FILE COPY o RE§UtED 10 R lDOCUMENTO;NTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use Public Disclosure Authorized

Report No. P-1612a-YU

REPORT AND RECOMMENDATION

OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN Public Disclosure Authorized TO

REPUBLISKA SKUPNOST ZA CESTE S.R. SLOVENIJE (Republic Community for Roads of the Socialist Republic of Slovenia)

ZAJEDNICA PREDUZECA ZA PUTEVE S.R. SRBIJE (Association of Enterprises for Roads of the Socialist Republic of Serbia)

and

REPUBLISKA SAMOUPRAVNA INTERESNA ZAJEDNICA ZA PUTEVE S.R. CRNE GORE (Self-Managing Republic Interest Community for Roads of-the Socialist Republic of Montenegro)

Public Disclosure Authorized WITH THE GUARANTEE OF

THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

FOR A

SEVENTH HIGHWAY PROJECT

June 25, 1975 Public Disclosure Authorized

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 It may not be published, quoted or cited without Bank Group authorization.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

Currency Unit Yugoslav Dinar (Din.)

US$1 Din. 16.00 Din. 1 us$o.0625

Din. 1,000 US$62.50

Din. 1,000,000 US$62,500.00

* The Yugoslav Dinar has been floating since July 13, 1973. The currency equivalents given above are as of September 30, 197h. The Yugoslav Central Bank established on October 29, 1974 a new intervention rate of US$1.00 equal to Dinars 17.23.

Fiscal Year January 1 to December 31 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO REPUBLISKA SKUPNOST ZA CESTE S.R. SLOVENIJE (Republic Community for Roads of the Socialist Republic of Slovenia), ZAJEDNICA PREDUZECA ZA PUTEVE S.R. SRBIJE (Association of Enterprises for Roads of the Socialist Republic of Serbia) and REPUBLISKA SAMOUPRAVNA INTERESNA ZAJEDNICA ZA PUTEVE S.R. CRNE GORE (Self-Managing Republic Interest Community for Roads of the Socialist Republic of Montenegro) WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

1. I submit the following report and recommendation on a proposed loan to the Republic Community for Roads of the Socialist Republic of Slovenia, the Association of Enterprises for Roads of the Socialist Republic of Serbia, and the Self-Managing Republic Interest Community for Roads of the Socialist Republic of Montenegro, with the guarantee of the Socialist Federal Republic of Yugoslavia, for the equivalent of US$40.0 million to help finance a seventh highway project. The loan would have a term of 23 years, including three and one-half years of grace, with interest at 8-1/2 percent per annum. Of the loan, $100,000 would be set aside for technical assistance; a portion of this sum would be held by the three Borrowers for their share, and the balance re- lent to the other republican and provincial road organizations, or subsidiary borrowers. 1/ The portion relent to the subsidiary borrowers would be deter- mined by the expenditures in this category incurred for their benefit or for institutions located in their territory. The relending terms would be the same as those of the Bank Loan.

1/ These are: (i) Republicki Fond za Puteve S.R. Bosne i Hercegovine, Sarajevo (Republic Road Fund of Bosnia and Herzegovina); (ii) Republicki Fond za Ceste S.R. Hrvatske, Zagreb (Republic Road Fund of Croatia); (iii) Republicki Fond za Patista S.R. Makedonije, Skopje (Republic Roa:d Fund of Macedonia); (iv) Saviet az Puteve ASP Vojvodine, Novi Sad (Provincial Road Council - Vojvodina); and (v) Preduzece za Puteve ASP Kosovo, Pristina (Provincial Road Enterprise - Kosovo).

The use in the text of "road organizations" refers to both the borrowers and these subsidiary borrowers. PART I - THE ECONOMY

in November 1972; its 2. A basic economic mission visited Yugoslavia tR74-1) was distri- report entitled "The Economic Development of Yugoslavia" An economic updating buted to the Executive Directors on January 2, 1974. are reflected mission visited the country in October 1974 and its findings Annex I. in this report. Basic data on the economy are given in

Economic Trends and Development Issues growth and significant 3. The Yugoslav economy has experienced rapid at constant prices in- structural change during the past two decades. GDP GDP by over 4.5 percent creased by about 5.5 percent per year and per capita US$890 (1973). The per year. Average per capita GDP is estimated at around both absolutely and as number of people engaged in agriculture has decreased in industry and a percentage of the labor force, while the number engaged nearly half of the services has correspondingly increased. However in 1971 it on small private labor force was still engaged in agriculture, most of for 22 percent of the farms. Industry accounted for 23 percent and services labor force. About 10 percent were working abroad or unemployed. strengthened by the 4. Two important features of the economy have been the means of produc- recent constitutional changes. Self-management, whereby to them to manage, has tion used by different workers' collectives are given basic unit of orga- emerged as the fundamental right and obligation of every for most important nized labor in whatever sector. Second, the responsibility to the Republics and economic and social policy decisions has been delegated increasing reliance Provinces. Against this background, Yugoslavia has placed to international on the market mechanism and the opening-up of the economy trade. has been played 5. The leading role in economic and social development enterprises and institu- by the social sector, which includes government, most and which accounts tions such as libraries, hospitals, theatres and schools, labor force. All for 85 percent of GDP and employs over half of the total and re- the enterprises and institutions are under workers' self-management sector predominantly sources are under social ownership. There is a private land holdings) and comprised-of peasant farms (with a 10 hectare limit on of non-family workers), small enterprises (with a 5 person limit on the number and tourism. In the mainly in handicrafts, construction, trade, transport government policy. past the private sector has been relatively neglected by attention to private However, the government has lately been devoting more production. farmers with a view to accelerating the growth of agricultural - 3 -

6. Despite a policy of fostering accelerated growth in the less- developed regions, major differences persist in the levels of development among Republics. The more-developed regions are located in the north and include 65 percent of the population. But even this area includes sizeable pockets of poverty, particularly in private agriculture. The less-developed regions are in the south and are generally more mountainous and less densely populated. This makes agriculture and transportation more difficult. The southern regions are rich in minerals, coal and hydro-power generating poten- tial. The development of these resources has provided the major stimulus for growth.

7. Although the economy of the less-developed regions has been growing at almost the same rate as the more advanced areas, per capita income has lagged behind because of faster population growth (1.6 percent per year as compared with 0.7 percent in the more-developed regions). Consequently, regional inequalities have widened. Average per capita GDP in the less- developed regions now amounts to about 50 percent of that of the rest of the country. Yugoslavia's development policy aims at reducing regional inequal- ities by transferring investment funds from the more advanced to the less- developed regions. In 1972 these transfers amounted to almost US$300 mil- lion, about one-third of the less-developed regions' total investment ex- penditure.

8. In addition to significant regional income differences there are substantial sectoral income differences. For example, per capita GDP in pri- vate agriculture in Kosovo (by far the poorest region), is just over US$100 or about one-ninth of the national average. Many private farmers there sup- plement their incomes by working in the social sector but are, nevertheless, unable to maintain an adequate standard of living. Although incomes in pri- vate agriculture are somewhat higher in other parts of the country, they re- main far below those obtaining in non-agricultural activities.

9. Thus far, the employment situation in Yugoslavia has remained man- ageable not least because of the sizeable temporary migration abroad which, since 1972 has stabilized at a level of about 1.1 million. Open unemployment was estimated to be around 3.5 percent of the resident active population in mid-1974, and in the private agricultural sector there was severe underem- ployment. There is considerable public concern about the size and composi- tion of the emigrant labor force. The Government expects that the economy has now reached a level and momentum of development which should create an annual increase of domestic employment exceeding the natural increase in the labor force and policies are being introduced to encourage the return of skilled and educated workers and those who have been abroad for some time. However, due to an economic slowdown in major recipient countries, job opportunities abroad may decline and migrant workers may return faster than intended with potentially negative effects on domestic unemployment and on the balance of payments. -4-

Recent Developments by inflation and 10. Rapid economic growth since 1968 was accompanied financial diffi- balance of payments problems. Many enterprises experienced programs and a lack culties primarily as a result of over-zealous investment the external pay- of financial discipline. To counter inflation and improve measures aimed at ments position, the Government, in 1972 and 1973, adopted temporarily restricting monetary expansion, limiting public expenditure, personal income, im- strengthening price controls, reducing the growth of limitations on proving the financial structure of enterprises and imposing pressure on external borrowing. In addition, to neutralize the inflationary percent in January the balance of payments, the dinar was devalued by 16.6 dinar has been floating 1971, and again by 18.8 percent in December 1971. The Bank established since July 1973 and on October 29, 1974 the Yugoslav Central an effective deval- a new intervention rate of US$1.00 equal to Dinars 17.23, uation of 7 percent. slowed from 8.8 per- 11. As a result of these measures economic growth 1973. Exports in- cent in 1971 to 4.4 percent in 1972 and 5.1 percent in rates than imports. creased during the same period at significantly higher in 1972) the Aided by a sharp rise in workers' remittances (up 36 percent 1972, the first sur- current account showed a surplus of US$419 million in in 1973 ($464 plus since 1965. A current account surplus was again achieved equivalent of about million). Foreign exchange reserves increased from the by the end of one month's merchandise imports in 1971, to nearly 4 months however, and most 1973. There was no slowdown in the rate of inflation, per year through 1973. prices continued to rise at the rate of 15-20 percent an estimated an- 12. In 1974 economic growth picked up again (reaching accompanied by a recur- nual rate of 81percent). This higher growth rate was further amplified by rence of the difficulties associated with rapid growth, pace of inflation the changes in the international trade situation. The indicator--the accelerated and the annual rate of increase in the leading 30 percent. Liquidity overall producer price index--rose to approximately of the invest- problems in enterprises associated with the rapid increase deteriorated due to ment rate began to reappear. The balance of payments of commodity ex- the coincidence of worsening terms of trade, slow growth and stagnation of real ports to countries in the convertible currency area, deficit of about net exports of invisibles. As a result, a current account $1 billion is estimated for 1974. an average GDP 13. The Social Development Plan for 1971-75 projected clear that this will growth of 7.5 percent per year in real terms but it is two years of the period not be realized. Even if economic growth in the last would amount to reached that level, average growth during the five years the 1972/73 stabil- around 6.8 percent, due to the slowdown associated with this would still be ization measures. Given the slow population increase the preceding five- rather high, and would compare well with growth during year plan period (4.7 percent per year). -5-

The Energy Sector

14. On a caloric basis abouit two-thirds of Yugoslavia's energy needs in 1973 were met from domestic sources. Domestically-mined coal remains an im- portant source of fuel. Practically all thermal power plants are coal-fired. About one-third of the oil consumed is of domestic origin. Yugoslavia gen- erates more than half of its electricity from hydro plants despite the fact that only about 30 percent of its hydro power potential has been developed. The shortages of electricity that are emerging are not due to the lack of hydro generation potential, coal or oil, but rather to insufficient plant capacity and delayed construction. National energy policy emphasizes maximum development of domestic resources to curb the need for imported energy. Federal agencies are preparing studies to coordinate this development for the most efficient use of resources.

15. In spite of Yugoslavia's relatively low dependence on imported oil, increases in the price of oil are bound to affect the government's efforts to improve the external payments position. In 1973 oil imports amounted to US$259 million, or 6 percent of commodity imports. For 1974 oil import pay- ments were of the order of US$900 million, at an average c.i.f. price of US$100 per metric ton - m.t. (US$13 per barrel), equivalent to about 13 per- cent of imports of goods and services. The impact on the balance of payments has been to contribute to a substantial current account deficit in 1974, which will continue in later years, instead of the surpluses Yugoslavia has enjoyed recently.

16. The indirect consequences of the world energy crisis are unclear. On the positive side the availability of coal and hydropower resources should improve the country's international competitive position, although their de- velopment would require heavy investment with long gestation periods. On the other hand job opportunities for Yugoslavs working abroad may diminish as eco- nomic growth in Western Europe slows down. Returning migrant workers would exacerbate unemployment and housing problems and workers' remittances, which have played a dynamic role in the economy, may suffer. Moreover, stagnation in economic activity abroad could affect Yugoslavia's exports. Although the rise in the cost of automobile and air transportation might unfavorably in- fluence tourism, preliminary 1974 data show foreign tourist visits about equal to 1973 and foreign exchange earnings slightly higher. These conflicting trends are being watched carefully by the Yugoslav authorities and the Bank.

Capital Requirements

17. Yugoslavia is dependent to a large degree on imported equipment for its economic development and the country has borrowed substantial amounts abroad. Gross capital inflows have more than tripled during the last five years, reaching US$1,186 million in 1973, mostly in medium-term commercial credit. However, due to rapidly rising amortization payments, an increase of US$746 million in gross inflows between 1967 and 1972 resulted in an in- crease in the net inflow of only US$224 million. The growing discrepancy - 6 -

between gross and net inflows reflects a shift, following the 1965 Economic Reforms, from long-term official loans to medium-term commercial credits as a result of the limited availability of official capital and the liberaliza- tion of foreign trade and borrowing. The United States, the Federal Republic of Germany, Switzerland, Italy and the United Kingdom have provided most of the commercial credits. IBRD, the Federal Republic of Germany, and the USSR have been the principal sources of long-term official capital.

18. Until recently it was thought that much of the foreign exchange needed to finance inmports would come from the growth of exports of goods and invisibles. However, deteriorating terms of trade - adversely affected by price rises for petroleum and other basic raw materials - and the slowdown in Western Europe, make it doubtful whether this source will continue to expand at its previous high rate and the country will, therefore, need to maintain a high level of foreign borrowing. Its gross medium- and long-term capital require- ments are tentatively estimated at between US$2.0 and 2.5 billion per year during 1974-79. Around US$500-600 million of this may be provided in the form of official development assistance from bilateral and multilateral sources. The remainder will come mainly from foreign banks and suppliers. Raising such large sums will be a formidable challenge, but Yugoslavia's success in the past in obtaining the funds it requires from the capital markets, and its con- tinued good credit standing, give grounds for confidence that it will be able to obtain the capital inflow required to finance its development efforts.

Creditworthiness

19. In spite of the present unsettled international conditions, the prospects for Yugoslavia's continued economic growth during the next decade are good. The country's endowment of natural and human resources, its rela- tively low dependence on imported energy sources, its pragmatic approach to economic problems and its readiness to undertake institutional changes, com- bine to give grounds for a favorable assessment of future prospects.

20. External public and publicly-guaranteed debt outstanding as of December 31, 1973 was US$1,912 million. In addition there was US$2,407 mil- lion non-public external debt outstanding. Total (public and non-public) debt service payments in 1973 were equivalent to 13.5 percent of foreign exchange earnings i'ncluding workers' remittances. With external borrowing projected at around US$2 billion per year during 1974-76 with a rising trend, the debt service ratio (public and non-public) is expected to gradually increase over the next few years. Taking into account Yugoslavia's debt service record and the measures taken in the past to control balance of payments problems, as well as the prospective growth of production and foreign exchange earnings, Yugoslavia remains creditworthy for a substantial amount of Bank lending.

21. Many of the high priority projects in Yugoslavia have a low foreign exchange component due to the relatively advanced state of Yugoslav industry and the competitiveness of Yugoslav contractors. Were the Bank to confine its lending to the foreign exchange costs of projects, an adequate contribu- tion to Yugoslavia's external capital needs could be made only by spreading the lending over a large number of projects, including some of lesser prior- ity. Therefore it seems reasonable to provide for some measure of local ex- penditure financing in the Bank's lending program, especially for projects concentrated in the less developed regions. The proposed project includes a small element of local cost financing which is described in more detail in paragraph 43.

PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA

22. The Bank has made 34 loans totalling about US$1,141 million to Yugoslavia. Of this amount approximately 50 percent (US$531.4 million) has been for 12 loans for the transportation sector - six for highways totalling US$180 million, four for railways totalling US$248 million, US$59.4 million for the Naftagas pipeline and $44 million for the Port of Bar Project. Bank lending has generally concentrated on infrastructure including, in addition to the transportation loans, power (four loans totalling US$198 million) telecommunications (one loan for US$40 million), three multipurpose projects totalling US$103 million and US$6 million for the Dubrovnik Water Supply and Wastewater project. Nine loans have also been made for industry, two for tourism and two for agriculture (one for agricultural industries in Macedonia and the other for agricultural credit). IFC has made eight investments in Yugoslavia totalling about US$80 million.

23. In the past few years delays in loan effectiveness have hampered project implementation. To some extent delays are inevitable since the clearance of loan documents involves all the Republics and Provinces in every case. Thus conditions of effectiveness can rarely be met speedily regardless of how well the ground is prepared. Following the adoption of a new constitu- tion last year, the Federal Government is drawing up plans for revised proce- dures which would simplify the loan ratification process and enable project implementation to get underway more quickly. In the meantime steps have been taken to speed up the existing clearance procedure. All six loans approved in FY74 have been declared effective and disbursements have started under all of them. Disbursements generally have picked up substantially and have been running at a rate in excess of $100 million per annum over the past six months. There have been delays in the execution of several projects particu- larly the Belgrade-Bar railway project and the Bernardin and Babin Kuk tourism projects. Annex II contains a summary statement of Bank loans and IFC invest- ments as of May 31, 1975 and notes on the execution of on-going projects.

24. The major objectives of Bank lending to Yugoslavia are to accelerate development in the less-developed regions of the country; to promote agricul- tural development, particularly among the small private farmers by providing basic infrastructure credit for the financing of farm development, equipment - 8 - and processing facilities; to promote structural reforms in major sectors of the economy through improved coordination and the strengthening of institu- tions; and to provide Yugoslavia with long-term external capital and thus reduce the country's dependence on short-term external borrowings. These objectives are basically the same as those which have guided Bank lending in previous years, but efforts to give special support to the less-developed regions and the small farmers are being strengthened.

25. Over the next two years loans envisaged for less developed areas include an urban pollution control project for the city of Sarajevo and two major multipurpose projects. Highway, railway, power transmission and oil pipeline projects during the same period will both assist the less-developed regions and promote structural reforms in the transport and energy sectors. IFC is currently investigating several new investment opportunities to encour- age joint ventures which would provide technical, management and marketing expertise as well as long-term capital.

26. In addition to substantial assistance given in identifying and pre- paring projects for Bank financing, the Bank is providing technical assistance in several areas. A series of regional studies of the four less-developed re- gions of Yugoslavia was initiated two years ago and two studies, covering Kosovo and Bosnia-Herzegovina, have been completed. A third study, of Macedonia, was commenced in April this year. This series, when completed, will contribute to better assessment of development programs and will assist in formulating development strategies for these regions. Other current ac- tivities include assistance with a study on the Yugoslav capital market de- signed to help improve resource mobilization and allocation, and assistance for a training program for auditors of the Social Accounting Service, which audits all enterprises and Government activities, including Bank financed projects. Assistance from EDI, as well as the Bank, has been directed towards the improvement of project evaluation; this objective is also im- plicit in most Bank loans to Yugoslavia.

27. The level of Bank lending has risen substantially and is expected to average about US$200 million during the period FY74-76. Although this represents only a small proportion of the country's need for external finance, it would be equivalent to almost one-third of the annual long-term official capital inflow in convertible currencies. The outstanding debt to the Bank is expected to remain at less than 10 percent of Yugoslavia's total external debt. Service on Bank loans as a proportion of total debt service would in- crease from 3.2 percent in 1973 to 4.8 percent in 1976. PART III - THE TRANSPORT SECTOR IN YUGOSLAVIA

28. The development of Yugoslavia's transport system was shaped by the country's topography. The major routes developed along the Sava-Danube valley in the north and avoided the mountains in the central and southern regions. This influence, together with different historical development between the northern and southern regions, had resulted by the early twentieth century in an unbalanced distribution of transport infrastructure: while the northern regions already had a sound transport system, the system in the southern regions remained underdeveloped. The transport system was heavily damaged during the Second World War and its reconstruction was a major task during the first postwar decade. Since then the transport networks have been substantially expanded, through construction and modernization of the national trunk routes, both for railways and highways, and through expansion of port facilities on the Adriatic coast. Today Yugoslavia has a well-diversified sys- tem comprising 10,400 km of railways, 98,000 km of roads, 15 airports, 5 major seaports and a sizeable network of inland waterways. The roads and railways are the backbone of the transport system, together carrying some 90 percent of the total freight and 95 percent of passenger traffic in 1972.

29. In spite of many physical improvements during the last decade, the development of transport infrastructure in general has not been adequate to meet the rapidly growing demand. The railways offer slow service; many of the roads are below standard; and the capacity of some ports needs to be expanded. These deficiencies are partly due to the relatively low priority given to the sector by Government authorities and inadequate investments in transport infrastructure. The administration and development of the sector have been also affected by the political and economic decentralization in the 1960's in which the responsibility for the sector was transferred from the Federal Government to the Republics and Provinces. The regional authorities could only gradually strengthen their own institutions to meet their respons- ibilities, particularly for institutional arrangements for financing the sector. The decentralization weakened transport administration, coordination and plan- ning. It also aggravated the difficulties faced by many enterprises in the sector, particularly the railways, in mobilizing funds for investment.

30. The economic reforms of the 1960's facilitated the liberalization of the transport industry. From 1960 to 1970 passenger and freight traffic grew at annual rates of about 10 and 7 percent, respectively. While the reforms encouraged growth, they brought about structural changes. Passenger and freight traffic on the roads, benefiting greatly from the liberalization policies, grew at 23 and 20 percent, respectively, while for railways the comparable figures were 0 and 2.5 percent. Today the roads carry 51 percent and 77 percent of the freight and passenger traffic, respectively, compared to the railways' 39 and 18 percent. - 10 -

31. The Yugoslav system, characterized by decentralization of the econ- omic and social units, has made it difficult in recent years to coordinate policy for the development of the transport sector as a whole. The policies that are pursued, such as the freedom of choice by users to select their transport mode and competition in a market economy among autonomous transport enterprises, reflect the nation's prevailing economic climate. In 1971 a Federal Secretariat for Transport and Communications was established to facil- itate more coordinated development of the sector, but it has been unable, with its limited authority, to perform this role effectively. While the Yugoslav authorities are increasingly aware of the need for more coordination in highway development, the rapid constitutional changes have made it difficult to find a suitable formula which would provide effective coordination at the national level and which is also acceptable to the Republics and Provinces. The Federal Government agreed in the sixth Highway Loan to take steps to co- ordinate planning and investments in the highway sector and among transport modes, but the specific actions that can be taken depend on agreement between the Republics and Provinces and various transport organizations concerned. At present the structure of the road organizations within Yugoslavia is still under discussion and subject to change. The former Road Funds (see paragraph 35) are becoming road communities, which involve greater participation by consumers in decision making, and other changes that are expected to affect the coordination of planning and investments are anticipated by the end of 1976. In the meantime the Bank continues to emphasize the need for coordina- tion with the Yugoslav authorities. In the proposed loan it has been agreed that the Council of Republic and Provincial Road Organizations (CRO), formed in 1971, would act as fiscal agent for the loan and would administer the training component, as under the Sixth Highway Loan, as well as coordinate procurement (Sections 2.10, 4.01, and Schedule 8 of the Loan Agreement). The organization of CRO and its role in coordinating highway development are described more fully in paragraphs 36 and 37. Within various transport modes coordination is improving, primarily through voluntary and informal associa- tions among the enterprises, and among the Republics and Provinces. Although the Community of Yugoslav Railways (CYR) and the CRO are not comparable in status and role, the development of CYR offers an encouraging example for the highway and port sub-sectors.

32. Bank lending to the transport sector has aimed at providing finan- cial assistance for priority infrastructure projects, for which funds are generally scarce. Another important objective has been to improve coordina- tion of sector investment and planning through bodies like CYR and CRO. The present loan would contribute to this goal, as did the Fourth Loan for rail- ways and the Loan for the expansion of the port facilities at Bar, both made in the first half of FY75.

The Hlighway Sub-Sector

33. Prior to 1955, the development of road transport was rather limited under a Government policy which accorded priority to the railways. Since then, both the vehicle fleet and traffic have grown rapidly, reflecting steady economic growth and encouraged by the liberalization of the transport - 11 -

sector: road traffic trebled between 1960 and 1965, and doubled again between 1967 and 1972. The highway network has also increased from 82,000 km, in the late 1950's, to 98,000 km by 1973, and paved roads increased from 5,000 km in 1958 to 33,000 in 1973. Despite these rapid improvements, the highway network is still characterized by low density of paved roads, par- ticularly in the less-developed regions; it is, for the most part, inadequate for the current and projected traffic volume. Many paved roads, having evolved from gravel roads, are sub-standard and without adequate foundations. Other paved roads are already congested.

34. Highway expenditures for investment and maintenance have increased steadily over the last decade, but they have not been sufficient in view of the existing backlog and the rapid expansion and modernization of the econ- omy. Highway expenditures increased from about US$100 million per annum during 1966-70, to an average of about US$250 million per annum under the current 1971-75 five-year plan. Actual annual expenditures during 1972 amounted to US$230 million and in 1973 to US$250 million. However, these increases are modest compared to the need. Since the mid-1960's, when the Federal Government's responsibility for financing highway expenditures was transferred to the Republics and Provinces, highway financing has tended to depend to some extent on ad hoc resource mobilization. The main sources of highway financing are the earmarked revenues from fuel taxes, which provided about 54 percent of the total highway expenditures in 1973. The other sources include contributions by the Republics, Provinces and Communes, the Federal Fund for Financing the Accelerated Development of Less-Developed Regions, and loans from the local banks and the World Bank.

35. Administration of the highway sub-sector underwent drastic changes, from a centralized system to a decentralized one, as the responsibility of the Federal Government was transferred to the Republics and Provinces in 1968. Since then, Road Funds, Road Councils or Road Enterprises (Serbia and Kosovo) were established as the responsible agency for planning, design, construction and maintenance of all public roads in their territory, except those local roads which are constructed and maintained by communes. The Road Funds, now being called Communities, have generally large staffs and are directly involved in highway planning, project preparation and supervision. The Road Councils, with more limited staffs, do some planning, but their primary function is supervision of road maintenance. The Road Funds, Councils and Enterprises are managed by boards, whose members represent trading and business enter- prises, consulting firms, individual exporters, and the republic and local governments. They generally function as administrative and supervisory agencies, employing consultants for pre-investment and engineering studies, and contracting out construction work and maintenance.

36. The CRO, established by the Road Funds, Councils and Enterprises to deal with technical and financial matters of common interest, has been the principal coordinator of the highway sub-sector since its founding in 1971. It is an informal association with no permanent secretariat of its own, but it has been active in standardization of engineering design, data collection and other technical matters. It has also been instrumental in the preparation of uniform guidelines for feasibility studies. The current five-year highway - 12 - development plan (1971-75) was prepared by the CRO, but it is essentially a consolidation of the individual plans of the Republics and Provinces, since CRO has no independent authority in formulating policy or establishing plans for highway development.

37. Since the first loan in 1963, the Bank has made six loans for high- ways. The first three projects (Loans 344-YU, 485-YU and 608-YU) were com- pleted in 1966, 1971 and 1974 respectively. The others (Loans 678-YU, 751-YU and 990-YU), are under construction (see Annex II). Implementation of all these projects has been satisfactory, although the third, fourth and fifth projects have experienced cost increases ranging from 8 to 12 percent due to inflation. Since the Third Highway Project in 1969, the Bank has maintained a close dialogue with the Yugoslav authorities concerning the institutional problems, and has played a role in the establishment of the Federal Committee for Transport and Communications and the CRO. In order to improve project preparation and to provide a sound basis for planning, the Fifth Project in- cluded a staff training component, as do the Sixth and the proposed project, aimed at improving the capacity of the road organizations' staff to prepare highway studies. The Federal Government agreed under the Sixth Highway Loan in 1974 that uniform guidelines would be applied in the preparation of feasibility studies for major highways and that a competent institution would be charged with screening these feasibility studies. These guidelines were used for the preparation of feasibility studies for the proposed loan; and the studies were screened by the CRO. The present highway project was better prepared than the previous ones, although the quality of feasibility studies still needs to be improved. The goals of improved project preparation and provision of a sound basis for planning will continue to guide future Bank lending for highway projects.

PART IV - THE PROJECT

38. In April, 1974 the Federal Government requested Bank assistance in financing the construction of about 235 km of highway in the Socialist Republics of Croatia, Macedonia, Montenegro, Serbia, and Slovenia, and in the Socialist Autonomous Province of Kosovo. All of these were top priority road sections featured in the 1971-75 Middle Term Highway Plans of the respective Republics and Province. From these sections the Bank has selected 90 km of highways in Montenegro, Serbia, and Slovenia as the most suitable for Bank financing at this juncture. The others were not included because of sub- marginal rates of return and need for further preparation. The feasibility studies for the highways in Montenegro and Serbia were prepared by the Road Research Institute of Belgrade and the study for the Slovenian Highway was carried out by the consultant firm Dorsch-Berger of the Federal Republic of Germany and the U.S. Following a pre-appraisal mission in May-June 1974, the project was appraised in November/December 1974. Negotiations were held in Washington, D.C. in May 1975. The Yugoslav Delegation was led by Mr. Lojze Blenkus, President of the CRO and Director of the Republic Community for Roads - 13 -

of Slovenia, and included representatives of the Governments and road organi- zations of Slovenia, Serbia, and Montenegro, as well as the Federal Secretar- iat for Finance and the Federal Committee for Traffic.

39. The purposes of the project, which is described in detail in the Ap- praisal Report entitled "Appraisal of a Seventh Highway Project, Yugoslavia," dated June 17, 1975, and summarized in Annex III to this report, would be to:

(a) relieve congestion on two highways of international importance in Slovenia and Serbia by upgrading the pre- sent two-lane highways to four-lane divided highways;

(b) upgrade the highway between Titograd, the capital of Montenegro, and Niksic, an important industrial center; and

(c) provide training to improve the preparation of highway fea- sibility studies.

Borrowers and Project Execution

40. The Borrowers would be the road organizations of Slovenia, Monte- negro, and Serbia, each being responsible for the amount of the loan allocated to it. These organizations operate on the basis of annual work programs derived from the five-year programs and financial plans that have been approv- ed by the Republican and Provincial Assemblies. They are responsible for all public roads in their respective jurisdictions, except those local roads under the jurisdiction of the communes, and accordingly the respective organ- izations would be responsible for construction and supervision of the project road sections. All have participated satisfactorily in previous Bank loans. Supervision of construction would be carried out by Yugoslav consulting en- gineers and technical institutes that have already done the detailed engineer- ing for the project.

41. The CR0 would act as fiscal and coordinating agent for the loan. As under the Fifth and Sixth Highway Loans, the CR0 would also carry out staff training in the preparation of highway feasibility studies. About 12 man- months of services by expatriate transportation economists would be provided to assist the staff of the road organizations and related institutes with the application of the "Guidelines" (see paragraph 36) and to assist in overall highway planning. The portion of the loan set aside for training would be allocated through a Relending Agreement between the Borrowers and the other participating road organizations and the CR0. The execution of a satisfactory Relending Agreement would be a condition of effectiveness of the Loan Agree- ment (Section 8.01 (c)).

Project Cost and Financing

42. The total cost of the project, including taxes and duties, is es- timated at US$117.4 million, with a foreign exchange component of US$37.0 - 14 - million. The costs of the road sections (not including contingencies) are as follows: Slovenia - $25.1 million, Serbia - $30.7 million, and Montenegro - $24.9 million. A price contingency of 32 percent for construction assumes annual price increases of 17 percent in 1975, 14 in 1976, and 12 percent in both 1977 and 1978 for both foreign and local costs. Physical contingencies are estimated at 10 percent.

43. The foreign exchange cost estimate is based on the assumption that local enterprises would win all the construction contracts under internation- al bidding, as under previous loans. The proposed Bank loan of US$40.0 million would finance 34 percent of total project costs, including US$3.0 million of local costs. Twenty-seven percent of the loan would go to Slovenia, thirty- six percent to Serbia, and thirty-seven percent to MIontenegro, thus allocat- ing 73 percent to the less developed regions. Since Montenegro is one of the least developed areas in Yugoslavia, it would receive the US$3.0 million of local cost financing, which would be used for civil works. This is in accord with the Bank's policy of special support for the less developed republics. Montenegro is currently heavily committed to mobilizing resources for trans- portation projects, including the Belgrade/Bar Railway and the Port of Bar. Each Republic would finance its share of the remaining local costs estimated at US$77.4 million. Local costs of construction would be met by the road organizations of the Republics of Slovenia, Serbia and Montenegro, and the local costs of the training component of the project would be financed by them and the other participating road organizations. A condition of effec- tiveness would be that the three Republics have each given guarantees to pro- vide funds for their individual parts of the project, including cost over- runs (Section 8.01 (a)). An additional condition of effectiveness would be that for all three Republics the necessary regulations authorizing the con- struction of the road sections and providing financial resources for the ex- ecution of the project are in full force and effect (Section 8.01 (b)). The proposed loan would include retroactive financing of US$140,000 for the pre- paratory works for a tunnel, which is part of the subproject in Montenegro. Completion of these preparatory works in advance of the major tunnel works will shorten the construction period by about nine months.

Procurement

44. Construction contracts on the basis of unit prices would be awarded after international competitive bidding in accordance with the Bank's Guide- lines for Procurement. Prequalification procedures for all three subprojects began in June 1975. Bids for the construction contracts would be invited in August 1975 and contracts are expected to be awarded in December 1975. The contracts would include price escalation clauses.

Disbursements

45. The proceeds of the proposed Bank loan would finance: (a) 30 per- cent of the civil works contracts in Slovenia, 32 percent of those in Serbia, 41 percent of those in Montenegro, and (b) 100 percent of the foreign exchange costs of technical assistance. The higher percentage for Montenegro again reflects the Bank's policy of special support to the less developed republics. - 15 -

Environmental Impact

46. None of the three project roads would adversely affect the environ- ment. The alignment of the new Titograd-Niksic road would allow traffic to Niksic from the Adriatic coast and from Albania to bypass Titograd, thus re- lieving the urban area from traffic noise and air pollution.

Justification

47. The project road sections would help to meet the heavy transporta- tion demand generated by Yugoslavia's growing manufacturing and tourism in- dustries. The existing highways in the project areas are inadequate for both present and forecast traffic volumes, and without the improvements provided for in the project, bottlenecks would arise. In Slovenia, the subproject is part of the country's primary highway network, serving both internal and in- ternational traffic. Traffic on this road is expected to grow at between 5-9 percent annually over the next 20 years. The economic rate of return for this subproject would be 20.5 percent. The Serbian subproject would also form part of Yugoslavia's primary highway network, serving not only domestic traffic but the transit of major commodities across Europe. These sections in Serbia are already badly congested, and traffic on them is ex- pected to grow at annual rates between 4 and 11 percent over the next twenty years. The economic rates of return on the Serbian section would range be- tween 19 and 49 percent. The project road in Montenegro is a main artery of that Republic, leading partly over very rough terrain. The road and the ad- jacent railway handle most of the traffic for four major local industries - a bauxite mine near Niksic, an aluminum plant in Titograd, and an iron and steel plant and a brewery at Niksic, that are, to a considerable extent, export-oriented. The railway is of low standard and limited capacity and its improvement would require a substantial investment. The present road and railway cannot cope with the projected expansion of the local industries. The new road would offer considerable economies for the transport of bauxite, the major freight component between Niksic and Titograd, which can be trucked directly from the mines to the refinery at Titograd. Total traffic would double between 1973 and 1980 and by 1985 traffic is expected to increase by another 50 percent over 1980. The benefits from the improvements derive largely from savings in vehicle operating costs and time savings. The econo- mic returns are 15 percent and 19 percent for the two subsections of the road.

48. Benefits accruing from the staff training are not quantifiable. They would be of a long-term nature, arising from improvements in highway planning, project preparation and administration of the sub-sector. The participation of CR0, as the coordinator and executor of the training under the project, is expected to reinforce the contributions of earlier Bank loans to institution-building in this sub-sector. In particular the CRO's partici- pation in the project would help improve overall highway planning. - 16 -

PART V - LEGAL INSTRUMENTS AND AUTHORITY

49. The draft Loan Agreement between the Bank and the Republic Community for Roads of Slovenia, the Self-Managing Republic Interest Community for Roads of Montenegro, and the Association of Enterprises for Roads of Serbia, the draft Guarantee Agreement between the Socialist Federal Republic and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a draft resolution approving the proposed Loan are being distributed to the Executive Directors separately.

50. The draft Loan Agreement contains the Borrowers' obligation to enter into a Relending Agreement with other road organizations of the participating Socialist Republics and Socialist Autonomous Provinces for relending a portion of the proceeds of the loan allocated for staff training. A feature of the Loan Agreement of special interest is the role of the CRO, particularly in relation to coordination of highway development, referred to in paragraphs 36, 37 and 41.

51. Special conditions of loan effectiveness are:

(a) Republic regulations authorizing the construction and providing financial resources are in full force and effect (paragraph 43, Loan Agreement Section 8.01(a));

(b) Republics have given guarantees to provide funds for their part of the project, including cost overruns (paragraph 43, Loan Agreement Section 8.01(b));

(c) The execution of a satisfactory Relending Agreement for the portion of the loan set aside for training (paragraph 41, Loan Agreement Section 8.01(c)); and

(d) All necessary consents and approvals have been given for the CRO to act as fiscal agent, administrator of the training com- ponent, and coordinator of procurement (paragraph 31, Loan Agreement Section 8.01(d)).

52. I am satisfied that the proposed loan would comply with Articles of Agreement of the Bank.

PART VI - RECOMMENDATIONS

53. I recommend that the Executive Directors approve this proposed loan.

Robert S. McNamara Attachments President June 25, 1975 Amnex1 Page 1

COAJNTRIDIATA - 7000SIA 8I.

AREA POPULATrON EE90ITT 2 I8ceS. 20.77 mlllino (mid-1972) 202 Per ka2of arable land

SOCIAL.INDICATORS Reference Countries '2LI"ia Y"" Portugal RM_ManlcGr. Fed.Ret -97 1970 1970 1970 SlPER APT u A sRAh /I 375 890 L. 780 Is 810 I. 3,390 I. DFI4OIPAPH'IC rate (Par thousand) 21, 18 20 I. 18 ~ 10 .2Li Crude death rate (per thousand) 10 9 L i ~ 9 ~ 1 Inant sorteilty rate (per thoveen live births) 88 4.3 8L9i1 2 L~ Life expectancy at birth (yearn) 62 8 6 6938 ~ 03 R Ocone reprodection rat 2 .3 1.3 . 3 Popolatton growth rate Z 1.2 . 1 P. 10.9/ Population growth rate - urbant Age structure (percent) 3 7 f 2. a 2 a 2 /

65-6 v3 6n 65 61. j 6 63 Age dependency ratio /4j 0.6 0 06.5~ ~ 05L Z 65an-d~ ovenency-6 84 9.8. 90 112 Ecoeneicretin dependency ~~~~~~~~~~ 1.0 0.9 1.2 0 7 ~ 0. Urban popul.tion us percent of total 28 /d 39 Itfd .. 12/0.e 38.1 /h.i Family plahning~ No.of acnptcr- uuaie to,3.. Ne. of users %of married oceen) *..

orce-rfR. (thounande) 8,300 8,900 /f 3,100 LI 990 27, k Prerentage employed in agriculture 57 4571 30 9e9 17~: a Percentage unnepl.yod33fad7a 1 0

Pecn ntRio l Inco... received by highest 5% 17 LO 1 n .. 6ZLi Percent of national income received by highest 20% .1 ~ 2 L-. Percent ot national income received by loest 20% 7 L ~ 7 L, .21 zi Percent Of nr.iOo.ua income received by lowest 40% 19 LB .19 /n MSTRINUTIONOF LARD o1IIERHip %owmud by top 105 of owners .. 5 ond by anlleet 10% of owners ..

HEALTHAND NUTRITION FbPul.atio Per phyiciian 1,400 a 1,010 1,100 81.0 41 Sic Population per -.raig person 500 L11 900 200 ~ 350 Population per hospital bed 190a 180 160 120 90 Per caPita celorie nupply as %of requiremats ~ 115 121 1,18 118 121 Per caPita protein eupply, total (grass per dayyL 91 912 85 92 80 Of which, Mote1 and pulse 27 L29 p0086 Death rate 1-4. Yearsra . a7 25 . 21 56..

EDUICATION Adusted /B prboay school enrollment ratio 91 9195 109 132 Adjueted Z eaCorolary school enrollment ratio 31 45 65 62 61 TeasftIShoolin Pravided, first and secod level 12 12 13 12-11. 12-15 Vocational en'ollwent as %of sac, school enrollsonnt 72 72 32 58 /.C 48 Adult literacy rnte % 77 85A ~ 65 /i . 9'9 /8.v

7 aaeNo. of persons per roes (urban) 1.~7 ~ .3 f ~ 1.3 ~ 0. Percent of oncopied units withmut piped water 58 e 6 b . 8 3, b Accesstofelentrinity (as S of total population) 55 .j 88 a 85 4.9 ma i10 Percent of lal populatim, connected to electricity 36 wa8 80 sa .2 L.8

per'P. 10 population 81, 171 169/ 150 /I 309 Passenger ca pr 1~ppltion 3 189 1Li . 5 Electrcpsscnutin(wp.) 529 L 1,570 Li 1026 1,9314L ,617L Ne.sPrintconsumPtiOn p.c. kg per year 2. .2i39 28L 85L7

Not-s Pigurserefer elther to the latest periods or to acon fento etal. tsqmprature,body weigtta, an the latestyearn. Latestperiods refer i. principleto di.tribotlonby age and a"a of atinna PoPolatiana. the years 1956-60or 1966-70;the latestyears in pr~i.. /6 Proteinstandards (requiremasee) for all sountrias as attb- cipl. to 1960 and 1970. liabhdby USDAEoomnlo ResearchSerrice prov-ide for a cioic- a1The Per CepiteGO entimateis at marketprices for allowanceof 60 greas of total proteinper day, and 20 gams of year other than1960,calculated by the eae convernion animaland pol1s protein,of which 10 grassshould be aninal techniqueas the 1972 WorldBank Atlas. protein. These tiandardaare ascawbhat1eer thanthose of 75 /2 Averagenonber of daughtereper wonen of reproductive gram of totalprotein and 23 gras of animalprotein as an age. averagefor the world, proposed by FAO in the Third World Faud Z2 Populetion growth raten ar for the decodes ending in Surey. 1960 and 1970. P osO.studice have suggested that crude death rtate of chi dren Ai Ratio of population under 15 and 65 end over to popula. agen 1 thmnogh 4 ma be used as a first appenalmation index of ticm o g 15afor eenec ra tio and to laborcton for.f ages 15-61 age depen dency laborio /8aPercentage enrolld of corresponding population of oh-o1 age FAO rferece standardsrepresent physiological re- as defi-edfrc .ch enutry'. quirenents for normal actinity and health, taking

/a 1972; lb 1965-70, UN eatimate; I. 1973; /d For tIe definitio- of urban, Bae U'.KkpD)(hl ~Yearbook ~1971,' page 157; Ie Cities, townas and 183 oth~er localitieThaving urban Coi-cnmoch.-. eieIc Li19 1. Rat1o of PoPuIlato-n under 15 and 65 end over to Itetl labor force; /bh 1969; Li DefinitIon not available; I Esint.nt; 1 EttL.at boned on the results of a labor force sample sur~vey; /I. 1962; /m 1963; In H .useholds; /. 1960; Percen t of salaried workers eareiog morn than 2,500 lei; 4a Porcut of salaried worker comcing lea. than 1,100 Io,; 7/ Incoodlng eldwives, assitant ru.urce and aenistant midwives; L Includes midwives; It 1960-72; /u 1970171; 77 15 yearn and over; Iw 1961; /x 1966; LX Urban only; LjUrban end rural; Pretg fdelns 7 eturpiped inside; Fulj_tiL education; /Ld Ratio of eglotoe-d job nachero to active population; I.e 1970-72; 7a? I96-70; /.I Including enigsation.

aAlthough RonianisI in the man,eper capita GNP group as Yug-1-ivl, it hoe bean s.eleted aoes the social de-clpocort pioccing poLciee and population siec arc simila.r in both. Moreo-r, both countries have mj.cr t,Rade tie. with one

SoIcec-ti- of the Federal Rpublic of Ger .myaso - objective country is booed on the close economic ties maintaied by thetocuris an well an no the &otthat the greater pert of Yuguslovis'. 800,000 wokrker,who wor broad, hove forvd -pc.ply-nt in the Feder.l Republic of Gcr-mo.

R9 June 21. , 1975 ANNEX I II4PORT DiTAIL Page 2 (million US$)

Av. 1/ 2/2 A. Constant (1972) Prices 1967-69 1972 1973 1974- 1975- 1976-

1. Food 131 207 228 259 250 250 2. Other consumer goods 309 296 295 348 345 370 3. Petroleum 83 161 182 205 217 230 4. Other intermediate goods 1,262 1,875 2,116 2,391 2,151 2f76 5. Capitel goods 547 689 833 922 987 1,056 6. Total goods c.i.f. 2,332 3,227 3,654 4,125 4,303 4,582 7. Non-factor services 299 594 522 602 638 676

8. Total goods and NFS 2,631 3,821 14,176 4,727 4,981 5,258

B. Price Indices (1972 = 100)

1. Food 83.9 100 150.6 187.6 197.0 206.9 2. Other consumer goods 78.9 100 120.5 147.0 163.1 1.79.h 3. Petroleum 81.1 100 142.5 455.5 505.5 542.5 4. Other intermediate goods 81.b 100 120.5 167.8 184.2 197.2 5. Capital goods 78.9 100 120.5 144.6 160.4 173.5 6. Non-factor services 78.9 100 123.5 154.9 169.6 183.0

C. Current Prices

1. Food 110 207 343 486 493 517 2. Other consumer goods 244 296 356 512 563 664 3. Petroleum 68 161 259 934 1,097 1,246 4. Other intermediate goods 1,027 1,875 2,550 4,013 4,686 5,278 5. Capital goods 432 689 1,004 1,333 1,583 1,832 6. Total goods 1,880 3,227 4,511 7,278 8,422 9,538 7. Non-factor services 236 594 657 932 1,082 1,237

8. Total goods and NFS 2,116 3,821 5,168 8,210 9,5oL 10,774

1/ Estimates.

2/ Projections.

Iay 1, 1975 ANNEX I Page 3 EXPORT DETAIL (million US$)

Av. 1/ 2/ A. Constant (l972) Prices 1966-69 1972 1973 1974- 1975-/ 1976-

1. Meat 245 247 193 67 100 150 2. Other agricultural products 54 21 34 40 60 60 3. Wood 69 83 68 70 71 72 4. Steel 65 51 74 76 79 81 5. Copper 37 53 33 33 33 33 6. Other primary metals 71 82 80 81 83 84 7. Machinery and equipment 375 544 603 664 717 774 8. Fabrics and clothing 203 274 259 261 296 313 9. All other goods 597 1,019 918 1,085 1,150 1,253 10. Total goods 1,714 2,237 2,264 2,377 2,589 2,820 11. Non-factor services 743 1,188 1,249 1,303 1,381 1,464

12. Total goods and NFS 2,457 3,425 3,513 3,680 3,970 4,284

B. Price Indices (1972 = 100)

1. Meat 62.9 100 127.7 140.9 160.4 169.2 2. Other agricultural products 83.5 100 150.6 186.5 205.2 215.5 3. Wood 77.9 100 204.0 218.5 229.4 240.8 4. Steel 51.3 100 132.0 152.2 165.5 172.2 5. Copper 120.5 100 168.9 229.0 ,218.0 221.6 6. Other primary metals 103.6 100 144.7 205.3 201.0 207.2 7. Machinery and eouipment 78.9 100 120.5 145.6 161.1 173.5 8. Fabrics and clothing 78.9 100 120.5 137.3 152.3 163.6 9. All other goods 78.9 100 120.5 171.0 187.9 144.8 10. Total goods 77.6 100 126.0 162.5 176.9 188.1 11. Non-factor services 78.9 100 123.8 154.9 169.6 183.0

C. Current Prices

1. Meat 154 247 247 94 160 254 2. Other agricultural commodities 45 21 52 75 123 129 3. Wood 53 83 139 152 163 173 4. Steel 33 51 98 116 130 139 5. Copper 44 53 56 77 73 74 6. Other primary metals 74 82 115 167 166 175 7. Machinery and equipment 296 544 727 966 1,155 1,343 8. Fabrics and clothing 160 274 313 358 450 513 9. All other goods 471 1,019 1,107 1,855 2,161 2,504 10. Total goods 1,330 2,237 2,853 3,860 4,581 5,304 11. Non-factor services 586 1,188 1,546 2,019 2,342 2,679

12. Total goods and NFS 1,916 3,425 It,399 5,879 6,923 7,983

1/ Estimates. 2/ Projections.

May 1, 1975 LiNEX I Page 4

SUMMARY BALANCE OF PAYMENTS (million US$')

Av. 3/ V4 4/ 1967-69 1972 1973 19714- 1975- 1976t-

1. Imports (inc. NFS) 2,116 3,821 5,168 8,210 9,509 10,774 2. EXports (incl. NFS) 1,916 3,425 4,409 5,879 6,923 7,983 3. Blance of goods and NFS -200 -396 -759 -2,331 -2,586 -2,791 4. Interest -62 -138 -155 -261 -321 -406 a. On public debt -56 -63 -76 -126 -150 -169 b. On other debt -6 -75 -79 -138 -171 -237 5. Workers' remittances 139 889 1,310 1,500 1,673 1,837 6. Other factor services (net) -17 -10 -19 -8 -14 -23 7. Current transfers (net) 38 74 87 140 110 140 8. Balance of current accounts -101 419 464 -963 -1,108 -1,243 9. Official capital grants ------10, Public M & LT loans a. Disbursements 185 538 400 450 500 600 b. Repayments -172 -415 -293 -333 -369 -396 c. Net Disbursements 13 123 107 117 131 204 11. Other M & LT (net) 1/ a. Disbursements 17 234 300 620 949 1,506 1,728 b. Repayments -38 -92 -323 -494 -528 -689 c. Net Disbursements 1/ 196 208 297 455 977 1,039 12. IMF Drawings -7 22 - - - - 13. Other short term -69 -350 -307 35 - - 14. Use of reserves -33 -422 -561 356 - -

Memo Items

15. Reserves (net), end period -120 145 689 481 481 481 16. Debt service ratio: 2/ Public 11.1 11.1 6.5 6.2 6.0 5.8 Total 13.2 15.0 13.5 14.8 14.2 15.2 17. External debt outstanding and disbursed, end period: Public 1,191 1,730 1,912 2,029 2,160 2,364 Total 1,785 3,552 4,319 4,816 5,824 6,937 IBRD 212 358 430 495 574 674 18. IBRD service as % of: Public debt service 7.6 A14.6 9.0 9.6 10.9 12.7 Total debt service 6.4 814 3.2 4.0 4.6 1.8

1/ Includes private direct investment. 2/ On exports (incl. NFS) plus workers' remittances. Estimates. JT/ Projections. May 1, 1975 ANNEX I Pagr S SELSCTED ECOIIOPIC DSVELOPMENTDATA

AV. Actuals Pmjections Growth Rates As %o Grjy 197-69 1972 19 1974 1975 1976 1965-7C 1970-73 197376- 1972 1971, 1?76

National Accounts (average 1967-69 prices; million U5S$)

GDP 10,542 13,491 14,375 15,450 16,704 17,957 4.7 6.1 7.6 100.0 101.0 101.2 - -1_. -1.2 Gains fror tens of trade 1 -7 -18 -155 -174 -211 100. 3 100.C Gross Domestic Incore 10,543 13,484 14,357 15,295 16,530 17,746 4.7 6.1 7.3 100.0 ?2.!. irpo-ts (incl. NFS) 2,116 3,270 3,377 3,681 4,°00 45o00 11.5 6.4 1(.0 2h.3 2L.1 8.3 6.0 19.o 18.5 1-*P FXnorvs (irport capacity, incl. NF5) 1,918 2,647 2,810 2,829 3,022 3,346 7.7 4.7 5.o Resource gap 198 623 567 852 983 1,159

73.1 71.6 71..0 Cnns,irption 7,628 9,861 10,257 10,953 11,688 12,591 6.2 5.1 7.1 31.5 34.o :- Investment (incl. stocks) 3,113 4,2146 4,667 5,194 5,825 6,309 4.0 7.4, 10.6

32.4 13.5 3L.7 Noti.onsol Savings 3,013 4,364 4,887 5,279 5,758 6,161 3.0 11.4 8.0 29.b 29.0 Domestic Savings 2,915 3,623 4,100 4,342 4,842 5,155 1.1 8.9 7.9 26.9

Price Indices (1567-69 * 100) 9.7 17.7 Import price index 98.3 122.4 147.0 173.0 203.6 239.7 2.8 2.8 15.0 11.8 Export nrice index 98.3 121.6 146.1 163.3 182.6 204.0 -5.2 Terms of trade index 100.0 99.3 99.4 94.4 89.7 8595 0.0 0.2

Public Finance (current prices; million US$) 19.2 Current receipts 5,206 6,560 7,819 9,320 10,624 . 12.5 . 16.3 19.2 Current expenditures 4,382 5,521 6,581 7,844 8,942 19.2 Budgetary savings 824 1,039 1,238 1,476 1,682 . -1.7 Other public saving 8 1 1 , 1 1 1 1.6 19.2 Public sector investment 848 841 1,039 1,238 1,476 1,682

May 1, 1975 ANNEIX II Page 1

THE STATUS OF BANK GROUi' OPERATIONS IN YUGOSLAVIA

A. STATEMENT OF BANK LOANS (as at May 31, 1975) USS million Amount (less cancellations) Number Year Borrower Purpose Bank Undisbursed Thirteen Loans fully disbursed 326.2 531 1968 Yugoslav Investment Bank Railways 50.0 0.9 657 1970 Yugoslav Investment Bank Telecommuni- cations 40.0 1.6 678 1970 SFRY Roads 40.0 2.6 751 1971 SFRY Roads 35.0 7.2 752 1971 Hotel "Bernardin", Piran Tourism 10.0 6.7 777 1971 SFRY Multi-purpose Water 45.0 38.9 782 1971 "Babin Kuk" lHotelsko Turisticki Centar, Dubrovnik Tourism 20.0 16.8 836 1972 Twelve Electric Power Enterprises in Yugoslavia Power 75.0 44.7 894 1973 Stopanska Banka, Skopje Agricultural Industries 31.0 19.2 916 1973 Naftagas Gas Pipeline 59.4 51.0 947 1973 Kikinda Iron Foundry 14.5 9.1 965 1974 IMT Tractor Factory 18.5 15.5 966 1974 FOB Iron Foundry 15.0 12.6 990 1974 Bosnia-Herzegovina Road Fund Roads 30.0 18.7 1012 1974 Stopanska Banka, Skopje Industrial. Credit 28.0 27.6 1013 1974 Privredna Banka Sarajevo Industrial Credit 22.0 21.9 1026 1974 Community of Yugoslav Railways Railways 93.0 90.1 1060* 1974 Port of Bar Harbor Expansion 44.0 44.0 1066* 1974 Vodovod Dubrovnik Water Supply and Waste- water 6.0 6.0 1129* 1975 Vojvodjanska Banka Agricultural Credit 50.0 50.0 Total (less cancellation) 1071.1 485.1 of which has been repaid 119.4 Total now outstanding 951.7 Amount sold 7.7 of which: Amount repaid 6.1 1.6 Total now held by Bank 950.1 Total undisbursed 485.1

* Not yet effective. ANNEX II Page 2

B. STATEMENT OF IFC INVESTME.NTS (as .:t May 31, 1975)

Type of Amount in US$ million Year Oblipgor Business Loan Equity Total

1970 International Investment Corpora- Investment - 2.0 2.0 tion for Yugoslavia Corporation 1970 Zavodi Crvena Zastava Fiat S.P.A. Automotive 5.0 3.0 13.0 Industrv 1971 Tovarna Automobilov in Motorjev Automotive 7.5 2.3 9.8 Maribor (TAM>)/Klockner- Industry Humboldt Deutz A.G. (KHD) 1972 FAP-FAMOS Belgrade/Daimler Automotive 13.07 3.0 16.0 Benzz A.G. Industry 1972 Sava/Semperit Tires 4.0 1.5 5.5 1973 Belisce/Bell Pulp and Paper 13.4 - 13.4 1974 Zelezarna Jesenice/ARMiCO Special Steel 10.0 - 10.0 1974 Salonit Anhovo Cement Plant 10.0 - 10.0

Total Gross Commitments 62.9 16.8 79.7 less cancellations, terminations repayment and sales 9.3 2.4 11.7

Total Commitments held by IFC 53.6 14.4 68.0

Total Undisbursed 19.6 6.3 25.9

C. PROJECTS IN EXECUTION -t

Loan 531 Belgrade-Bar Railway: US$50.0 million Loan of March 22, 1968; Closing Date: December 31, 1975.

The completion of this project was originally scheduled for 1973 but geo-technical and other construction difficulties in mountainous terrain are expected to delay operation of the line at least until 1976. The Closing Date will be adjusted when the final completion date is known.

As a result of inflation and cost overruns, the total project cost has increased from $225.5 million to $350.0 million. Supplementary finance authorized under existing legislation was exhausted at the end of 1974. How- ever, a further US$59 million, approved in principle, is awaiting completion of the legislative process and adequate interim finance is being provided by local banks.

1/ 'Thse notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with understanding that they do not purport to present a balanced evaluation of stmnrnths and weaknesses in project execution. ANNEX II Page 3

Loan 657 Telecommunications: US$40.0 million Loan of February 20, 1970; Closing Date: June 30, 1975.

Delays in civil works have occurred which will delay completion of the project until late 1975. With the exception of the earth satellite sta- tion, only preliminary works have been completed. A cost overrun of US$5.1 million for orders already placed is expected due to currency revaluations. Following a revision of the disbursement schedule, disbursements are now in line with the revised projections.

Loan 678 Fourth Highway: US$40.0 million Loan of May 28, 1970; Closing Date: December 31, 1975

After an initial delay of about one year in starting work on the Sarajevo-Zenica section because of difficulties in acquiring the right-of-way, and delays due to inclement weather in 1974, work on this section has been proceeding satisfactorily and it is expected to be completed in the fall of 1975. All other road sections are open for traffic. The Closing Date has been postponed from June 30, 1974 to December 31, 1975.

Loan 751 Fifth Highway: US$35.0 million Loan of June 18, 1971; Closing Date: September 1, 1976.

After an initial delay of about eight months in fulfilling the conditions for effectiveness of the loan, construction work on all sections has progressed well. All road sections but one are open for traffic. The remaining section is expected to be completed by the end of 1975. An 8 per- cent increase in the appraisal cost estimate is expected. Disbursements under the Loan are about one year behind the appraisal estimate.

Loan 752 Bernardin Tourism: US$10.0 million Loan of June 18, 1971; Closing Date; June 30, 1976.

There have been delays in implementation of the project due to delays in making the loan effective, appointing consultants, providing the necessary infrastructure and approvals by local authorities. As a result disbursements are behind schedule. Bids received in July 1974 indicated that the project, if it were to be implemented as originally envisaged (2,500 beds) would cost approximately 100 percent above the originally estimated cost of US$25.6 million. This increase was mainly due to rapid inflation in construc- tion costs. The Bank and the project sponsors have agreed to finance a reduced complex containing some 1,616 beds. The total cost would be US$35.8 million, requiring additional financing of about US$10 million. Financing for the revised project has been arranged and construction has begun. ANNEX II Page 4

Loan 777 Ibar Multipurpose Water: US$45.0 million Loan of June 30, 1971; Closing Date: December 31, 1976.

The start of project work was delayed for one year. However, construction is now well underway with the main dam scheduled for completion in 1976 and the irrigation networks in 1977. Project costs are currently estimated to be about 17 percent above the appraisal estimate. Additional funds are being provided by the Province of Kosovo. Disbursements are proceeding in line with the revised schedule. Arrangements for land consolid- ation and agricultural extension services have been delayed but proposals are now being studied.

Loan 782 Babin Kuk Tourism: US$20.0 million Loan of July 21, 1971; Closing Date: July 31, 1976.

There have been delays in the implementation of the project due to delays in making the loan effective and in mobilizing consultants. According- ly disbursements are behind schedule. Although these problems have now been largely resolved, the project is almost two years behind schedule. Bids for civil works and estimates for other components indicated that the project would cost at least twice as much as originally estimated (US$49.9 million). This increase is largely due to rapid inflation in construction costs. The Bank and the project sponsors have agreed to finance a reduced complex con- taining some 2,034 beds. The total cost would be US$51.5 million requiring additional financing of about US$1.6 million. Financing for the revised project has been arranged and construction has begun.

Loan 836 Power Transmission: US$75.0 million Loan of June 23, 1972; Closing Date: June 30, 1977.

Project execution began about one year behind schedule mainly because of coordination difficulties and inherent delays in reaching agree- ment among 12 borrowers. (This is the first attempt at countrywide coordina- tion in the sector). All main contracts have been awarded and construction is proceeding satisfactorily. Action on appointment of Management consultants to help improve planning, operation and management of the interconnected power system is lagging and reporting, especially on financial matters, has been deficient; accordingly, financial performance of some of the borrowers is in doubt. Also, in response to the principles of self-management, certain of the borrowers have reorganized and further reorganizations may be expected, complicating the task of assessing financial performance. Cost overruns of about 50 percent are expected to be met from loans from the Federal Republic of Germany and the borrowers' own resources.

Loan 894 Agricultural Industries (Macedonia): US$31 million Loan of May 25 1973; Closing Date: December 31, 1978.

Forty-two of the expected 43 social sector subloans, and 35 private sector subloans (81 percent of the amount allocated) have been approved by the lending institution. Private sector demand for subloans already exceeds fi- nancing available under the project. Four social sector sub-projects have been completed and twenty-nine are under construction. Progress is being made on the three studies encompassed by the project. ANNEX II Page 5

Loan 916 Naftagas Plpeline: US$59.4 million Loan of June 25, 1973; Closing Date: June 30, 1977.

This loan became effective on March 22, 1974, after about four months' delay. Bids received on pipes and equipment exceeded appraisal es- timates and civil works costs have increased so that project costs are now about 93 percent above the appraisal estimate. Additional local finance for civil works is being arranged but little additional foreign finance for pipes and equipment is available. Discussions continue with the Borrower to trim the project of its less essential items and to revise the implementation schedule for the reduced project.

Loan 947 Kikinda Iron Foundry: US$14.5 million Loan of November 30, 1973; Closing Date: March 31, 1978.

This loan was declared effective oi-iMay 28, 1974 after four months delay, which was primarily due to the extra timne required for the ratification of the Guarantee Agreement by the Federal Assembly. Project implementation is proceeding on schedule.

Loan 966 FOB Iron Foundry: US$15.0 million Loan of February 22, 1974; Closing Date: December 31, 1977.

This loan became effective on May 28, 1974. Project implementation is proceeding on schedule and disbursements are underway.

Loan 965 IMT Tractor Factor Expansion: US$18.5 million Loan of February 22, 1974; Closing Date: December 31, 1977.

This loan became effective on June 11, 1974. Project implementation is proceeding on schedule and disbursements are underway.

Loan 990 Sixth Highway: US$30.0 million Loan of I1y 31, 1974; Closing Date: December 31, 1977.

This loan was declared effective on December 10, 1974. Project implementation is proceeding on schedule and disbursements have begun.

Loan 1012 Macedonia/Kosovo Industrial Credit: US$28.0 million Loan of June 21, 1974; Closing date: December 31, 1978.

This loan was declared effective on December 19, 1974 and five subprojects including three below the free limit have been approved for dis- bursements. ANNEX II Page 6

Loan 1013 Bosnia Herzegovina/Montenegro Industrial Credit: US$22.0 million Loan of June 21, 1974; Closing date: December 31, 1978.

This loan was declared effective on December 19, 1974 and six sub- projects (including three below the free limit) have been approved for dis- bursements.

Loan 1026 Fourth Railway: US$93 million Loan of July 10, 1974; Closing Date: December 31, 1977.

This loan was declared effective on February 12, 1975 and disburse- ments have begun. Only about half the investment expenditures planned for 1974 were incurred, due partly to delays in Loan effectiveness and delays in deliveries of traction and rolling stock. However, physical execution is ahead of expenditures due to good progress in track overhaul.

Loan 1060 Port of Bar: US$44.0 million Loan of December 11, 1974; Closing Date: June 30, 1978.

This loan was declared effective on June 13, 1975. AN1NEX III Page 1

YUGOSLAVIA: SEVENTH HIGHWAY PROJECT

Loan and Project Summary

Borrowers: The Republic Community for Roads of the Socialist Republic of Slovenia, Association of Enterprises for Roads of the Socialist Republic of Serbia, Self-Managing Republic Interest Community for Roads of the Socialist Republic of Montenegro.

Guarantor: The Socialist Federal Republic of Yugoslavia.

Beneficiaries: An appropriate share of the US$100,000 for training in the preparation of highway feasibility studies (Part II of the project) would be relent to the other road or- ganizations that are not borrowers. The proposed bene- ficiaries' shares would be determined by the expenditure in this category incurred for their benefit or for insti- tutions located in their territory.

Amount: US$40.0 million, equivalent, in various currencies.

Terms: Amortization in 23 years, including a 3-1/2 year grace period, with interest at 8-1/2 percent.

Relending Terms: Same as for Bank loan.

Project The project would comprise: Description: (a) the construction and supervision of the following highway sections:

(i) in the Republic of Slovenia, a four-lane divided highway between Dolgi-Most and Vrhnika (11.4 km);

(ii) in the Republic of Serbia, a four-lane divided highway between Surcin (airport) and Belgrade (8.0 km) and between Belgrade (Ring Road) and Mali Pozarevac (21.5 km);

(iii) in the Republic of Montenegro, a two-lane high- way between Titograd and Niksic (49.4 kim).

(b) the provision of 12 nianmonths of training in the preparation of highway feasibility studies. ANNEX III Page 2

Estimated Cost: US$ '000 Local Foreign Total

Construction of Highways Slovenia 17,604 7,545 25,149 Serbia 20,864 9,818 30,682 Montenegro 16,886 8,050 24,936 Subtotal 55,354 25,413 80,767

Training 23 87 110

Contingency Allowances Physical 5,536 2,541 8,077 Price 19,487 8,959 28,446 Subtotal 25,023 11,500 36,523

Total Project Costs 80,400 37,000 117,400

Financing Plan: US$ Million Percent of Equivalent Total

Road Organizations 77.4 66 IBRD Loan 40.0 34

117.4 100

Estimated Disbursements:

Amount (US$ million) IBRD Fiscal Year Annual Cumulative

1976 3.8 3.8 1977 9.2 13.0 1978 17.0 30.0 1979 10.0 40.0

Procurement Construction contracts on the basis of unit prices would Arrangements: be awarded after international competitive bidding in accordance with the Bank's Guidelines for Procurement. Prequalification procedures for all three subprojects began in June 1975. Bids for the construction contracts would be invited in August 1975 and contracts are ex- pected to be awarded in December 1975. The contracts would include price escalation clauses and are expected to be won by Yugoslal" construction enterprises. Retro- active financing for the preparation works for a tunnel in Montenegro would be included.

Rate of Return: The most probable economic rates of return for individual highway sections would vary from 15 to 49 percent. ANNEX III Page 3

Technical Assis- 12 manmonths to train and assist the staff of the tance (Consul- Republic and Provincial Road Organizations and related tants): institutes in the application of guidelines for the preparation of feasibility studies for major highways and in overall highway planning.

Estimated Project Completion Date: December 31, 1978

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