ReportNo. 3585-HU Hungary: Investment Issues and Options (In Two Volumes) Volume If: Sectoral Annexes Public Disclosure Authorized August25,1986 Europe,Middle East and North Africa Region FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Thisreport hasa restricteddistribution and may be usedby recipients only in the performanceof their officialduties. Its contentsmay not otherwise be disdosedwithout World Bankauthorization. CURRENCY EQUIVALENTS Currency Unit : Forint (Ft) October 1981: Ft 35.0 = US$ 1.00 Ft 1 billion = US$ 28.57 million June 1984: Ft 49.05 = US$ 1.00 Ft I b. = US$ 20.39 m. March 1985: Ft 50.88 = US$ 1.00 Ft I b. US$ 19.54 m. March 1986: Ft 46.71 = US$ 1.00 Ft I b. = US$ 21.41 m. Hungary Fiscal Year: January 1 to December 31 Weight and Measures: Metric System FOR OMCILL USE ONLY TABLE OF CONTENTS VOLUME TWO ANNEXESON SECTORALINVESTMENTS: POLICIES AND PROGRAMS ANNIEX Page No. I. MANUFACTURING .................................... 1 A. Recent Performance ......................... 1 B. Technological Development ................................. 4 C. Investment Plans for 1986-90 ............................... 6 D. Projects under Consideration for 1986-90 .... ........... 7 a. Metallurgical Industries ............................... 7 (i) Iron and Steel .................................. 7 (ii) Aluminium ....................................... 8 (iii) Other Non-Ferrous Metal Industries .... .......... 8 b. Engineering ............................................ 9 (i) Vehicles and Transport Equipment ................ 9 (ii) Telecommunications......................... .0..... (iii) Other Engineering Industries .................... 10 c. Chemical Industries .................................... 10 d. Light Industry ......................................... 11 e. Food Industries ........................................ 13 II. ENERGY ..................................................... 14 Introduction ............................................... 14 A. Lessons of Recent Experierice............................... 15 a Effectiveness of Energy Demand Management .... .......... 15 b. Constrained Domestic Energy Production ................. 15 c. Flexibility in Planning ................................ 15 B. Sector Issues ....................... .......................17 a. Energy Pricinr . .........................................17 b. Future of Cncrgy RationalizationCredit Facility ....... 22 c. Energy Demand Projections .............................. 24 d. Labor Constraints on Coal Production ................... 29 This document has a restricted distribution and may be used by recipients only in the performance | of their officialduties. Its contents may not otherwise be disclosedwithout World Bank authorization. Page No. C. Energy Investment Program............................. 31 Overview ................................................ 31 a. Power Subsector ........................................ 34 b. Coal Subsector ......................................... 40 c. Petroleum Subsector .................................... 43 d. Energy Sector Financing ................................ 45 III. AGRICUTTUR...47 Introduction ............................................... 47 A. Brief Overview of Hungarian Agriculture .... ................47 B. Growth and Profitability in Agriculture .... ................48 C. Agriculture in the Seventh Plan ............................ 50 a. Management Reform .51 b. Wages and Incentive Proposals. 51 c. Pricing Issues .52 (i) Outputs and Inputs .52 (ii) Land Pricing .55 (iii) Recommendations .55 D. Investment Policies and Plans .............................. 58 a. The Volume of Investment .58 b. Sources of Finance .60 (i) Own Resources .60 (ii) Credit .61 (iii) Subsidies/Grants .61 c. The Technical Composition of Investments in Agriculture .62 d. Investment Priorities .62 (i) Land Reclamation and Irrigation .63 (ii) Small Scale Farming .64 E. Marketing Institutions .65 AMNEX Page No. IV. RANSPORT, COMMUNICATIONS AND WATER ........................66 A. Inter-Urban Transport ......................................66 Introduction ............................................... 66 a. Strategic Considerations in the Choice of Transport Investments ..... ........................ 70 (i) Railways ..............................................70 (ii) Roads ......................... ........................ 72 (iii) Energy Conservation ................................... 73 b. Transport Investment in the Seventh Five-Year Plan 73 (i) The Railway (MAV) Investment Plan (1986-90) ..... 75 (ii) Highway Investment Plan (1986-90) .... ........... 79 c. Other Transport Investment (1986-90) .... ............... 82 (i) Road Transport ................. ................. 82 (ii) River Port and Shipping ..... .................... 82 (iii) Aviation ........................................83 (iv) Private Cars .................. .................. 83 B. Urban Transport .. 86 Background .. 86 a. Investment Proposals for the Seventh Plan .88 (i) Trolley Buses vs. Conventional Buses .89 (ii) Extension of the Budapest Metro .89 b. Pricing Policy .. 90 C. Postal Services and Telecommunications .91 General Context ........................ 91 a. Investment During Seventh Plan 95 b. Main Policy Issues .. 97 ANNEX Page No. (i) Rate of Expansion of Telephone Services .... ..... 97 (ii) Expansion of Telex Service ...................... 98 (iii) Digital Main Telephone Exchanges ................ 98 (iv) Distribution of New Telephone Capacity .... ...... 98 (v) Mechanization of Traditional Services .... ....... 98 (vi) New Project Idea: Postal Checking .... .......... 99 D. Water Management ........................................... 99 General Context ............................................ 99 a. Recent Investment ...................................... 99 b. Finance ................................................ 101 c. Pricing ................................................ 102 d. Investment Proposals for the Seventh Plan .... .......... 102 e. Major Policy Issues .................................... 104 V. HOUSING, CONSTRUCTION AND BUILDING MATERIALS ............... 105 A. Eousing ....................................................105 Introduction ............................................... 105 a. The Present Situation .................................. 107 b. Recent Policy Changes .................................. 114 c. Weekend Houses ......................................... 117 d. Investment Issues for the Seventh Plan ................. 119 e. Major Policy Issues .................................... 122 B. Construction ............................................... 125 a. Investment in the Seventh Plan ......................... 125 b. Major Policy Issues: Implementation Delays .... ........ 126 C. Building Materials .................... ..................... 127 a. Major Policy Issues .................................... 128 b. Investment During the Seventh Plan ..................... 128 VI. EDUCATION AND HEALTH .................................... 130 A. Education .130 Introduction ........ 130 ANNEX Page No. a. Major Policy Issues .................................... 133 (i) Facing the Secondary Bulge ....................... 133 (ii) Pricing and Priorities in Education .... ..........135 b. Sixth Plan Investment .................................. 137 c. InvestmentsDuring the Seventh Plan .................... 138 B. Health ..................................................... 140 Introduction ............................................... 140 a. Major Policy Issues .................................... 141 b. Investment During Seventh Plan ......................... 144 VII. TOURISM AND CULTURE ....... ............. ....................147 A. Tourism ....................................................147 General Context ........ .............. ......................147 a. Investment in the Seventh Plan ......................... 151 B. Culture .................................................... 153 a. Pricing ................................................ 154 VOLUME II TABLES Table Page No. 1.1 Selected Indices of IndustrialPerformance ................... 1 1.2 Gross Fixed Investment in Manufacturing,Fifth, Sixth, and Seventh Plans.. 3 1.3 Manufactuxing- Projected Investmentsby Subsector, 1985-90 ................................................... 6 1.4 Chemical Industry - Estimated Investment Programs, 1981-84 and 1985-90.12 2.1 Energy Producer Prices ...................... 19 2.2 Consumer Energy Prices .20 2.3 ResidentialEnergy Consumption per Square Meter of Dwelling Area .21 2.4 Per Capita Energy Expenditure as a Percentage of per Capita Total Expenditure, 1982 .22 2.5 Energy RationalizationProgram Credits approved up to December 31, 1984 ...........................................24 2.6 Value of Energy Savings Credits Approved up to December 31, 1984 .................... 25 2.7 Growth Rates of Final Energy Consumption by Sectors .28 2.8 Changes in Energy Intensity and GDP Elasticities .29 2.9 ElectricityConsumption Forecast.30 2.10 Structureof the Household Electricity Consumption.31 2.11 Age Distribution of Men Employed in the Energy Sector, 1981 ... 33 2.12 Distributionof Energy Investment by Subsector. 34 Table Page No. 2.13 Suumnary Energy Balance ........................................ 35 2.14 Power Subsector Investment Program, 1981-85 ................... 37 2.15 Power Station Refurbishment Program ..........................