 Internal

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00.f which Techn ical Fleet Eq.ips.eot and 544 444 4. 4. 40 0 4. 0 4 0 5. m .4Technical Ad.n. Personnel MaintenanD.F.0tn e .00 0 -5 Prod ive Maintenance. 4~~~ De 1. 440443 33N44 EN 443 3 4443 4-~~~ 04 TOTAL Worker- octoa

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Snorces DBSCC

March 1979 - 12 -

III. THE INVESTMENT PLAN AND THE PROJECT

A. Inland Waterway Subsector Investment Program

3.01 The subsector investment program is essentially based on the project canal. It includes the following additional investments, all of which are essential to the operation of the canal, which are included in the economic analysis:

Cost US$ Million

Seaport facilities 395.6 River ports and improvements 100.4 Barges and tug fleets 185.1

Total 681.1

Further information is given in Annex 3.1 and the economic analysis, Chapter IV. During loan negotiations, the Government agreed that the other essential works necessary for the canal shall be completed to the extent necessary to handle the forecast traffic from the time it shall be opened to through traffic.

3.02 The project will also provide the economic base for improvement or incorporation into the inland waterway network of several of the Danube tributaries in Romania. In particular, a 70-km waterway link along the River Argesul to Bucharest is being considered. Other multipurpose waterway develop- ment programs for navigation, hydroelectric power and irrigation are also being considered. These further developments, however, are not considered in this report.

B. Project Objectives, Dimensions and Timing

3.03 The principal objective of the project is to provide low-cost inland waterway transportation for large and rapidly growing volumes of bulk raw materials needed for Romania's growing industries and which will also encourage and facilitate the growth of international transit traffic. It is designed to eliminate the restrictions and uneconomic costs imposed by the LDN on inland cargo movements by constructing a 64-km canal from Cernavoda, on the Danube, eastward to a point just south of the Port of Constanta (Romania's only deep-sea port) on the Black Sea, where a new port is being constructed (South Constanta-Agigea). The port will have facilities for handling dry bulk carriers of up to 150,000 dwt and a barge transshipment terminal. The canal is designed for barge traffic and will accommodate convoys of up to six barges of - 13 -

3000 dwt each, transiting in both directions, i.e, up to 18,000 tons per convoy. In addition, three ports will be constructed along the length of the canal at Cernavoda, Medgidia and Basarabi.

3.04 The canal project is one of the largest civil engineering works currently being undertaken in the world. It involves about 294 million m3 of earth moving (242 million by dry excavation, 17 million by dredging, and 35 million by blasting), five million m3 of concrete of which one million is reinforced, six million m3 of stones for side-slope protection, about 1.2 million t of cement and 200,000 t of reinforcing and structural steel.

3.05 Construction of the canal and its supporting facilities started in 1976. They will be open to through barge traffic between the Danube and Agigea by the end of 1982 and are scheduled for completion by 1984. The first 36 km (from Cernavoda) are superimposed on the existing Carasu irrigation channel and about 15 km had been completed by July 1979.

C. Project Description (Map IBRD 14313 R)

3.06 The project consists of the following elements, further details of which are given in Annex 3.2:

(a) Civil Works

(i) The Canal

Construction of a canal about 64 km long, 7 m deep, 70 to 90 m wide at the bottom and 135 to 95 m wide at water surface between Cernavoda and the Danube and South Constanta-Agigea on the Black Sea.

(ii) The Locks

Construction of two identical locks at Cernavoda and Agigea. Each lock has: (a) two chambers 310 m long and 25 m wide; (b) walls and base of heavily reinforced concrete; and (c) double drop-type gates at each end.

(iii) Canal Ports

Construction of three canal ports at Cernavoda, Medgidia and Basarabi.

(iv) Utilities

Construction of two service roads, one on each side of the canal between Cernavoda and Agigea and railway - 14 -

connections, installation of power, electricity, water, drainage, sewage facilities, pipelines for fuel transport and telecommunication systems and provision of equipment therefor.

(v) Buildings

Construction of administration buildings needed for canal construction and operation and a building for Cernavoda pumping station.

(vi) Reinstallation of Affected Facilities

Replacement, reconstruction or relocation of existing transport, irrigation and other facilities that have to be removed or destroyed as a result of canal construction.

(b) Equipment

- Provision of equipment for operating the lock gates, for moving barges in the locks, for Cernavoda lock pumping sta- tion, and general cargo-handling equipment for canal ports.

(c) Signaling and Control

- Provision of radar and radio equipment, light and floating buoys, signaling installations, navigation control system, water management information system and automated coordinating system for the needs of irrigation, navigation and canal operation.

(d) Expropriation, Reclamation and Compensation

(i) Reclamation of about 2,800 ha of agricultural land to replace about 5,200 ha to be occupied by the proposed canal. Of the latter, about 1,800 ha are now non- productive; and

(ii) Compensation for about 600 ha of unreplaced agricul- tural land and for demolished or dismantled buildings, vineyards and orchards.

(e) Miscellaneous

(i) Provision of miscellaneous facilities needed to imple- ment the project. These include, inter alia, housing for workers, concrete plants, aggregate plants, trans- port modes, workshops, etc.

(ii) Supervision. - 15 -

D. Project Design

3.07 The project was designed by the Road, Water and Aerian Design Institute (IPTANA), supported by about 37 other local institutes which special- ize in canals, locks, hydrology, geology, seismology, land reclamation, transport, energy, construction, organization, etc. IPTANA is well-established and highly experienced, as are the supporting institutes, with ample profes- sional staff, laboratories and equipment. Studies and research work started in 1973 and are adequately completed; final engineering has also been prepared. A summary of the studies and design work is given in Annex 3.3. Several acceptable layouts were considered by the Romanians and the present is the least-cost solution and acceptable to the Bank. The Bank reviewed all aspects of construction--design, methods, procedures and equipment--and suggested certain improvements, particularly as regards the use of the largest and most efficient excavating equipment available. These improvements were accepted (para 3.26). With these improvements the Bank is satisfied that the project is technically sound and is being carried out in the most economic manner.

E. Soil Conditions

3.08 The topography of the land through which the canal is being built and the soil conditions are not the most favorable for this type of work and add considerably to the project cost. For the first section of the canal between Cernavoda and Basarabi (km 0 to km 41), the canal layout follows the Carasu Valley alignment. The soil is mainly clay of about 35 m thick over- lying limestone strata. Between km 0 and km 20 the level of water in the canal (+7.5 m) is, in certain locations, higher than the surrounding land; adequate side-slope protection and drainage systems are provided.

3.09 The second section of the canal between km 41 and km 61 runs in the high plateau which has levels ranging generally from +50 to +65 m with a maximum of about +70 m above sea level. Most of the material to be excavated in this section is chalk and limestone; about 35 million m3 have to be blasted before being removed. The permanent ground water level in this plateau is always higher than the canal water level. In addition, there are seven main faults crossing the canal between km 41 and km 55. This is expected to cause some difficulties during excavation of the limestone strata. Such excavation should be carried out by big excavators and loaders operating on a dry site. Several pumps with 20 m3/second capacity will be used during canal construction to ensure the removal of seeping water, and the necessary measures are being taken to ensure adequate control and drainage of water seeping into the canal during and after construction.

3.10 For the last section between km 61 and km 64, the ground level falls gradually from +62 m to sea level at the coast. Excavation will be mainly in limestone covered by a 25 m-thick layer of clay. - 16 -

F. Project Construction

3.11 Construction of the canal project is being carried out by the Danube-Black Sea Canal Central (DBSCC) (created specifically for this proj- ect), under contract with the MTTc beneficiary, Danube-Black Sea Canal Admin- istration (para. 2.01). In Romania all similar works are constructed by Romanian Construction Trusts, or Centrals, which are experienced and familiar with local conditions and regulations. This practice is acceptable to the Bank since, because of regulated wages and material prices, Romanian construc- tion costs are likely to be lower than those that would be submitted by foreign contractors under international competitive bidding (ICB).

3.12 DBSCC is under the direction of a Deputy Minister of MTTc, who has overriding powers over all authorities related to the construction of the canal. He has wide experience and an outstanding reputation acquired through responsibilit'yfor several projects of comparable magnitude and complexity. DBSCC employs about 15,000 workers including about 1,000 quali- fied engineers; these will be increased to 30,000 and 1,500 respectively by 1980. DBSCC is well organized; its performance is good and compares ade- quately with that of international contractors.

3.13 Land needed for the project is either owned by the Government or already expropriated. It will be available for the project as needed.

G. Supervision and Technical Assistance

3.14 The Administration as the beneficiary has prime responsibility for supervision and control of the project. Local institutes, principally IPTANA, involved in the design will continue to provide technical assistance to DBSCC during the construction period, as well as supervision and quality control, to ensure that work is carried out satisfactorily and in accordance with agreed plans and specifications. Of the 1,000 engineers available now to DBSCC (para. 3.12), 200 have supervisory responsibility and they adequately super- vise project construction. The above arrangements are satisfactory.

H. Construction Schedule

3.15 Construction of the canal started in 1976 and is scheduled for final completion in early 1984. However, the implementation schedule is planned to ensure that barges can transit the length of the canal by the end of 1982. Achievement of these goals is conditional upon the availability in due time of (i) adequate numbers of highly productive construction equipment and (ii) construction materials. During loan negotiations an undertaking was obtained from the Government that (i) the necessary construction equipment will be made available on site by the end of 1981 to ensure the opening of the canal to through traffic by the end of 1982 and final completion of the - 17 -

project in 1984, (ii) that 50% of the bitumen and reinforcing steel financed by the Bank loan will be made available to DBSCC before the end of 1981, 25% before the end of 1982 and 25% before the end of 1983 and (iii) that equipment to be incorporated in the project will be made available by mid-1982. About 4% of the work had been completed by the end of 1977, 11% by the end of 1978, and about 22% is expected to be completed by the end of 1979. Work is progres- sing on all fronts with different degrees of efficiency. The implementation schedule and critical path, as shown in Annex 3.4, were discussed with the Government and the IB and confirmed during loan negotiations.

I. Project Cost

3.16 The total project cost is estimated at lei 31,500 million (US$1,750 million equivalent). The estimate is based on expected November 1979 prices and includes physical and price contingencies. It excludes interest during construction. The foreign exchange component is estimated at US$551.7 million equivalent, or 31.5%. The foreign exchange component is reasonable considering the type of the project and the state of development of Romanian industry. The cost estimate has been reviewed with the IB and MTTc and appears reason- able. It was confirmed during loan negotiations. Details of the cost esti- mate are given in Annex 3.5 and of the foreign exchange component in Annex 3.6.

3.17 The cost estimate for civil works is based on unit rates of work prevailing in Romania under the system of regulated prices of materials and wages. However, the cost of excavation, which constitutes about 50% of the cost of civil works, compares reasonably with international prices. Cost of equipment used for excavation and construction is included in the estimated cost of the different items of the project, and includes spare parts.

3.18 Although detailed engineering has already been carried out for all items of the project, physical contingencies have been provided at 9% on all items, taking into consideration the anticipated difficulty in removing hard limestone between km 41 and 61. Because of the very low inflation rate in Romania, price contingencies on local costs have been compounded at 1% annually. This is in line with the practice for Bank-financed projects in Romania. Price contingencies on foreign costs are compounded at an annual rate of 7%. - 18 -

3.19 Phasing of expenditure on the project, spread over 1.976-1984,is estimated as follows:

Calendar Lei Million US$ Million Year Local Foreign Total Local Foreign Total

1976 46 20 66 2.6 1.1 3.7 1977 991 560 1,551 55.0 31.2 86.2 1978 1,869 851 2,720 103.8 47.3 151.1 1979 3,085 1,406 4,491 171.4 78.1 249.5 Subtotal 5,991 2,837 8,828 332.8 157.7 490.5

1980 4,165 1,896 6,061 231.4 105.3 336.7 1981 4,730 2,153 6,883 262.8 119.6 382.4 1982 4,506 2,052 6,558 250.3 114.0 364.3 1983 1,777 810 2,587 98.7 45.0 143.7 1984 401 182 583 22.3 10.1 32.4 Total 21,570 9,930 31,500 1,198.3 551.7 1,750.0

J. Project Financing

3.20 The project is included in the 1975-80 Unified National Plan for Social and Economic Development and in the 1981-1985 Plan now being discussed. As regards the foreign exchange costs, it is expected that, by the end of 1979, the Government will have committed the equivalent of US$229.5 million in foreign exchange. The proposed Bank loan amounts to US$100 million. Judging by the response of co-financiers to other Bank-financed projects in Romania it is expected that offers of co-financing will be obtained. They would be in the form of direct Bank loans and not suppliers' credits which would not be a rational possibility for this project. The amount and timing of co-financing will depend on market conditions and on the amounts and timing of co-finance being raised by Romania, with Bank assistance, on other Bank-financed projects. It is likely that for this project co-financing will be in the range of US$150-200 million equivalent. The terms may be affected by Ronania's recent weak balance of payments position. - 19 -

3.21 On the above basis the finance plan would be as follows:

US$ million % of % of equivalent total costs foreign exchange

Foreign exchange costs:

Government of Romania 229.5 13.1 41.6 Proposed Bank loan 100.0 5.7 18.1 Co-financing (maximum) 222.2 12.7 40.3 Subtotal 551.7 31.5 100.0

Local costs:

Government of Romania 1,198.3 68.5 Total 1,750.0 100.0

3.22 The Bank should continue to assist the Government in obtaining co-financing from appropriate sources, but, regardless of the amount of co-financing available, Romania is considered capable of financing the balance of foreign exchange costs, as well as the local costs. Also, it would not be possible for all offers of co-finance to be made, approved and effective until after Board approval of the proposed Bank loan. Therefore, approval of the proposed loan should not be deferred on this account, or made conditional on the obtaining of co-finance.

K. Procurement and Bank Involvement

Civil Works

3.23 Romanian Construction Trusts have already begun implementing all civil works. This is acceptable to the Bank since the Trusts are experienced and familiar with local conditions, methods and regulations. Under this arrangement construction costs are likely to be less than those which might have been submitted by international contractors.

Equipment to be Incorporated in the Project

3.24 Equipment to be incorporated in the project, including the lock gates, is suitable for Bank financing under ICB. A list of such equipment is given in Annex 3.7 with a total cost estimated at US$25 million equivalent.

Construction Materials

3.25 As regards construction materials, the IB requested, and it is recommended that the Bank loan be used to finance bitumen (used for sealing the side slopes) and reinforcing steel (Annex 3.6) for which Romania is a - 20 - net importer. It is recommended that this be limited to 35,000 t of bitumen and 70,000 t of reinforcing steel at a total estimated cost of US$35 million equivalent.

Construction Equipment

3.26 The considerable quantities of additional construction equipment needed to complete the works on time are, in principle, suitable for ICB. A list has been drawn up, comprising mainly the larger items, with a total estimated cost of US$40 million equivalent which will be financed by the Bank (Annex 3.8).

Project Items Suitable for Bank Financing

3.27 In summary, the following project elements are most suitable for Bank financing:

Category US$ million

1. Equipment to be incorporated in the project 25.0 2. Construction materials 35.0 3. Construction equipment 40.0 Total 100.0

During negotiations it was agreed that items costing US$100 million equivalent including contingencies would be procured following international advertising and competitive bidding in accordance witn the "Guidelines for Procurement Under World Bank Loans and IDA Credits - March 1977". Romanian manufacturers and suppliers would be allowed a preference of 15 percent or the applicable customs duty, whichever is lower. It is estimated that foreign suppliers would win contracts estimated to cost about $5 million principally for specialized machinery and equipment for the lock gates. Other items to be procured through TCB (about $95 million) are available domestically and, based on experience with previous Bank-financed irrigation and power projects, it is expected that Romanian manufacturers and suppliers would be successful in bidding for most of these items. The balance of equipment and construction materials would be procured under Romanian procedures and would not be eligible for disbursement under the proposed Bank loan.

Bank Financing

3.28 During loan negotiations agreement was reached on items above for which the loan will be disbursed. Disbursement would be 100% of foreign expenditures or 100% of ex-factory expenditures. There will be no retroactive financing or advance contracting under the Bank loan. - 21 -

3.29 Goods and services for which the loan will be disbursed will be procured by CONTRANSIMEX, a State company for foreign trade. The Danube-Black Sea Canal Administration and the Danube-Black Sea Canal Central are responsible for procuring all other goods and services.

3.30 In accordance with the foregoing and the project construction schedule (para. 3.15), an Estimated Schedule of Loan Disbursements has been prepared as Annex 3.9. This was confirmed during loan negotiations.

3.31 Because of the urgency to get the construction equipment on site and working at the earliest possible moment, the Romanian authorities agree that the ICB process must start immediately, to the extent of preparing specifica- tions, drafting notices and contracts, etc., so as to avoid any delay when the proposed loan becomes effective. The IB has already arranged with the design agencies to start the process as a matter of urgency. The Bank has already received draft tender documents for most items and review within the Bank has started.

L. Project Monitoring and Reporting

3.32 The IB is responsible for submitting to the Bank quarterly progress reports containing information needed to follow up project implementation as compared to the estimated schedule. The reports will include all data on progress of construction of each major item of civil works included in the project, progress on equipment and material procurement (whether or not financed by the Bank loan) and detailed project expenditure. The reports will underline any circumstances that may adversely affect the schedule of construc- tion, date of completion or project cost. During loan negotiations the format of progress reports and dates required for their submission were agreed.

3.33 The IB is also responsible for preparing and submitting to the Bank a completion report within six months of the loan closing date. The report will comment on project timing, execution and cost, and on the performance of DBSCC, as well as benefits obtained from its initial period of operation and those forecast for the foreseeable future. The report will also comment on the performance of the IB (the Borrower) and the Guarantor as regards their respective obligations under the Loan and Guarantee Agreements and on the degree of accomplishment of the project objectives. During negotiations the contents of the completion report and its timely provision were discussed. - 22 -

M. Employment, Ecology and Regional Development

Employment

3.34 Construction of the project is providing new jobs for about 15,000 men and women in 1979, including about 1,000 engineers. These numbers are expected to increase to 30,000 and 1,500 respectively in 1980 and thereafter. Operation of the project is expected to provide continuous jobs for about 700 persons.

Ecology

3.35 The canal and its supporting facilities are expected to have posi- tive effects, on balance, on the ecological conditions in the area. Studies carried out by specialized Romanian institutes concluded that the canal's fresh water would have no adverse effects on biotic conditions in the sea and the canal-sea connection. A physical planning model study was prepared to study means for preservation and relocation of historical and archeological monuments.

3.36 The canal will contribute to minimizing pollution by reducing trans- port fuel consumption substantially, as compared to an alternative railway transport system. It will allow the productive utilization of excavated earth for improving the quality of poor soil in the adjacent areas, prevent floods by controlling water in the valleys of about 28 tributary streams, and create an environment attractive to tourists. The canal region is the driest and one of the poorer regions in Romania. Flood control and water storage systems will help in saving crops during flood and drought seasons. The canal, because of fluctuating supplies of water from the Danube and tributary valleys and the system of irrigation works, would inhibit mosquito breeding and the spread of malaria. The existing Carasu irrigation canal, upon which the first 34 km of the canal are based, needs about 140 m3/second of water, whereas the total quantity needed for the canal after its completion is estimated at 190 m3/second. The difference of 50 m3/second to be taken from the Danube is not likely to adversely affect the water level in the lower parts of the river because its rate of discharge at Cernavoda reaches a minimum of 2,000 m3/second and a maximum of 10,000 m3/second.

Regional Development

3.37 The project conforms to the planned regional development scheme for the southeastern part of Romania. It will stimulate economic activity and generate new employment opportunities. It will improve agriculture locally, encourage tourism and generally enhance the amenities and quality of life in the region. - 23 - ANNEX 3.1 Page 1

STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Other Essential Investments

The investments necessary to enable the canal to be used to its fullest potential are:

(a) South Constanta-Agigea Seaport. A port, enclosed within new breakwaters, is being constructed on the Black Sea adjacent to Agigea (5 km south of Constanta) to handle the forecast canal traffic. It is a feasible extension to the existing port of Constanta and will provide scope also for an oil terminal and for further general and bulk cargo facilities in the future. The part of the port designed for canal traffic consists of: (i) a basin of about 180 ha for barges and tugs; (ii) eight piers totaling about 1,800 m long and 7 m deep for berthing barges; (iii) one pier 700 m long and 11 m deep for general cargo ships; (iv) one pier 700 m long and 14.5 m deep capable of handling bulk carriers up to 60,000 dwt each; and (v) one pier 700 m long and 19 m deep capable of handling bulk carriers of 150,000 dwt each. Work involves dredging of about two million m3, of which one million is sand and one million is limestone, and reclamation of about 700 ha using about 130 million m3 of soil excavated from the canal site. Work is underway, construction being by the Constanta Hydro-technical Construction Enterprise (CHCE) under contract with the Constanta Port Enterprise. CHCE is a subsidiary of DBSCC, both under the same Director, thus ensuring parallel construction and completion. The cost of the port related to the canal traffic is lei 7,122 million (US$395.7 million equivalent).

(b) Danube Ports and River Improvements. Construction of additional port facilities at the Danube ports of Galati and Calarasi and deepening and improving the curves in certain sections of the river between Cernavoda and each of the above two ports in order to allow safe transit and loading and unloading of convoys of large barges using the canal. Work at Calarasi involves creation of a new barge basin by dredging about 5 million m3, and construction of berths 2,000 m long. Work at Galati involves construction of berths 1,200 m long. Deepening the river Danube between Cernavoda and Calarasi and between Cernavoda and Galati and - 24 - ANNEX 3.1 Page 2

improving curves therein involves dredging of about one million m 3. Work is progressing. Total cost is lei 1,808 million (US$100.4 million equivalent).

(c) New Barge and Pusher Fleet. The composition of the new barge and pusher fleet needed to transport the canal traffic forecast to the year 2000 has been calculated on the basis of origin and destination data. The fleet will be con- structed in Romanian yards. Numbers and estimated costs as follows:

Cost/unit Total Cost rTotal Cost Type Number lei million lei million US$ million equiv.

Barges 2,000 dwt 25 4.5 112.5 6.25 2,500 dwt 106 5.4 572.4 31.80 3,000 dwt 308 6.3 1,940.4 107.80 Subtotal 439 2,625.3 145.85

Pushers 600 hp 6 10.0 60.0 3.33 800 hp 1 11.0 11.0 0.61 1,640 hp 12 15.0 180.0 10.00 2,400 hp 20 22.8 456.0 25.34 Subtotal 39 707.0 39.28 Total 3,332.3 185.13

Phasing of expenditure to conform to traffic growth requirements would be:

Lei million US$ equiv.

to 1982 1,676.0 93.11 1983 237.7 13.21 1984 272.1 15.12 1989 323.3 17.96 1999 823.2 45.73 Total T,332.3 185.13 - 25 - ANNEX 3.2 Page 1

STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Project Description

Further Details and Information

Para. 3.06(a)(i) - The canal is about 64 km long, 7 m deep, 70 to 90 m wide at the bottom and 95 to 135 m wide at water surface. The canal bottom is level; it is one meter above the mean water level of the Black Sea, which is tideless. The hydrographic basin of the canal covers an area of 875 km2. The project provides for the control of the high water from 28 tributary valleys by gradually moving it to storage basins. About 44 km are of straight sections and the remaining 20 km are of 16 curves of 3,000 to 55,000 m radius, well beyond the minimum radius required for the planned convoys. The side slopes are well designed and totally protected by bitumen sealing or concrete walls, as appropriate, mainly to avoid the effects of waves from passing vessels. The canal has a safety coefficient of 4.0 to 4.3 and a blocking coefficient of 7.4 to 8.2; these coefficients are adequate and in accordance with international norms. The canal is designed to allow barge convoys to pass in opposite directions.

Para. 3.06(a)(ii) - The Locks. Water flows by gravity from the Danube to the canal through a channel outside Cernavoda lock. In rare cases when the water level in the Danube is lower than the water level in the canal, a pumping station of an adequate capacity of 205 m3/second is used to pump water into the canal. At Agigea, water flows by gravity from the canal to the Black Sea through reinforced concrete culverts and sluice valves without the need for a pumping station.

Para. 3.06(a)(iii) - Canal Ports. The Cernavoda port is located between the lock and the Danube, the Medgidia port in the vicinity of a new cement factory (one million t annual capacity, at present), and the Basarabi port near the workshop for construction equipment repairs which will be used later as a ship repair facility for barges and tugboats. Each of the three ports has its own basin with adequate possibility for future expansion.

Cernavoda port will handle about two million t annually in 1985 and a maximum of 7 million t annually after 2000. The project provides for a maximum of 7 million t annually after 2000. The project provides for the construction of a nine-ha basin, 520 m of loading and unloading berths and 220 m of waiting berths, as well as for cargo-handling equipment and transit sheds.

Medgidia port will handle about 5 million t annually in 1985 and a maximum of 16.5 million t in 2000. It will receive mainly 5 million t - 26 - ANNEX 3.2 Page 2 of coal annually for the Medgidia power station, 2.5 million t of cement to be produced annually by 1990 by the Asbocement Combine Company, raw material for the cement factory and various agricultural products. The proj- ect provides for the construction of a 20-ha basin, 2,140 m of loading and unloading berths and 950 m of waiting berths, as well as for cargo-handling equipment, transit sheds, repair shops and convoy assembly water area.

Basarabi port, mainly a repair facility, will handle only 0.7 million t by 1985 with a possibility of doubling this traffic by 2000. The project provides for the construction of a 12.8-ha basin, 1,070 m of operating berths and 350 m of waiting berths, as well as for workshops and repair facilities.

Para. 3.06(a)(vi) - Reinstallation of Affected Facilities. These include four main overhead road bridges at Cernavoda, Medgidia, Basarabi and Agigea; four railway overhead bridges at Cernavoda, Medgidia, Agigea and across the Poarta Alba-Midia (km 37) irrigation canal; as well as telecommuni- cations, railway, road, electricity, water, gas and oil systems. The project also provides for the recovery of the affected irrigation system and the construction of a new irrigation system at the reclaimed areas and a drainage system for the affected areas at the Carasu Valley. Bridges are designed with adequate clearance for all barges and tugs that will use the canal. - 27 - ANNEX 3.3

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Summary of Studies and Design Work for the Canal

(1) Hydrographical, geological, seismological, technological, topographical, social and environmental studies;

(2) Soil investigation studies, excavation technologies, hydro- mechanization, side-slope protection and protection against frost, flood and erosion;

(3) Construction material studies (quarries and aggregate), utilization of excavated material (clay, silt, chalk, lime- stone) for reclamation, cement manufacturing and road construction;

(4) Model studies for canal, convoy system, locks, ports and pumping stations;

(5) Studies for automatic control, navigation security, flood and water control; management information system and optimization of project execution time schedule; and

(6) Project design (canal, locks, ports, roads, bridges, railways, power, water, telecommunications, buildings, equipment, draw- ings, specifications, construction, installation and organiza- tion). Among the supporting institutes, in particular, the Hydrotechnical Research Institute (ICH) played a major role in hydraulic studies and model tests for the canal, convoy system, locks, ports, water intakes and pumping stations, while the Land Reclamation, Design and Research Institute (ISPIF) carried out soil investigations, geological, topo- graphical and hydraulic studies and a detailed seismic survey of the area.

Bank staff thoroughly reviewed all the above studies and designs with the respective responsible institutes and found them accept- able. SIAFF APPkAISAL REPLOT

DANUBE-BILACKSEA CANAL PROJECT

ROMANIA

1/ Implementation Schedule and Critical Path

It em Year 1976 19/7 19)8 1979 1980 1981 1982 1983 -/ 1984-4

Site preparation ____

Conatruction equipment (demand)

Construction equipmentL______(delivery)

Canal (excavation) 2/ rw

Canal (protection)2/ _ __ _ _ \ , | t_

Cernavoda lock ______\___

Cernavoda puimping starion

AF,Igea~ luck ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~(a, Aiigea lock __-- ______.__/______

Equipment (permanent) , / - . . |

South ConaLanta-Agtgea \' povrt_ 3/rt_3 ______------

(ther auxiliary worksa ______.\ -- -

TechnIcal testing _. ______L______

1/ Studies and project design have been completed. 2/ Excent for part above water level which will be completed by end 1984. 3/ For facilities needed for canal traffic. 4/ In 1983 and 1984 other complementary works not affecting navigation on the canal will be completed. …------Critical path - 29 - ANNEX 3.5 STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Project Cost Estimate

-----Lei million------US$ million------Local Foreign Total Local Foreign Total % Civil Works Canal 12,229 5,596 17,825 679.4 310.9 990.3 56.6 Locks 1,066 741 1,807 59.2 41.2 100.4 5.7 Canal ports 680 663 1,343 37.8 36.8 74.6 4.3 Utilities 218 86 304 12.1 4.8 16.9 1.0 Buildings 141 3 144 7.8 0.2 8.0 0.4 Reinstatementof affected facilities 1 424 1,581 64.3 23.5 87.8 5.0 Subtotal civil works 15,491 7,513 23,004 860.6 417.4 1,278.0 73.0 Equipment Equipment cost 826 198 1,024 45.9 11.0 56.9 3.2 Installation 220 43 263 12.2 2.4 14.6 0.8

Signaling and Control Signaling 43 11 54 2.4 0.6 3.0 0.2 Control systems 24 2 26 1.3 0.1 1.4 0.1

Expropriationand Compensation Expropriation 61 - 61 3.4 - 3.4 0.2 Compensation 153 - 153 8.5 - 8.5 0.5 Land replacement 140 - 140 7.8 - 7.8 0.4

Miscellaneous,including Supervision 1,436 - 1,436 79.8 - 79.8 4.6

Studies and Design Studies and Research 228 - 228 12.7 - 12.7 0.7 Design 395 - 395 21.9 - 21.9 1.3 Subtotal 19,017 7,767 26,784 1,056.5 431.5 1,488.0 85.0 Contingencies Physical 1,712 698 2,410 95.1 38.8 133.9 7.7 Price 841 1,465 2,306 46.7 81.4 128.1 7.3

Total project cost 21,570 9,930 31,500 1,198.3 551.7 1,750.0 100.0

Source: DBSCC and Bank Staff December 1979 - 30 - ANNEX 3.6 STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Foreign Exchange Component

US$ Million

1. Equipment on site 165.3

2. Equipment on order from Comecon countries 18.3

3. Equipment still needed for project completion 168.6

4. Steel reinforcement - 106,250 t x $320 34.0

5. Bitumen - 51,000 t x $220 11.2

6. Permanent equipment 34.1

7. Physical contingency 38.8

8. Price contingency 81.4

Total 551.7

Sdnrce: Bank Staff Estimate December 1979 - 31 -

ANNEX 3.7

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Equipment to be Incorporated in the Project

US$?,million

Lock gates, including spares 7.8

Hydraulic equipment 4.5

Pipes, metal plates 3.3

Floating pontoons 2.5

Gaskets and paints 1.6

Pumping station (Cernavoda) 3.0

Communication and information system 1.0

Miscellaneous equipment 1.3

Total 25.0

Source: IB and Bank Staff December 1979 - 32 - ANNEX 3.8

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Construction Equipment Recommended for Bank Financing Unit Total Pricel' Cost 3 No. US$1,000 Excavators (7.0 to 8.Om ) 8 1,000 8,000

Excavators (2.5 to 3.2m3) 50 210 10,500

Dump trucks (50t off highway) 100 200 20,000

Mobile and tower cranes (llOmt) 12 125 1,500

Total 40,000

l/ Unit prices are based on expected bid award (either to local or to foreign suppliers), and include spare parts.

Source: IB and Bank Staff December 1979 - 33 - ANNEX 3.9

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Estimated Schedule of Loan Disbursement US$ million

IBRD Fiscal Year and Quarter Quarter Fiscal Year Cumulative

1979-80 June 30, 1980 5.0 5.0 5.0

1980-81 September30, 1980 10.0 15.0 December 31, 1980 15.0 30.0 March 31, 1981 15.0 45.0 June 30, 1981 15.0 55.0 60.0

1981-82 September 30,1981 10.0 70.0 December 31, 1981 7.5 77.5 March 31, 1982 5.0 82.5 June 30, 1982 5.0 27.5 87.5

1982-83 September 30, 1982 5.0 92.5 December 31, 1982 3.0 95.5 March 31, 1983 3.0 98.5 June 30, 1983 1.5 12.5 100.0

Source: Bank Staff December 1979 - 34 -

IV. ECONOMIC EVALUATION

A. General

4.01 Romania's current Five-year Development Plan calls for a continua- tion of the past industrialization strategy, with particular emphasis on the expansion of basic industries which require large volumes of low-value bulk raw materials. Domestic resources of such raw materials are being depleted at an accelerating pace--initially iron ore and coal in particular, but also, since 1968, crude oil. Demand is therefore increasingly met by imports, and, as a consequence, the rapid growth of international trade relations which characterized the past 25 years will continue to be a feature of the Romanian economy in the future.

4.02 These large import volumes of low-value bulk raw materials require an adequate, low-cost inland transportation system. The only feasible routes are the LDN from the Port of Sulina and the rail system from the deep-sea Port of Constanta, neither of which can meet the low-cost criterion, the LDN because draft limitations severely restrict the size of oceangoing vessels with the consequent loss of the benefits of using large bulk carriers, and the rail route because this mode is inherently higher cost than water transporta- tion for this type of traffic. Further considerations are that distances for traffic bound for upriver destinations are unnecessarily long via the LDN route and that traffic on the rail system from Constanta is approaching congestion levels. The project was therefore designed to provide the least- cost inland transportation system primarily to meet the specific transport requirements, both inland and also oceangoing, of several industrial projects which are being implemented under the current plan.

4.03 The project will provide much needed additional transport capacity in the heavily trafficked corridors of the transport network and will comple- ment existing facilities. In particular, by establishing a direct linkage between Constanta and the Danube, it will assure full utilization of the existing inland waterway system and realization of benefits arising from the use of this low-cost and energy-efficient transport mode in moving large volumes of bulk cargo. The project represents an essential and substantial part of the current program for expansion of transport capacity parallel to the growth of the economy. The elimination of the limitations on the use of the LDN system will also open the river for growth in international transit traffic which is at present inhibited from using this sea access.

4.04 For the purposes of the economic evaluation, the project is defined as including, in addition to the canal, that part of the new deep-sea port at South Constanta-Agigea which will serve the canal, river improvements, con- struction of three new ports on the canal, improvements and expansion of Danube ports, and a new barge and pusher tug fleet. Therefore the project represents a complete and integrated transport system. - 35 -

4.05 The economic evaluation of the project has been carried out in two stages: (i) a least-cost analysis of the canal component compared with a railway system as the next best alternative, and (ii) an estimation of the rate of return on the total project as defined above. Because construction of the canal and its supporting facilities started in 1976 both analyses were carried out (i) excluding the sunk costs and (ii) including the sunk costs (capital expenditures made to the end of 1978 are considered sunk costs). In the first stage of the economic analysis the canal alternative is found to be the least-cost solution for discount rates considerably higher than the presently accepted range of opportunity cost of capital in Romania, even with the inclusion of the sunk costs. The total project yields a satisfactory rate of return, with and without sunk costs, bearing out the economic rationale underlying the project. In both cases results were subjected to sensitivity to variations in traffic volumes and cost parameters. Under each of the sensitivity assumptions used the overall rate of return remains acceptable, while the canal remains the least-cost alternative.

B. Traffic Analysis and Forecast

4.06 Traffic projections discussed in the following paragraphs are largely the results of analysis of data relating to specific industrial projects, primarily iron and steel, located in the canal area and the cor- ridors which will be served by the project. Projections for steel and chemi- cals traffic are based on the findings of Bank subsector studies regarding production targets and their timing, location of plants, raw material require- ments and export potentials.

4.07 Traffic expected to use the project is projected to year 2000. However, because of the long economic life of the project, which for the purposes of economic analysis is assumed to be 40 years, traffic projections are extended beyond the year 2000 on the basis of annual increases of 2% in volumes to allow for normal growth. Traffic forecasts for the project are summarized below. - 36 -

Traffic Projections 1985-2000 (million tons)

1985 1990 2000

Imports Iron ore 13.50 21.60 20.30 Coal for steel production 3.10 5.50 [0.60 Coke for steel production 1.20 1.30 1.40 Nonferrous metal concentrates .42 .75 .88 Ferrous and nonferrous metals 1.00 1.20 1.40 Fodder .08 .10 .10 Logs .15 .15 .15 Chemical raw materials 1.80 2.00 4.50 Total 21.25 32.60 39.33

Exports Rolled products 2.00 2.40 2.80 Cement 1.50 1.50 1.50 Cereals .50 .50 .70 Other agricultural products .30 .30 .60 Fertilizers 3.00 3.00 3.00 Chemical products .40 .40 .60 Faience, marble .70 .80 1.10 Others .60 .65 1.4C Total 9.00 9.55 11.70

Internal traffic 13.60 22.63 37.07 Transit traffic 7.50 10.40 13.80 Grand Total 51.35 75.18 101.90

Basis for Traffic Projections

4.08 Parallel to Romania's rapid industrialization during the last 25 years, its foreign trade has also undergone radical changes both in volume and composition. Between 1950 and 1975 the volume of foreign trade, measured in current prices, rose from US$.604 million to US$11.8 billion. Over the past decade, there has been a marked acceleration in the rate of growth, reaching about 18.5% per annum in 1975. This rapid growth is due, to some extent, to international inflation, but more importantly is the- result of a steady acceleration in the real growth of foreign trade. The ratio of trade to GNP has increased to 20% in 1975 compared to about 13A'in the 1960s. Moreover, the sectors on which the successful growth of the economy are based, e.g., metallurgy, chemicals and engineering, have been those in which the importance of foreign trade has increased the most. The pace cf industriali- zation has resulted in depletion of domestic supplies of raw materials. At present Romania has to obtain about 95% of iron ore and 70% of coal require- ments from abroad. It is certain that Romania's dependence on the external sector will grow even more in the future and exports will have to be increased - 37 - to help pay for the growing imports. Parallel to the growth in export-import traffic, domestic traffic is also expected to increase. During the period 1970-77, total freight volume, exclusive of own-transport, increased about 72% from 414 m tons to 713 m tons. With further growth and diversification of the Romanian economy in the 80's, the internal freight movement is certain to increase at rates equaling or exceeding this rate.

4.09 For the above traffic projections the following categories were analyzed. Full information is given in Annex 4.1.

Imports and exports

(a) Imports of raw materials for steel production (b) Imports of ferrous and nonferrous metals (c) Imports of chemical raw materials (d) Exports of steel products (e) Exports of cement (f) Exports of chemicals and fertilizers (g) Miscellaneous export and import commodities

Internal Traffic

International transit traffic

C. Least-cost Analysis

4.10 The canal component of the project constitutes a major portion of the project investment costs. Therefore, before estimating the rate of return on the project the canal has been subjected to a least-cost analysis by comparing it with an alternative land transport facility linking the deep-sea port of South Constanta-Agigea with origin and destination points. Given that a preponderant portion of the forecast traffic is low-value bulk commodities, a railway system is used as the next-best alternative. The railway solution used in the analysis is designed to move the same forecast traffic volume as the project, excluding international transit traffic which will only occur in the forecast volume if the canal is built. Therefore, it is assumed that transport-related benefits resulting from both the project and next-best alternative are the same, although the canal yields some minor non-transport- related benefits. In the cost comparison these latter benefits are deducted from the cost of the project for the year in which they occur. Because of the long economic life of the canal and its capacity to accommodate a much larger volume of traffic than that forecast, a 40-year period of analysis has been used. Bearing in mind less severity of indivisibilities in railways compared to the canal, the railway investment expenditures are phased parallel to the growth of traffic volume.

4.11 Economic costs of both alternatives have been arrived at by border pricing of-individual cost components of both capital and operating costs. For tradable items, the conversion factors have been estimated by taking the - 38 - ratio of domestic prices to long-term international prices expected to prevail during the 1980s. All calculations have been based on November 1979 real prices and they exclude transfer payments, taxes, duties and price contingencies.

4.12 The canal alternative requires higher initial capital expenditures (about 31.3 billion lei, including sunk costs, for the canal, canal ports, river ports and barge terminal at South Constanta-Agigea port, and 4.7 billion lei for barge and pusher tug fleets) than the railway alternative (about 12 billion lei for new lines, marshaling yards and other supporting facilities and about 11.9 billion lei for locomotives and freight cars). Inland waterway and railway transport costs have been estimated on the basis of the optimal modus operandi established for each major origin and destination point, bearing in mind the volume and type of commodity to be transported. In the case of barge transport, for a predominant portion of forecast traffic, the type of operation involves the use of convoys consisting of six barges of 3000 dwt capacity pushed by a single pusher tug. Similarly, railway transport costs are estimated on the assumption that the most suitable type of operation would be used for each origin and destination point. On these bases, inland waterway transport costs are estimated to be about 0.045 letuon the average per ton/km compared to 0.198 leu by rail. Cost streams on the canal and the next-best alternative for selected years are shown below.

------Canal Alternative------Rail Alternative------Capital Cost/ Annual Costs/ Benefits-/ Capital Costs/ Annual Costs/ ------…(in million lei)------

1977 1617 - 1978 2720 - - - - 1979 4291 - 500 2300 - 1980 6061 - 500 5300 - 1981 6883 - 500 4130 - 1982 7458 - 500 4130 - 1983 3587 1090 203 - 3017 1984 907 1276 249 - 3421 1985 410 1505 336 1011 3523 1990 1026 2068 466 1435 4944 1995 587 2397 537 - 5588 2000 1092 2811 621 3000 6393 2005 90 3088 702 1074 7055 2010 90 3393 794 1148 7785 2015 90 3728 899 238 8591

/a Includes fleet/rolling stock and their replacements. 7b Includes transportation and maintenance costs. /c Includes canal specific benefits, i.e., savings in excavation cost of fill used in port construction, and 50 percent of benefit accruing to international transit traffic. - 39 -

4.13 Based on the methodology and data presented in the foregoing section, the canal with its supporting facilities is the least-cost alternative for discount rates at or below 24% without the sunk costs. Even if the sunk costs are included in the analysis the canal alternative remains the least-cost solution for discount rates at or below 16%, which is well above the oppor- tunity cost of capital of 9.0% presently estimated for Romania. These results are tested for their sensitivity to variations in traffic volumes as well as the cost parameters of the alternatives examined. In these tests the sunk costs are excluded from the analysis. The results obtained are summarized below.

Crossover discount rate

(a) 20% increase in canal investment costs 16.0 (b) 20% reduction in traffic volume 15.7 (c) 20% reduction in rail alternative investment costs 18.3 (d) 20% increase in barge transport costs 21.8 (e) 20% increase in total cost stream of canal alternative 14.7 (f) 20% reduction in total cost stream of rail alternative 14.2 (g) Combining 10% increase in total canal cost stream with 10% reduction in total rail cost stream 15.2

4.14 In all the sensitivity tests carried out assumptions used are conditions that are adverse to the canal alternative. The above results show that even under these rather unlikely situations the canal solution remains the least-cost alternative for discount rates which are above the opportunity cost of capital. These results confirm the strong economic case for adopting the canal alternative and barge transport for moving forecast traffic volumes.

D. Project Benefits

Nature of Benefits

4.15 The project will ensure that the planned industrial enterprises will receive their raw material requirements at the lowest cost. The avail- ability of a deep-sea port adequate to handle large bulk carriers will enable Romania to have access to a larger number of overseas suppliers of raw mate- rials than it presently has. The project will generate substantial benefits for the economy in the form of significant savings in ocean freight costs resulting from the use of large bulk carriers for imports of raw materials, and, by enabling the economy to utilize the Danubian waterway system to its full potential, will generate substantial transport cost savings in internal movement of bulk commodities. The benefits accruing from the project will also extend beyond the borders of Romania to the riparian countries. The availability of a new deep-sea port on the coast of the Black Sea, which is - 40 - directly linked to the Danubian system, will offer significant transport cost savings for these countries in importing bulk raw materials and exporting finished products. It is expected that an adequate part of the benefits accruing to the international transit traffic will be captured by Romania in the form of canal transit dues and port charges.

Assessment of Benefits

4.16 Because the existing transport facilities along the routes to be served by the project are presently utilized fully, forecast traffic volumes cannot be accommodated without some capacity expansion. In a "do-nothing" situation transport costs would rise sharply due to (a) continuous increases in ship-waiting times at ports, (b) serious congestion along the inland transport routes leading to progressively longer travel times and delays in deliveries, and (c) ultimately complete stoppages in growth of production activities which would use the project. Under these circumstances it would not be possible to estimate meaningfully the economic benefits of the project with reference to transport cost savings resulting from it. Therefore, for the purpose of quantifying the project benefits and estimating its rate of return, a "without project" situation has been defined.

4.17 Under the "without" case there is still a need for expansion of transport capacity to ensure the physical movement of traffic. These addi- tional capacity requirements have been estimated on the basis of an optimal distribution of forecast traffic in which commodity flows are assigned to those routes and modes so as to minimize transport costs. Bulk commodities, mainly imports of industrial raw materials, are allocated to the waterway system through the Sulina canal to Galati/Braila river ports and the remainder of forecast traffic is assumed to be transported by railway.

4.18 Given the traffic distribution between the waterways and railway networks, the investment expenditure of the "without" case has been determined. This level of investment represents the minimum capacity expansion require- ments of the existing transport system. Any reduction in this amount would be more than offset by increases in transport costs through delays in various parts of the system. Therefore, the investment expenditures of the "without" case are assumed to represent that portion of the project benefits which is not captured as transport cost savings. The investment expenditures of the "without" case are estimated by border pricing of cost components using the methodology discussed in paras. 4.11 and 4.12. These involve expansion of Braila/Galati river ports to handle both seagoing vessels and barges as well as river improvements, all amounting to about 6.5 billion lei or US$360 mil- lion. Also in order to increase the capacity of the rail facilities along Cuilnica-Constanta route and provide adequate rail terminal facilities at Constanta, an additional capital expenditure of 4.5 billion lei or US$250 million is required. With the addition of 7.3 billion lei or US$404 million for barge and pusher tug fleets and rail rolling stock, the total capital cost of the "without" case is estimated at about 18.3 billion lei or US$1.0 billion.

4.19 The principal economic benefits accruing from the project are (i) ocean freight cost savings on imported bulk raw materials, (ii) savings on - 41 -

oceangoing ship days due to shorter distances under the project by eliminating the Sulina route, (iii) savings in barge transport costs due to shorter distances under the project, (iv) savings in transport differential costs between railways and barges, (v) reductions in ship-waiting times at the port of Constanta, (vi) benefits from international transit traffic, and (vii) non-transport-related benefits. These are discussed below.

Ocean Freight Cost Savings

4.20 Because Braila/Galati river ports have limited access through the Sulina Canal, imported bulk cargo can only be brought in by ships of 15,000 dwt maximum partially laden. The project will enable Romania to utilize large bulk carriers of up to 150,000 dwt primarily on a charter basis for imports of raw materials from India, South and North American countries. Benefits resulting from this are conservatively assumed to be $10 or 180 lei, on the average, per ton of raw material imported.

Savings in Ship Days

4.21 Without the project seagoing vessels will need about 34 additional hours for a round trip from Sulina to Galati/Braila river ports. Moreover, the additional distance between Constanta and Sulina will add approximately 26 hours to ship time. In estimating benefits of the project time savings have been conservatively assumed to be 48 hours at US$5000 per day which will accrue to the Romanian economy.

Savings in Barge Transport Costs

4.22 Barge traffic destined to upriver ports will save a distance of 150 km, one way, by utilizing the project canal and the deep-sea port at South Constanta/Agigea. These benefits are estimated, on the basis of additional distances involved between Galati/Braila and upriver ports, at barge transport costs of 0.045 leu per ton/km.

Savings in Transport Differential

4.23 These benefits will accrue to internal traffic and a portion of export traffic. They are quantified on the basis of the transport cost differential between inland waterways and railways. (See the least-cost analysis, para. 4.12.)

Reductions in Ship-waiting Time

4.24 Without the project a part of the export traffic would be handled at the already congested Constanta port, where average ship-waiting time is at present about 8 days. In estimating the project benefits arising from savings in ship-waiting times, only the ship movement required to handle the project- related export traffic is considered. With this assumption, ship-waiting times are estimated to be 1920 ship-days in the year 1985, 2000 in 1990 and 2320 in 2000 and benefits are arrived at by using US$5000 per ship-day. - 42 -

Benefits from International Transit Traffic

4.25 As noted above, benefits accruing from the project will also be shared by several of the Danubian countries. These benefits, similar to those enjoyed by the Romanian economy, will be mainly in transport cost savings. In the analysis, it is assumed that Romania will capture 50% of these benefits in the form of canal toll charges and port dues. Even with these charges, the transport cost reductions resulting from the proposed project will make it advantageous for the riparian countries to utilize the new transport facilities and encourage transit traffic.

4.26 The following summarizes the quantified benefits accruing to Romania from the project:

Benefit Streams from the Project (in 1979 prices; in million lei)

International Transport Transit Cost Years Traffic Savings Total

1979-82 - - - 1983 203 6,077 6,280 1984 249 6,892 7,141 1985 336 7,032 7,368 1990 466 9,301 9,767 1995 537 10,782 11,319 2000 621 12,479 13,100 2005 702 13,437 14,139 2010 794 14,468 15,262 2015 899 15,579 16,478

Distribution of Project Benefits

4.27 The project benefits arising from internal and export-import traffic will accrue to Romania in full and will pervade the whole economy. Transport cost reductions for imports of industrial raw materials, both in terms of ocean freight rate savings as well as in terms of lower inland transport costs, will ultimately be reflected in the realization of the development plan goals and reduced prices for Romanian industrial products. The project will also enhance the competitive position of Romania in international markets for industrial products. Given the increased reliance on imported raw materials for maintaining industrial production of the country, the improved export position of Romania will be an important factor in its future development efforts. Benefits related to the internal traffic will foster industrializa- tion efforts of the country.

4.28 As to international transit traffic, it is recognized that the benefits accruing to international transit traffic may not be wholly passed on to Romania. Consequently, it has been assumed that only 50% of these benefits - 43 - will be captured. In this manner the facilities offered by the project will still be advantageous for the riparian countries to use. Non-transport-related benefits of the project will accrue to Romania in full.

4.29 The project will generate further benefits which could not be adequately quantified and therefore reflected in the analysis. Utilization of the River Danube waterway system to its full potential under the project will provide much-needed relief to the already congested transport system and will reduce transport costs for traffic which will continue to use the existing facilities. The availability of the most energy-efficient transport facility for the movement of large volumes of low-value bulk traffic will be a factor reducing Romania's dependence on imports of oil. Moreover, given that the relative price of energy including petroleum products will be certain to increase in the future, the advantages of the project are certain to be higher than the benefit estimations indicate. The project canal will also serve as a fresh-water reservoir for irrigation in the region, one of the driest parts of the country. In addition the project will stimulate economic growth in the canal area, which Is one of the least developed regions of the country, following the availability of adequate and low-cost transport facilities.

E. Economic Costs of the Project

4.30 Similar to the methodology outlined in paras. 4.11 and 4.12 for the least-cost analysis, the total economic costs of the project are estimated by border pricing of each cost component. Economic cost estimates are based on November 1979 prices and exclude price contingencies. Local taxes and customs duties are also excluded from the cost estimates. Annual operating costs of the project are also estimated separately without price escalation. The total economic cost stream of the project is given below.

Economic Cost Stream: Total Project (January 1979 prices, in m. lei)

Canal Port Fleet Transport Costs

1977-1978 4,337 - - - 1979 4,291 510 - - 1980 6,061 900 - - 1981 6,883 1,200 - - 1982 6,558 1,400 900 - 1983 2,587 450 1,000 2,198 1984 583 300 324 2,573 1985 - - 410 3,035 1990 - - 1,026 4,410 1995 - - - 5,111 2000 - - 1,092 5,643 2005 - - 90 6,199 2010 - - 90 6,811 2015 - - 90 7,483 - 44 -

F. Economic Return and Sensitivity Analysis

4.31 Based on the methodology and data presented in the foregoing sec- tions the project yields a satisfactory rate of return of 25.5% excluding the sunk costs. With the inclusion of the sunk costs the rate of return is about 19%. The first year rate of return, based on transport costs savings, is estimated to be about 13% using a 10% discount rate and excluding sunk costs. These results confirm the economic justification of the project, its impor- tance for the Romanian economy, and its timing.

4.32 The economic return was tested for its sensitivity to variations in the cost and benefit parameters. The results are summarized below.

Rate of Return

Without With Sunk-Costs Sunk-Costs

(a) 20% increase in project capital costs 20.6 14.6 (b) 20% increase in total cost stream of the project 18.8 12.8 (c) 20% decrease in total project benefit stream 17.7 11.7 (d) Two-year lag 17.0 11.0

The above tests show that even under these rather unlikely situations the proj- ect yields a satisfactory rate of return. These results confirm the strong economic case for the project.

Risks

4.33 The risk of not attaining project objectives due to shortfalls in forecast traffic, cost overruns or delays in project implementation is considered low. The fact that traffic forecasts are largely based on industry- wide analysis as well as specific projects which have been or will be commis- sioned minimizes the risk that they will not be realized. Forecast traffic is certain to use the proiect because existing facilities are already fully utilized and because barge transport is the most efficient mode moving this predominantly low-value bulk cargo. One risk is the vulnerability of export prospects of the project's principal user industries -- steel and chemicals. Failure to realize the targets set for steel exports will not greatly affect the forecast traffic volume as these will be mainly in the forirof manufactured goods using other transport facilities. For the chemical industry, risk of export shortfalls is much greater. As this group of commodities represents a small portion of the total traffic, it will have negligible effect on total project benefits. Moreover, such shortfalls wculd not necessarily reduce the project traffic volume as there is a domestic demand for chemicals in the canal area and a fair proportion of them would be transported using project facilities. A second possible risk would be a shortfall in the volume of total steel output with a resulting shortfall in the volume of imported raw - 45 - materials. This risk is considered low as traffic assumptions are highly conservative and are based on industrywide production, consumption and export estimates made by Bank staff. If the total steel output target is found to be in excess of demand, it is likely that production of older, less efficient plants will be reduced. Thus the output levels of new plants at Calarasi and Galati, which will rely on the project for their raw material supplies, would be unchanged. Despite these assurances, however, the risk of shortfalls in forecast traffic volume is taken into account in the sensitivity analysis. As shown above, under the assumption of a 20% reduction in traffic volume, the project still yields a satisfactory rate of return. Because work on the proj- ect started in 1976 and a considerable portion of it has been completed, cost estimates and the project implementation schedule benefited from the experience gained thus far. Therefore they are realistic and reliable. As a result, risks of cost overruns and delays in project implementation are considered low. However, in the unlikely event of a two-year delay in opening the project canal to through traffic, the rate of return on the project still remains satisfactory. - 46 - ANNEX 4.1 Page 1

STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Information on Traffic Forecasts

Imports and Exports

(a) Imports of Raw Materials for Steel Production. Imports of iron ore, coal and coke, required to sustain the planned steel production, account for about 59% of import-export traffic and about 41% of domestically generated traffic in 1985 (18 m tons); for 1990 the respective share of steel-related imports are: 67% and 43% (28.4 m tons) and for year 2000: 65% and 39% (32.3 m tons). These traffic forecasts have been based on steel production targets which have been recently reviewed by the Bank and found to be economically viable. Production of raw steel is planned to reach 20.4 m tons in 1985 and about 24.5 m tons in 1990 after which no major expansion in steel capacity is expected. It is assumed that after 1990 steel output would be increased by 1% per annum to keep up with the growth in demand parallel to population increases. In order to sustain the production level in 1985, it is estimated that Romania will import 8.0 m tons of coal, 1.2 m tons of coke and 27.7 m tons of ore representing 62%, 3% and 87% respectively of the total require- ments. The two major steel complexes which will rely on the project for their raw material requirements are Calarasi and Galati, both located on the Danube. Phase II of the new Calarasi plant, is assumed to be completed in 1990, producing 2.7 m tons of steel per annum requiring 4.1 m tons of coal (2.0 m tons of which will be imported) and 6.4 m tons of iron ore (6.0 m tons of which will be imported). All 8.0 m tons of the imported raw materiaLs will utilize the canal project. The Galati complex, which at present has an annual capacity of 7 m tons, is being expanded to 9.5 m tons capacity requiring about 25.5 m tons of raw materials. Of this amount 18.9 tons will be imported. It is estimated that about 15 m tons will be transported by the facilities of the project, the remainder being supplied through other sources. The Hunedoara plant will receive 1.5 m tons of its 14.3 m tons of raw material requirements--of which 8.9 m tons will be imported--through the use of the canal. Steel-related traffic projections for 1990 are arrived at by increasing the volumes of imported raw materials by 20% parallel to the planned increase in output. It must be noted that this is a conservative assumption as Romania's reliance on imported raw materials will continue to increase. The project, which brings about considerable transport cost savings for imported bulk materials, will be certain to attract this additional traffic.

(b) Imports of Ferrous and Nonferrous Metals. The Romanian ferrous and nonferrous metallurgical industries have been growing at an average annual rate of 10% during the past two decades. The current Five-year Plan and the Pros- pective Plan to year 1990 aim at a somewhat faster growth rate. The forecast imports of metals needed to sustain this growth rate are estimated to be 1 m tons in 1985, 1.2 m tons in 1990 and 1.4 m tons in year 2000. -47 - ANNEX 4.1 Page 2

(c) Imports of Chemical Raw Materials. Imports of raw materials for chemical production are the next largest group of items in traffic forecast figures. The chemical industry exceeded other branches of industry in terms of growth for nearly 20 years until about the 1970's when the growth rate settled to about 16%. Current plans call for a continued expansion though at a somewhat reduced rate, 15%. Romania, in order to sustain the functioning of its well-established chemical production capacity and to maintain the growth rate envisaged in the plan will increasingly be dependent on imported raw materials, particularly hydrocarbons derived from crude oil and other chemical concentrates.

(d) Exports of Steel Products. Romania is expected to increase its exports of raw steel, mainly rolled products. In the forecast figures, steel exports amount to two million tons in 1985, 2.4 m tons in 1990 and 2.8 m tons in 2000. Given the fact that Romanian exports of rolled steel products aver- aged around 1.3 m tons in the 1970's, the forecast figures represent realistic expectations.

(e) Exports of Cement. The construction materials industry has been one of the fastest growing subsectors of the country with output often exceeding domestic demand. This has permitted Romania to export a significant proportion of its output, particularly that of cement, for which it has established a steady market. Given that the current plan includes expansion of cement pro- duction in Medgidia, the forecast of 1.5 m tons of cement exports per annum for the whole analysis period is a continuation of the existing condition and therefore represents a conservative estimate of traffic in this commodity.

(f) Exports of Fertilizers and Chemicals. Annual fertilizer exports have been projected to be around 3.0 m tons to year 2000. Other chemical products, carbide, and synthetic rubber are expected to add about 0.4 m tons in 1985 and 1990 and 0.6 m tons in 2000 to export traffic.

(g) Miscellaneous Export and Import Commodities. Other items which are included in the import forecasts are fodders and exotic woods. Wide variations in crop yields from one year to the next make it difficult for Romania to sup- ply the whole of the fodder requirements for its livestock production. There- fore, in order to maintain the targets set for livestock products, it will be necessary to supplement local production of animal feed with some feedgrains and protein needs. Exotic woods, on the other hand, will supply woodwork industries with essential raw materials. These two import items are projected to add 230,000 tons of traffic in 1985 and 250,000 tons in 1990 and 2000. Among the export items, sanitary equipment and faience are projected to be around 0.5 m tons in 1985, 0.6 in 1990 and 0.8 in 2000. Other export items include cereals, livestock products and commodities of a general cargo nature.

Internal Traffic

Traffic forecasts for internal traffic, similar to export-import traffic, have been based largely on individual project developments within the area of the project and along the routes which will be served by it. In addition, past trends have also been examined and the growth potentials of - 48 - ANNEX 4.1 Page 3 the canal area have been borne in mind. Traffic volume between points along the canal and the rest of the country increased rapidly during recent years, reaching about 8 m tons in 1978. About 80% of the traffic volume consisted of construction materials, i.e. gravel and stone from the banks of the River Danube; about 11%, coal and coke, and the remainder, general cargo and agri- cultural commodities. In the forecast traffic volume, construction materials continue to be important, about six m tons in 1985, eight m tons in 1990 and 12 m tons in 2000. This is mainly but not exclusively due to the construction of South Constanta-Agigea port which is planned to continue in several stages until year 2000. Moreover, several public works, mainly roads, are in the plan for the canal area and will require substantial volumes of construction materials. The planned thermal power station at Medgigia will also receive its coal supplies through the waterway network, adding about 5 m tons to the traffic volume in 1990, increasing to 6.7 m tons in 1995 and 10 m tons in year 2000. The Medgidia cement factory will generate an additional 1.4 m tons of traffic in 1985, 2.0 m in 1985 and about 3.3 m in year 2000. The remainder of the forecast traffic consists of general cargo of various types, cereals and petroleum products.

International Transit Traffic

The River Danube enables its riparian countries to benefit from sub- stantial transport cost savings afforded by the project in importing essential raw materials for their industries as well as exporting finished products to the Middle East and the rest of the world. At present traffic originating from or destined to these landlocked countries is hampered by inadequate capacity offered by the Romanian ports at Braila and Galati and the limita- tions on the size of seagoing vessels which can use the Sulina Canal. As a result, Romania is not, at present, in a position to accept several offers that have been made by Danube riparian countries for the transshipment of their cargo. To date Romania has received firm and long-term contracts from several of the riparian countries amounting to some 7.5 m tons by 1985. This international transit traffic consists of upstream movement of bulk cargo, e.g., iron ore of about 2 m tons for Austria from Brazil; 0.5 m tons of soya bean oil to Austria from the USA, bulk phosphates from Morocco, about 2.0 m tons and 1.5 m tons of oil for Czechoslovakia. Major components of downstream traffic are rolled steel products from Hungary and Czechoslovakia, 0.5 m tons and 0.1 m tons from Austria; and chemicals, ceramics, timber and glassware from Austria and Czechoslovakia, 0.3 m tons. The traffic projections based on specific contracts that have been negotiated by the Romanian authorities and the Danubian riparian countries do not take into account the effects of the Rhine-Mainz-Danube Canal. The completion of this canal will extend the influence area of the proposed project to the Western European countries and will certainly add substantial amounts to the volume of international transit traffic. Accordingly, forecast volumes of 10.4 m tons in 1990 and 13.8 m tons in 2000 are conservative estimates. - 49 -

V. FINANCIAL AND TARIFF ANALYSIS-- DANUBE-BLACK SEA CANAL ADMINISTRATION

A. General Principles

5.01 Since there are no past or present financial data for use as a base, the financial analysis will be a pro forma one to demonstrate the approximate level of canal tariff dues that it will be necessary to levy in order to cover the direct operating costs, the liabilities in respect of the investment and benefit (described below). It will also relate these tariffs to prices under alternative routes, thus supporting the economic return. In Romania's cen- trally planned economy all net benefits of an economic enterprise accrue to the State. Prices are therefore fixed at levels designed to cover costs with a small margin (benefit) for specific purposes, largely according to the annual or other plans for each enterprise. Financial rates of return on investment are meaningless as an indicator of investment performance, which is provided by the economic rate of return.

5.02 The purposes and distribution of the benefit are:

(a) repayment of original working capital over 15 years;

(b) up to 10% of annual benefits to the State. These pay- ments, which clearly are variable, are treated as addi- tional recuperation of investment;

(c) the creation of development funds for future investment by the enterprise, in accordance with approved plans;

(d) employees' housing funds;

(e) social activities for the workers in the enterprise, according to plan;

(f) workers' bonuses;

(g) the balance is paid to the State.

It should be noted that in this case the State agency to receive payments will be MTTc.

5.03 In a more normal industrial project for an ongoing enterprise in Romania, where the economic life more nearly approximates borrowing terms, the beneficiary enterprise is expected to generate funds from its operations to:

(a) assist in financing the investment out of depreciation (see below); - 50 -

(b) nieet service on external debt;

(c) repay the State's investment over a period related to the economic life of the project;

(d) pay interest on any local borrowing; and

(e) pay to the State some return on its investment.

However, in the circumstances of this project, the whole of the investment funds are being provided by the State, including external financing, i.e., the proposed Bank loan and any co-financing that might be obtained. Although the IB is the borrower, the MTTc is primarily responsible for providing the funds to service the external debt, which would be relatively short-term. The economic life of the civil works in the canal is probably between 60 and 100 years, but for the purposes of this analysis the average economic life of the project is assumed to be 65 years, which is reasonable. This means that the administration will repay the total investment by paying one sixty-fifth commencing with the first year of operations (1983). This is not depreciation in the Western accounting tradition but a formula for amortization of invest- ment funds. It does mean, however, that the Administration may not necessarily be able to provide sufficient funds to repay external debt as the liability arises. In addition, the Administration will pay the total interest on external debt, starting from the commencement of operations. Since tariffs have to cover these liabilities, interest becomes, for this purpose, an operating cost.

B. Canal Dues

5.04 Dues will be assessed on barge tonnage, irrespective of the cargo tonnage, or whether they are loaded, partially loaded or in ballast. Although dues will be cost-based, they will be related to the economic benefits by demonstrating that total prices for canal transit (including barge tariffs and canal dues) will be less than comparable existing prices via Sulina. Although the Government considers that the railway and canal are not strictly competi- tive, since each will tend to attract the traffic for which it is best suited, the financial analysis will also demonstrate that canal prices for the traffic it is expected to handle will be less than comparable rail prices for the Agigea-Cernavoda section.

5.05 Canal transit dues will be levied on the barges and not on the cargo. This is so for the following reasons:

(a) Because of the imbalance between imports and exports and between upstream and downstream internal cargo movements, a number of barge transits will be in ballast. A convoy may include loaded and empty barges; - 51 -

(b) Different cargo categories require different storage space and/or have different densities;

(c) There will be different levels of partial barge loading;

(d) The same use is made of the investment by a barge irrespec- tive of its load level;

(e) For tariffs to be levied on cargo, it would require complex cal- culations for tariffs on each of a wide variety of cargo. This would be difficult to levy and administer; and

(f) It is already the basis of assessment of dues for transiting the LDN.

5.06 In order to calculate the levels of barge transit dues necessary to cover costs and provide a margin of benefit, it is necessary to calculate the approximate barge capacity required by a ton of cargo, taking into account (a), (b) and (c) of the above paragraph, i.e., cargo tonnage translated into required barge capacity. However, there is no mathematical correlation between cargo tonnage and vessel capacity, so an approximate ratio has been calculated, based partly on the Suez Canal appraisal report ratio and partly on Romania's own tariff coefficients for various commodities. This gives a coefficient of about 1.0 barge ton per kilometer (bt/km) for 0.65 cargo metric ton per kilometer (cmt/km). In considering the financial analysis it must be borne in mind that this coefficient, although critical, is necessarily approxi- mate and allowance must be made for a margin of error.

5.07 Prices are generally assessed, and fixed by the Government, for five-year periods in advance. This has the advantage of providing cost stabil- ity for industrial financial forecasts. They may be changed in exceptional circumstances such as, for example, substantial unexpected inflation.

5.08 The canal is a highly capital-intensive investment with a very long operational life. The pricing policy will be the pragmatic one of enabling the Government to recuperate the investment cost over time, including interest on external financing, while enabling the economic benefits to accrue, as far as possible, to the user industries by way of reduced inland transportation charges. Within the context of the Romanian system this approach is satis- factory to the Bank.

C. Cost to be Covered by Dues

5.09 Financial costs to be borne by the Administration, and therefore to be covered by canal dues, comprise three principal categories, apart from benefits:

(a) Cash operating costs (labor, repairs and maintenance, and miscellaneous). In this analysis they represent only about 8% of the total. - 52 -

(b) Amortization of investment funds, which extends through the economic life of the investment (in lieu of depreciation). It would be equivalent to about 52%.

(c) Interest on external debt through the term of the debt, about 40%. Internal funds are interest-free.

5.10 Capital costs are thus critical in fixing the level of canal dues. Recuperation of investment is a fixed annual sum. Interest on external debt, however, is related to debt maturity, interest rates and repayment terms (e.g., fixed equal payments of interest plus capital), and has no relationship to the economic aspects of the investment. It is variable, the highest charge occurring at the beginning of operations and rapidly decreasing over the term of the debt at the same time as traffic is expected to rise. It is likely, therefore, to exert a dampening effect on traffic growth in early years because of insufficient price incentives to use the canal as compared with existing routes. As regards domestic traffic, the effect may well be to reduce the economic incentives to industrial growth that the canal is designed to foster, while it would be likely to inhibit the growth of international transit traffic, for which substantial demand remains unmet. Transit traffic may be regarded as marginal and dues from any increase in such traffic would represent economic benefits accruing directly to the State. It is clear, therefore, that debt interest is the most critical item of cost to be covered by dues.

5.11 Considering the foregoing, three possible alternative formulae for the payment of interest by the Administration to MTTc were reviewed:

(a) payment of interest as it becomes due;

(b) payment in equal annual parts of the total interest to loan maturity; and

(c) the treatment of interest as part of the original invest- ment cost to be amortized over 65 years. During appraisal the MTTc and the IB agreed that Case (b) would be adopted. This is acceptable to the Bank on the grounds that:

(i) the resulting levels of dues would be sufficient to encourage the use of the canal and the growth of traffic;

(ii) the levels of dues would ensure the optimum retention within the country of the economic benefits;

(iii) economic benefits would be distributed directly to the user industries, this being an important aspect of Romania's economic structure;

(iv) it would enable MTTc the better to plan its own budgetary requirements during the term of the debt; and

(v) it compares most closely with normal practice in Romania. - 53 -

5.12 The amount and maturity of the proposed Bank loan, as assumed for this analysis, are US$100 million equivalent for a term of 15 years including three years grace. The interest rate is assumed to be 8% per annum, which approximates the Bank's current lending rate. The number, amount, interest rates and maturities of possible co-financing loans are not known. It is assumed that the total amount of US$222.2 million equivalent will be obtained as shown in the finance plan (para 3.21). Terms are assumed to be uniform maturities of 10 years from 1980 including five years grace at 10% per annum. Actual terms obtained may prove more or less favorable.

5.13 Under the circumstances there is no purpose in treating separately interest during construction, or before commencement of operations, and interest after operations begin. Total interest is therefore amortized in equal annual installments over 12 years from commencement of operations (1983) to the latest maturity (1994), i.e., of the proposed Bank loan.

D. Financial Forecasts and Tariff Analysis

5.14 A combined pro forma financial statement, analysis of canal barge transit dues and cash flow statement has been prepared, based on the foregoing review and agreed tariff policy, and on the traffic forecasts (Annex 5.2). The years 1983 and 1984, while the project is being completed, will be introductory start-up years, and traffic will not reach its normal growth pattern until 1985. Because of this and since canal dues will be set for the five-year period 1983-87, this period should be considered as a whole in assessing the dues. This means that dues should be set at a level that will provide, over the period, sufficient cumulative benefits to meet the requirements detailed in para 5.03. The level of dues to meet all criteria has been calculated at leu 0.195 per btk. This, however, will result in deficits being incurred during the start-up years, 1983 and 1984, and initial working capital must be sufficient to ensure the cash flow to meet the fixed capital costs, which amount to about 92% of the total costs to be covered by dues. Since the debt service dates are not yet known, working capital requirements have been assumed at about six months annual costs, or lei 375 million. Annual repayments, out of benefit, would be lei 25 million for 15 years. During negotiations it was agreed that the Administration would be provided with sufficient working capital for the normal course of operations of the canal and other facilities included in the Project. This is as provided by law and covers the Adminis- tration's liabilities as regards amortization of investment funds and payment of interest on external loans.

5.15 During the second five-year period, 1988-1992, traffic growth would enable dues to be lowered to leu 0.165 per btk. Further traffic growth, com- bined with elimination of interest after 1994, will enable dues to be substan- tially lowered, to about leu 0.12 for 1995-1999 and to leu 0.08 for 2000 and after.

5.16 As regards price incentives to traffic to use the canal, the follow- ing table compares total transport costs of one metric ton of cargo from Agigea to Cernavoda, through the canal, via Sulina and by rail: - 54 -

1983-87 1988-92 1993-94 1995-99 2000

Assumed canal transit dues per btk - leu 0.195 0.165 0.140 0.090 0.080 Equivalent dues per cmtk Coefficient = 0.65 leu 0.300 0.254 0.215 0.138 0.123

Total price per cmt - lei

By Danube-Black Sea Canal Canal dues - 64 k 19.2 16.3 13.8 8.8 7.9 Freight 11.0 11.0 11.0 11.0 11.0 Total 30. 77724.8 18 .

Via Sulina and LDN

Dues - LDN 10.9 10.9 10.9 10.9 10.9 Freight 30.0 30.0 30.0 30.0 30.0 Total 40.9 40.9 40.9 40.9 40.9

By Rail

Freight 21.0 21.0 21.0 21.0 21.0 Transshipment at Cernavoda 21.3 21.3 21.3 21.3 21.3 Total 42.3 42.3 42.3 42 3 42.3 =~~ 5.17 Savings by the canal as compared with the Sulina route are about 28% in the first five years, rising to about 40% in 1994. Thereafter, with the elimination of the annual charge for interest on external debt, the savings are more than 50%. Savings over the rail route are somewhat greater. Even in the early years the savings are substantial and give an adequate margin for higher levels of dues if necessary. These figures also indicate that dues are relatively insensitive to traffic volumes since, for the total canal transport price to reach parity with the Sulina route, traffic volumes would have to be about 35%, 45%, 55%, 70% and 75% lower than forecast for the respective periods.

5.18 The MTTc is primarily responsible for providing the IB with funds needed to service the external debt on this project. A cash flow statement has been prepared (Annex 5.3) that shows, on the basis of this analysis, that the MTTc's shortfall on debt servicing for this project will reach about 3,500 million lei in 1989. This is because of the assumptions made regarding the amount of and short repayment terms of co-financing. A reduction in the amount of co-financing (e.g., to about US$150 million as more probable) on longer maturity terms would ameliorate the situation. In any event, in the first place debt service would be guaranteed by the general resources of the Government and, secondly, the cash flow becomes positive in 1995, while capital amortization continues until 2047. - 55 -

5.19 This analysis demonstrates that the Administration can, with a rational formula for setting canal transit dues, be a financially viable enterprise, conforming with the laws regarding financial self-sufficiency, and in a manner acceptable to the Bank, while ensuring the optimum retention within Romania of the economic benefits of the project. During negotiations it was agreed that revenues of the Danube-Black Sea Canal Administration (derived from tariffs set in accordance with the agreed formula in para 5.11) would be sufficient to meet the Administration's responsibilities regarding amortization of investment funds and payment of interest on external loans. As regards any necessary adjustments of tariff levels, this is satisfactorily covered under Romanian law and the wording of the Loan Covenant.

E. Cash Flow Statements and Balance Sheets

5.20 Since the allocation of benefits (surplus) cannot be anticipated, it is not possible to prepare a more detailed cash flow statement than is given in Annex 5.2 or balance sheets. In any event, in the unique circum- stances of this project as a financial enterprise, allied to the Romanian economic financial system, any such financial statements would add nothing to this analysis.

F. Accounts and Audit

5.21 In addition to the financial control and audit functions exercised by the IB, as the agency responsible for financial and economic aspects of investment projects that are channeled through it, the Ministry of Finance, through its State General Financial Inspectorate, is responsible to the Gov- ernment for the equivalent of an audit of financial enterprises. The content and presentation of financial accounts differ from those normally submitted to the Bank, but it is possible to adjust them to provide sufficient information for the Bank adequately to monitor project implementation and operations. During loan negotiations it was agreed that the Bank will be provided, not later than six months after the end of each fiscal year, with a certified copy of the financial statements of the Danube-Black Sea Canal Administration for such fiscal year, together with an audit report thereon by the Ministry of Finance. - 56 -

ANNEX 5.1

STAFF APPRAISAL REPORT

DANUBE-BLACKSEA CANAL PROJECT

ROMANIA

Danube-BlackSea Canal Administration Capitalizationof Canal Operations

------Million Lei------

A. Project Cost 31,500

Add: Cost of administrative buildings 7 31,507 Deduct: Cost of canal ports: Civil works 1,343 Equipment 6 Contingencies 237 1,586 29,921 Residual values: Constructionworkers' housing 97 Basarabi workshops 145 242 Net fixed assets taken over 29,679

Recuperation - 65 years 456.6 p.a. B. PreliminaryExpenditure

Training 2 Wages and salaries 53 Social security 9 Miscellaneous 49 113

Recuperation65 years 1.7 p.a.

Source: Bank Staff December 1979 STAFF APPFRAISL £IUORT

DAWUBE-BLACKSEA CANAL PROJECT

ROMANIA

Danube-Black Sea Canal Administration Pro Forma Financial Statement,

Analysis of Canal Barge Transit Dues and Cash Flow Statement

1983 1984 1985 1986 1987 1988 1989 1990 1994 1995 2000

A. [raffic 70.7 76.9 85.7 88.1 101.9 Cargo metric tons (cmt) - millions 40.7 48.0 56.4 58.5 61.6 65.6 4,003 4,352 4,756 4,862 5,681 Cargo metric ton kilometers (cmtk) - millions 2,226 2,665 3,169 3,294 3,468 3,738 Barge ton kilometers (btk) equivalent 6,158 6,695 7,317 7,480 8,740 (coefficient = 0.65) - millions 3,425 4,100 4,875 5,068 5,335 5,751

B. Annual Costs to be Covered by Transit Dues - million lei Amortization of Investment Funds: 459.2 459.2 459.2 459.2 459.2 459.2 459.2 Cost of investment, including preliminary expenditure 412.4 449.8 459.2 459.2 Interest on external loans, including interest 350.1 350,1 350.1 349.5 - - during construction 350.1 350.1 350.1 350.1 350.1 809.3 808.7 459.2 459.2 Subtotal 762.5 799.9 809.3 809.3 809.3 809.3 809.3

Recurring Expenses 25.6 26.8 29.1 30.3 32.1 32.6 35.0 Labor costs: Cross wages 21.0 22.1 23.3 24.5 4.4 4.5 4.8 4.9 5.3 Social security 3.2 3.3 3.5 3.7 3.8 4.0 21.5 22.1 22.8 26.1 26.9 32.3 Repairs and maintenance 20.0 20.2 20.4 20.6 21.0 19.6 20.0 20.4 20.8 23.4 24.0 27.3 Miscellaneous 18.7 18.9 19.1 19.3 78.4 86.4 88.4 99.9 Subtotal 62.9 64.5 66.3 68.1 70.0 72.3 76.0 887.7 895.1 547.6 559.1 Total 825.4 864.4 875.6 877.4 879.3 881.6 885.3

Add benefit (say) 107. of total annual costs 53.2 53.5 53.8 54.6 54.8 55.9 excluding interest 47.5 51.4 52.6 52.7 52.9 938.8 941.5 949.7 602.4 615.0 Total revenue required (nominal) 872.9 915.8 928.2 930.1 932.2 934.8 0.1747 0.1625 0.1525 0.1406 0.1298 0.0805 0.0704 C. Revenue Required per btk - leu 0.2549 0.2234 0.1905 0.1835 0.165 0.165 0.140 0.090 0.080 Assumed Transit Dues per btk - leu 0.195 0.195 0.195 0.195 0.195 0.165 1,016.1 1,104.7 1,024.4 673.2 699.2 Revenue - million lei 667.9 799.5 950.6 988.3 1,040.3 948.9 67.3 130.8 217.0 129.3 125.6 140.1 Benefit (deficit) - million lei (157.5) ( 64.9) 75.0 110.9 161.0 124.5 191.8 322.6 539.6 Cumulative (222.4) (147.4) ( 36.5)

D. Cash Flow - million lei 374.5 416.8 522.6 Working capital - opening 375.0 192.5 102.6 152.6 238.5 67.3 130.8 217.0 Benefit (deficit) (157.5) ( 64.9) 75.0 110.9 161.0 ( 25.0) ( 25.0) ( 25.0) Amortization of working capital ( 25.0) ( 25.0) ( 25.0) ( 25.0) ( 25.0) 416.8 522.6 714.6 Working capital - closing !/ 192.5 102.6 152.6 238.5 374.5

1/ Subject to other allocations of benefits.

Sources: Ministry of Transport and Telecommunications and Bank Staff December 1979 STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

Cash Flow Statement - Ministry of Transport and Telecommunications

------Million lei ------

------Outgoings ------Recoveries ------

Annual Cumulative Debt Service Working Amortization Amortization of surplus surplus Interest Repayment capital Total Interest oi investment working capital Total (deficit) (deficit) 1989 211.7 211.7 (211.7) (211.7) 1981 462.4 462.4 (462.4) (674.1) 1982 517.1 517.1 (517.1) (1,191.2) 1983 538.2 94.0 375.0 1,007.2 350.1 412.4 25.0 787.5 (219.7) (1,410.9) 1984 534.5 101.6 636.1 350.1 449.8 25.0 824.9 188.8 (1,222.1) 1985 510.3 761.8 272.1 350.1 459.2 25.0 834.3 (437.8) (1,659.9) 1986 434.5 837.6 1,272.1 350.1 459.2 25.0 834.3 (437.8) (2,535.5) 1987 351.1 921.0 1,272.1 350.1 459.2 25.0 834.3 (437.8) (2,973.3) 1988 259.4 1,012.7 1,272.1 350.1 459.2 25.0 834.3 (437.8) (2,973.3) 1989 158.5 1,113.5 1,272.0 350.1 459.2 25.0 834.3 (437.7) (3,411.0) 1990 73.4 162.7 236.1 350.1 459.2 25.0 834.3 598.2 (-,812.8) 1991 60.1 176.0 236.1 350.1 459.2 25.0 834.3 598.2 (2,214.6) 1992 45.8 190.3 236.1 350.1 459.2 25.0 834.3 598.2 (1,616.4) 1993 30.2 205.9 236.1 350.1 459.2 25.0 834.3 598.2 (1,018.2) 1994 13.4 222.5 235.9 349.5 459.2 25.0 833.7 597.8 ( 420.4) 1995 - 459.2 25.0 484.2 484.2 63.8 1996 - 459.2 25.0 484.2 484.2 548.0 1997 - 459.2 25.0 484.2 484.2 1,032.2 4,200.6 5,800.6 37.50 10,375.2 4,200.6 6,831.8 375.0 11,407.4

Source: Bank Staff December 1979 - 59 -

VI. AGREEMENTSREACHED AND RECOMMENDATIONS

6.01 During loan negotiations,agreement was reachedwith the Government and IB on the following:

(a) Timely completionof other essential investmentsnecessary for the canal (para 3.01); (b) (i) Necessary constructionequipment will be made availableon site by the end of 1981; (ii) 50% of bitumen and reinforcingsteel financedby the Bank will be made availablebefore the end of 1981, 25% before the end of 1982 and 25% before the end of 1983, and (iii) equipment to be incorporatedin the project will be made available by mid-1982. The implementationschedule and critical path (para 3.15);

(c) The project cost estimates and the foreign exchange component (para 3.16);

(d) Project items to be financed by the Bank (para 3.28);

(e) Schedule of loan disbursements(para 3.30);

(f) Format of the progress reports to be submittedquarterly (para 3.32);

(g) Provision of adequate working capital to the canal Administration (para 5.14);

(h) Pricing policy to be adopted in setting canal transit dues and their review (para 5.19);

(i) Submissionof annual audited financial statements (para 5.21);

6.02 Based on the above agreementsthe project is suitable for a Bank loan of US$100 million to the InvestmentBank with the guaranteeof the Republic of Romania on standard Bank terms for a term of 15 years including a grace period of three and one-half years. It is recommendedthat the approval of the loan is not deferred pending or made conditionalon the obtaining of co-financing(para 3.22). - 60 -

ANNEX

Documents in Project File

A. General

1. Government Study - Danube-Black Sea Canal - Data and Information, August 1978.

B. Engineering

1. List of construction equipment available on site, July 1979 2. List of construction equipment under contract, July 1979 3. Agreed list of construction equipment for project completion, July 1979 4. Layouts and designs for canal locks 5. Theoretical and actual performance indicators for principal construction equipment used on site 6. List of spare parts for principal construction equipment used on site 7. Volumes of excavated materials by types and location 8. Schedule for excavation by location, type of materials, and volumes

C. Organization

1. Laws relating to financial self-sufficiency and organization and operation of enterprises (in Legal Department files).

D. Economic

1. Detailed traffic projections by commodity and by origin- destination points 2. Transport cost estimates for each origin and destination point by barge transport 3. Transport cost estimates for each origin and destination point by railway transport 4. Capital cost estimates for railway alternative 5. Details of data, assumptions and calculations for least-cost analysis and the economic return from the project

E. Financial

1. Details of data, assumptions and calculations for debt-servicing and financial analysis 2. Present tariff structure for subsector ______n______IBRD14312

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