World Bank Document...IPTANA Road, Water and Aerian Design Institute ISP,IF Land Reclamation Design...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 2676a-RO

STAFF APPRAISAL REPORT

DANUBE-BLACK SEA CANAL PROJECT

ROMANIA

December 20, 1979

Projects DepartmentEurope, Middle East and North Africa Region

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

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CURRENCY EQUIVALENTS

Currency Unit: Leu (plural lei)

1. Official Rate

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

2. Tourist Rate

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

3. Conversion Rate for Traded Goods

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

The Official Exchange Rate of lei 4.47 per US$1 is used only for accountingpurposes. The rate used for tourist transactions is lei 12 per US$1, havingbeen revalued from a rate of lei 14.38 per US$1 in October 1974. Beginningin March 1978 a trading rate of lei 18 per US$1 has been used to convert thepriceq of all traded goods; this rate is considered representative of theaverage 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 tonsDBSCC Danube-Black Sea Canal Centralcmt Cargo metric tonsCONTRANSIMEX State Company for Foreign TradeDWT Department of Water Transportdwt Deadweight tonsIB Romanian Investment BankICH Hydrotechnical Research InstituteIPTANA Road, Water and Aerian Design InstituteISP,IF Land Reclamation Design and Research InstituteITFG Enterprise for River NavigationLDN Lower Danube NavigationmlTc Ministry of Transport and TelecommunicationsSPC State Planning Committee

The Administration Danube-Black Sea Canal Administration (the canal operatingenterprise)

ROMANIAN FISCAL YEARJanuary 1 to December 31

FOR OFFICIAL USE ONLY



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 THEBORROWER ................................................ 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 theAdministration ........................... 9

Annex 2.2 Provisional Organization Chart, CanalAdministration ........................... 11

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

A. Inland Waterway Subsector Investment Program ... ..... 12B. 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 document has a restricted distribution and may be used by recipients only in the performanceof their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Table of Contents (Cont'd) Page No.

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

Annex 3.1 Other Essential Investments .... .......... 23Annex 3.2 Project Description - Further Details

and Information .......................... 25Annex 3.3 Summary of Studies and Design Work

for the Canal ............................ 27Annex 3.4 Implementation Schedule and Critical Path. 28Annex 3.5 Project Cost Estimate .................... 29Annex 3.6 Foreign Exchange Component .... ........... 30Annex 3.7 Equipment to be Incorporated in the

Project and Suitable for Bank Financing 31Annex 3.8 Construction Equipment Recommended for

Bank Financing ........................... 32Annex 3.9 Estimated Schedule of Loan Disbursement 33

IV. ECONOMIC EVALUATION ..................................... 34

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

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

V. FINANCIAL AND TARIFF ANALYSIS - DANUBE-BLACK SEA CANALADMINISTRATION .......................................... 49

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



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 squarekilometers. It is bordered by Bulgaria to the south, Hungary and Yugoslaviato the west, and to the north and northeast by the USSR. The Black Sea liesto the east providing Romania with a 245 kilometer-long coastline. Alongmuch of its southern border flows the Danube, the most important navigableriver in southeast Europe.

1.02 Romania's topography consists of three principal relief zones ofapproximately equal size. In the middle of the country lie the Carpathianmountains rising to over 2500 meters. Around this mountain range there arehills and tablelands ranging in height from 500 to 200 meters. The thirdrelief zone consists of the lowlands located in the western and southernregions of the country.

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

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

1.05 No data have been available on "own transport" services (owned onlyby State enterprises) to determine their extent although they are relativelyminor. Ignoring these services and movement by private cars, rail is the mostimportant 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 thetotal 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 requiresubstantial additions to the available capacity in the near future.

1.09 Transport coordination is achieved through discretionary controlswithin the framework of the comprehensive transport planning process discussedabove. Each user of transport services is required to specify both histransport needs and the mode he desires about a year in advance. His specifi-cations are reviewed by the authorities and often accepted. Users are allowedto revise their demands downward, without penalty, if the request is made 10days before the service is required. Monthly reviews are made of transportrequirements and modal allocations are revised according to departures fromthe plan. However, although the choice of mode is made initially by transportusers, in practice the allocation of traffic to different transport modes isdetermined by the overall transport investment program. No extensive data areavailable at present to determine the nature of the relationship betweentransport prices and the cost of providing them, but in interpreting transportdemands for investment requirements, the Romanian authorities base decisionson general cost characteristics of alternative modes as well as types ofcommodities and haul lengths involved. As a result, there is little evidencesuggesting 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 hasits 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 toDWT.

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

(d) The Enterprise for River Navigation (ITFG), also known asNavrom Galati, with headquarters at Galati and subordinatedto DWT. It is responsible for:

-4-

(i) operating the three river ports for oceangoing ships

at Tulcea, Galati and Braila, and for normal cargooperations at Sulina;

(ii) stevedoring, shore-handling and loading and unloadingof 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 industrialenterprises own their own barges); and

(iv) passenger river transportation.

(e) The River Administration of the Lower Danube (AFDJ). Thisis a Government Agency of DWT, responsible for operating and

maintaining the ship canal between Sulina and Tulcea (theSulina Canal) and for providing pilotage as well as for

operating the Lower Danube Navigation (LDN) between Sulinaand 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. Thereare 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 (onthe Black Sea) to Tulcea, and was constructed about 100 years ago, enablesoceangoing ships, drawing a maximum of 7.0 m over the Sulina Bar, to navigateup river about 175 km to Galati and Braila, where cargoes are transshipped tobarges. In recent years, with the rapid growth in cargo volumes, particularlydry bulk, the draft restriction at the Sulina Bar has inhibited the use oflarge bulk carriers, thus imposing heavy uneconomic transportation costs.Despite the rapid growth in cargo volumes, particularly dry bulk, the role ofthe Danubian waterway system in Romania is at present limited to about 3% ofthe total ton-km of total cargo movements.

1.13 Because of the extended shallow berm created by siltation from theDanube and the effect of the southerly flow of the littoral drift, it is notpracticable or economical to relieve the situation by constructing a deep-water port at Sulina for the accommodation of large bulk carriers. Initialinvestment costs would be extremely high while substantial recurring costswould be incurred in maintaining adequate water depths. Such a possiblealternative was therefore discarded. On the other hand the deep-sea port ofConstanta on the Black Sea is beyond the influence of the delta and can beexpanded southward. Romania has for some years therefore been planning toconstruct 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 uneconomicLDN. Work started in 1976 on the project. The linkage provided by theproject will enable Romania to avoid the heavy uneconomic transport costs thatare increasingly hindering its industrial development. The elimination of thelimitations on the use of the LDN system will also open the river for growthin international transit traffic, which is at present inhibited from usingthis sea access. Romania has requested the Bank to assist in financing theproject, 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 thetransport sector in Romania. A clearly defined Bank strategy has not as yetemerged because of the present lack of detailed and comprehensive knowledgeof the sector within the Bank. However, the project has provided the Bankwith an introduction to the sector and the principal issues facing it, and,in the future, the Bank could make significant contributions toward soundand rational transport policies and investment programs and implementationof those programs. Indeed, the Bank has already contributed to the moreefficient implementation of the present project (para 3.07). On a broaderaspect, the proposed loan would help to develop further Romania's access tointernational capital markets, through co-financing, already successful inBank projects in other sectors.

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II. THE DANUBE-BLACK SEA CANAL ADMINISTRATIONAND THE BORROWER

A. Organization and Management of the Canal

2.01 The canal project is unique to Romania, unprecedented in its sizeand nature. Because of the extremely large investment and substantial eco-nomic benefits of the project and its long economic life, the Governmentdecided that it should be entrusted to a new separate entity that will operatethe canal on an economically and financially viable basis. The Bank agreeswith 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 offinancial self-sufficiency and operated pursuant to legal provisions for theorganization and operation of State enterprises. An English translation ofthe Decree is given in Annex 2.1. Mr. Niculai Zeicu was appointed Directoron 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 hasto be a "beneficiary" of an investment that has certain duties and obligationsduring 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 completeand ready to take over operations as soon as the canal isopen to traffic.

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

2.03 Until commencement of operations on the canal the Administrationis 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 installationsand other equipment to be incorporated in the project; alsoport 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 theproject) will be operated by the Administration or be handed over to otherexisting enterprises, e.g., Navrom Galati and IEPC. An organization chart forcanal operations is given in Annex 2.2. In any event the accounting recordsof 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) andguaranteed by the Republic of Romania. The IB is the specialized agency,under the Ministry of Finance, for investment projects in all sectors of theeconomy 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 commencesin the preparation phase of a project; its staff appraises all major invest-ment projects technically and financially and recommends approval or otherwiseof their financing to the Government. When a particular project and itsfinancial plan have been approved by the Council of State, all major funds arechanneled through the IB in accordance with the approved financial plan. Allpayments for the execution of a project have to be authorized by the IB whichkeeps separate accounts for each category in the financial plan for everyenterprise. It is the IB's obligation to ensure that a project: is executedaccording to the financial and technical data included in the final technicaland economic study approved by the Council of State. Its inspectors checkwhether the project is proceeding according to the schedule approved in theplan.

C. International Traffic

2.06 International traffic on the River Danube is regulated by theDanube Commission, under the Convention of 1948, which subjects the Danube toa 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. TheRomanian Government states that the canal will be a national waterway and notbe 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 anon-discriminatory basis, and the Government has given the Bank a letter tothis effect.

- 9 - ANNEX 2.1



ROMANIA

Translation of the Decree Creating the Administration

DECREE

regarding the establishment of the Danube-Black SeaCanal 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 requiredfor operation and ensures their reception;

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

(c) contracts design documentations, verifies and approves theexecution 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 fornavigation, 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, aswell as installations for information feed-back that con-tribute to the safety of navigation and water management onthe canal;

(1) ensures all operation and maintenance activity.

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

Article 4: Expenditures for the operation of the Danube-BlackSea Canal Administration, including the training up to the commissioning ofthe 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 indicatorsapproved by the Ministry of Transport and Telecommunications for the transpor-tation sector.

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

PRESIDENTNICOLAE CEAUSESCU

Bucharest, May 12, 1979No. 180


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

| Central Dispatching Organization and Labor

of the Cnal P rotection Dept.

| Operation and Water |Personnel Remouneration_ManS ameolt De artmPtenI I

Hydroterhmical JunctionsOperation DePartrent I Juridic Office

Electronic Sign. nd Telecot. PRODUC T V E U N I T S

|_Installation 0perntion Det. Administratlion Dept

_ | Techoicna Pleet. Equipment & | Canal Cernavoda Agigea Sign, and

Tras. M asOEat oD . Op-rtinJunctinJtioion- Telecom Protoco. Dept.

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 DIRECTIONCHIEF ACCOUNTANT

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

l t InstallationnMaintennnceDept.am u h' . 01 C C3nt lDet.3l1]1I>|II nI__ Wa n Supp

Nhydritechnical .

Maintenance Dept. 5.0 N 444 -, -0 c...tig ept

Electr. Sign., Telec-m and Lb . 5 5 .0 .0 p a 0.0 . j

Source:~~~~~~~~~L DDC 11

Installations Mainnc pt. t

Techn ical Fleet Eq.ips.eot and 544 444 4. 4. 40 0 4. 00. 0 4 0 5. f which

Maintenan e D.F. .00 0tn 0 -5 m .4Technical Ad.n. PersonnelMaintenance De 1. 440 33 . 4~~~ 443 N44 EN 443 3 4443 4-~~~ 04 TOTAL Worker- octoa Prod ive

C1_hief Mechanic

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 projectcanal. It includes the following additional investments, all of which areessential to the operation of the canal, which are included in the economicanalysis:

CostUS$ Million

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

Total 681.1

Further information is given in Annex 3.1 and the economic analysis, ChapterIV. During loan negotiations, the Government agreed that the other essentialworks necessary for the canal shall be completed to the extent necessary tohandle the forecast traffic from the time it shall be opened to throughtraffic.

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

B. Project Objectives, Dimensions and Timing

3.03 The principal objective of the project is to provide low-costinland waterway transportation for large and rapidly growing volumes of bulkraw materials needed for Romania's growing industries and which will alsoencourage and facilitate the growth of international transit traffic. It isdesigned to eliminate the restrictions and uneconomic costs imposed by the LDNon inland cargo movements by constructing a 64-km canal from Cernavoda, on theDanube, eastward to a point just south of the Port of Constanta (Romania'sonly 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 bulkcarriers of up to 150,000 dwt and a barge transshipment terminal. The canal isdesigned 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 perconvoy. In addition, three ports will be constructed along the length of thecanal at Cernavoda, Medgidia and Basarabi.

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

3.05 Construction of the canal and its supporting facilities startedin 1976. They will be open to through barge traffic between the Danube andAgigea by the end of 1982 and are scheduled for completion by 1984. The first36 km (from Cernavoda) are superimposed on the existing Carasu irrigationchannel 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 ofwhich 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 atwater surface between Cernavoda and the Danube and SouthConstanta-Agigea on the Black Sea.

(ii) The Locks

Construction of two identical locks at Cernavoda andAgigea. Each lock has: (a) two chambers 310 m longand 25 m wide; (b) walls and base of heavily reinforcedconcrete; and (c) double drop-type gates ateach end.

(iii) Canal Ports

Construction of three canal ports at Cernavoda, Medgidiaand Basarabi.

(iv) Utilities

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

- 14 -

connections, installation of power, electricity, water,drainage, sewage facilities, pipelines for fuel transportand telecommunication systems and provision of equipmenttherefor.

(v) Buildings

Construction of administration buildings needed forcanal construction and operation and a building forCernavoda pumping station.

(vi) Reinstallation of Affected Facilities

Replacement, reconstruction or relocation of existingtransport, irrigation and other facilities that have tobe removed or destroyed as a result of canal construction.

(b) Equipment

- Provision of equipment for operating the lock gates, formoving 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 floatingbuoys, signaling installations, navigation control system,water management information system and automated coordinatingsystem for the needs of irrigation, navigation and canaloperation.

(d) Expropriation, Reclamation and Compensation

(i) Reclamation of about 2,800 ha of agricultural land toreplace about 5,200 ha to be occupied by the proposedcanal. 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, housingfor 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 theDanube-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 byRomanian Construction Trusts, or Centrals, which are experienced and familiarwith local conditions and regulations. This practice is acceptable to theBank since, because of regulated wages and material prices, Romanian construc-tion costs are likely to be lower than those that would be submitted byforeign contractors under international competitive bidding (ICB).

3.12 DBSCC is under the direction of a Deputy Minister of MTTc, whohas overriding powers over all authorities related to the construction ofthe canal. He has wide experience and an outstanding reputation acquiredthrough responsibilit'y for several projects of comparable magnitude andcomplexity. DBSCC employs about 15,000 workers including about 1,000 quali-fied engineers; these will be increased to 30,000 and 1,500 respectively by1980. 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 Governmentor 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 forsupervision and control of the project. Local institutes, principally IPTANA,involved in the design will continue to provide technical assistance to DBSCCduring the construction period, as well as supervision and quality control, toensure that work is carried out satisfactorily and in accordance with agreedplans 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 forfinal completion in early 1984. However, the implementation schedule isplanned to ensure that barges can transit the length of the canal by the endof 1982. Achievement of these goals is conditional upon the availability indue time of (i) adequate numbers of highly productive construction equipmentand (ii) construction materials. During loan negotiations an undertaking wasobtained from the Government that (i) the necessary construction equipmentwill be made available on site by the end of 1981 to ensure the opening of thecanal 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$1,750million 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, isestimated as follows:

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

1976 46 20 66 2.6 1.1 3.71977 991 560 1,551 55.0 31.2 86.21978 1,869 851 2,720 103.8 47.3 151.11979 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 6,061 231.4 105.3 336.71981 4,730 2,153 6,883 262.8 119.6 382.41982 4,506 2,052 6,558 250.3 114.0 364.31983 1,777 810 2,587 98.7 45.0 143.71984 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 forSocial 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 of1979, the Government will have committed the equivalent of US$229.5 million inforeign exchange. The proposed Bank loan amounts to US$100 million. Judgingby the response of co-financiers to other Bank-financed projects in Romaniait is expected that offers of co-financing will be obtained. They would be inthe form of direct Bank loans and not suppliers' credits which would not be arational possibility for this project. The amount and timing of co-financingwill depend on market conditions and on the amounts and timing of co-financebeing 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 ofUS$150-200 million equivalent. The terms may be affected by Ronania's recentweak balance of payments position.

- 19 -

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

US$ million % of % ofequivalent 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 68.5Total 1,750.0 100.0

3.22 The Bank should continue to assist the Government in obtainingco-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 bitumenand 70,000 t of reinforcing steel at a total estimated cost of US$35 millionequivalent.

Construction Equipment

3.26 The considerable quantities of additional construction equipmentneeded 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 totalestimated cost of US$40 million equivalent which will be financed by theBank (Annex 3.8).

Project Items Suitable for Bank Financing

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

Category US$ million

1. Equipment to be incorporatedin the project 25.0

2. Construction materials 35.03. Construction equipment 40.0

Total 100.0

During negotiations it was agreed that items costing US$100 million equivalentincluding contingencies would be procured following international advertisingand competitive bidding in accordance witn the "Guidelines for ProcurementUnder World Bank Loans and IDA Credits - March 1977". Romanian manufacturersand suppliers would be allowed a preference of 15 percent or the applicablecustoms duty, whichever is lower. It is estimated that foreign suppliers wouldwin contracts estimated to cost about $5 million principally for specializedmachinery and equipment for the lock gates. Other items to be procuredthrough TCB (about $95 million) are available domestically and, based onexperience with previous Bank-financed irrigation and power projects, it isexpected that Romanian manufacturers and suppliers would be successful inbidding for most of these items. The balance of equipment and constructionmaterials would be procured under Romanian procedures and would not be eligiblefor disbursement under the proposed Bank loan.

Bank Financing

3.28 During loan negotiations agreement was reached on items above forwhich the loan will be disbursed. Disbursement would be 100% of foreignexpenditures or 100% of ex-factory expenditures. There will be no retroactivefinancing 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 15,000men and women in 1979, including about 1,000 engineers. These numbers areexpected 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 700persons.

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. Studiescarried out by specialized Romanian institutes concluded that the canal'sfresh water would have no adverse effects on biotic conditions in the sea andthe canal-sea connection. A physical planning model study was prepared tostudy means for preservation and relocation of historical and archeologicalmonuments.

3.36 The canal will contribute to minimizing pollution by reducing trans-port fuel consumption substantially, as compared to an alternative railwaytransport system. It will allow the productive utilization of excavated earthfor improving the quality of poor soil in the adjacent areas, prevent floodsby controlling water in the valleys of about 28 tributary streams, and createan environment attractive to tourists. The canal region is the driest and oneof the poorer regions in Romania. Flood control and water storage systemswill help in saving crops during flood and drought seasons. The canal,because of fluctuating supplies of water from the Danube and tributary valleysand the system of irrigation works, would inhibit mosquito breeding and thespread of malaria. The existing Carasu irrigation canal, upon which the first34 km of the canal are based, needs about 140 m3/second of water, whereas thetotal quantity needed for the canal after its completion is estimated at 190m3/second. The difference of 50 m3/second to be taken from the Danube is notlikely to adversely affect the water level in the lower parts of the riverbecause its rate of discharge at Cernavoda reaches a minimum of 2,000 m3/secondand a maximum of 10,000 m3/second.

Regional Development

3.37 The project conforms to the planned regional development scheme forthe southeastern part of Romania. It will stimulate economic activity andgenerate new employment opportunities. It will improve agriculture locally,encourage tourism and generally enhance the amenities and quality of life inthe region.

- 23 - ANNEX 3.1Page 1



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 withinnew 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 foran oil terminal and for further general and bulk cargo

facilities in the future. The part of the port designedfor canal traffic consists of: (i) a basin of about 180 hafor 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 reclamationof about 700 ha using about 130 million m3 of soil excavated

from the canal site. Work is underway, construction beingby 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 7,122million (US$395.7 million equivalent).

(b) Danube Ports and River Improvements. Construction ofadditional port facilities at the Danube ports of Galati andCalarasi and deepening and improving the curves in certain

sections of the river between Cernavoda and each of theabove 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 bydredging about 5 million m3, and construction of berths2,000 m long. Work at Galati involves construction of

berths 1,200 m long. Deepening the river Danube betweenCernavoda and Calarasi and between Cernavoda and Galati and

- 24 - ANNEX 3.1

Page 2

improving curves therein involves dredging of about one

million m3. Work is progressing. Total cost is lei 1,808million (US$100.4 million equivalent).

(c) New Barge and Pusher Fleet. The composition of the newbarge and pusher fleet needed to transport the canal trafficforecast to the year 2000 has been calculated on the basisof origin and destination data. The fleet will be con-structed in Romanian yards. Numbers and estimated costs asfollows:

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

Barges 2,000 dwt 25 4.5 112.5 6.252,500 dwt 106 5.4 572.4 31.803,000 dwt 308 6.3 1,940.4 107.80Subtotal 439 2,625.3 145.85

Pushers 600 hp 6 10.0 60.0 3.33800 hp 1 11.0 11.0 0.61

1,640 hp 12 15.0 180.0 10.002,400 hp 20 22.8 456.0 25.34Subtotal 39 707.0 39.28Total 3,332.3 185.13

Phasing of expenditure to conform to traffic growth requirementswould be:

Lei million US$ equiv.

to 1982 1,676.0 93.111983 237.7 13.211984 272.1 15.121989 323.3 17.961999 823.2 45.73Total T,332.3 185.13

- 25 - ANNEX 3.2

Page 1



ROMANIA

Project Description

Further Details and Information

Para. 3.06(a)(i) - The canal is about 64 km long, 7 m deep, 70 to90 m wide at the bottom and 95 to 135 m wide at water surface. The canalbottom 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 875km2. The project provides for the control of the high water from 28 tributaryvalleys by gradually moving it to storage basins. About 44 km are of straightsections 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 sideslopes are well designed and totally protected by bitumen sealing or concretewalls, as appropriate, mainly to avoid the effects of waves from passingvessels. The canal has a safety coefficient of 4.0 to 4.3 and a blockingcoefficient of 7.4 to 8.2; these coefficients are adequate and in accordancewith international norms. The canal is designed to allow barge convoys topass in opposite directions.

Para. 3.06(a)(ii) - The Locks. Water flows by gravity from theDanube to the canal through a channel outside Cernavoda lock. In rare caseswhen 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 pumpwater into the canal. At Agigea, water flows by gravity from the canal to theBlack Sea through reinforced concrete culverts and sluice valves without theneed for a pumping station.

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

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

Medgidia port will handle about 5 million t annually in 1985and a maximum of 16.5 million t in 2000. It will receive mainly 5 million t

- 26 - ANNEX 3.2Page 2

of coal annually for the Medgidia power station, 2.5 million t of cementto be produced annually by 1990 by the Asbocement Combine Company, rawmaterial 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 andunloading berths and 950 m of waiting berths, as well as for cargo-handlingequipment, transit sheds, repair shops and convoy assembly water area.

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

Para. 3.06(a)(vi) - Reinstallation of Affected Facilities. Theseinclude four main overhead road bridges at Cernavoda, Medgidia, Basarabi andAgigea; four railway overhead bridges at Cernavoda, Medgidia, Agigea andacross the Poarta Alba-Midia (km 37) irrigation canal; as well as telecommuni-cations, railway, road, electricity, water, gas and oil systems. The projectalso provides for the recovery of the affected irrigation system and theconstruction of a new irrigation system at the reclaimed areas and a drainagesystem for the affected areas at the Carasu Valley. Bridges are designedwith adequate clearance for all barges and tugs that will use the canal.

- 27 - ANNEX 3.3



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 againstfrost, flood and erosion;

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

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

(5) Studies for automatic control, navigation security, flood andwater control; management information system and optimizationof 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, theHydrotechnical Research Institute (ICH) played a major rolein hydraulic studies and model tests for the canal, convoysystem, 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 surveyof the area.

Bank staff thoroughly reviewed all the above studies and designswith the respective responsible institutes and found them accept-

able.

SIAFF APPkAISAL REPLOT

DANUBE-BILACK SEA CANAL PROJECT

ROMAN IA

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/ rwCanal (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 works a ____ ___ _ _ _ _ ___ __ \ -- _____. -

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



ROMANIA

Project Cost Estimate

-----Lei million----- ---- US$ million------Local Foreign Total Local Foreign Total %

Civil WorksCanal 12,229 5,596 17,825 679.4 310.9 990.3 56.6Locks 1,066 741 1,807 59.2 41.2 100.4 5.7Canal ports 680 663 1,343 37.8 36.8 74.6 4.3Utilities 218 86 304 12.1 4.8 16.9 1.0Buildings 141 3 144 7.8 0.2 8.0 0.4Reinstatement of affectedfacilities 1 424 1,581 64.3 23.5 87.8 5.0Subtotal civil works 15,491 7,513 23,004 860.6 417.4 1,278.0 73.0

EquipmentEquipment cost 826 198 1,024 45.9 11.0 56.9 3.2Installation 220 43 263 12.2 2.4 14.6 0.8

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

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

Miscellaneous, includingSupervision 1,436 - 1,436 79.8 - 79.8 4.6

Studies and DesignStudies and Research 228 - 228 12.7 - 12.7 0.7Design 395 - 395 21.9 - 21.9 1.3Subtotal 19,017 7,767 26,784 1,056.5 431.5 1,488.0 85.0

ContingenciesPhysical 1,712 698 2,410 95.1 38.8 133.9 7.7Price 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 StaffDecember 1979

- 30 -

ANNEX 3.6



ROMANIA

Foreign Exchange Component

US$ Million

1. Equipment on site 165.3

2. Equipment on order from Comeconcountries 18.3

3. Equipment still needed for projectcompletion 168.6

4. Steel reinforcement - 106,250 tx $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



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 StaffDecember 1979

- 32 -ANNEX 3.8



ROMANIA

Construction Equipment Recommendedfor Bank Financing

Unit TotalPricel' Cost

3 No. US$1,000Excavators (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 localor to foreign suppliers), and include spare parts.

Source: IB and Bank StaffDecember 1979

- 33 -

ANNEX 3.9



ROMANIA

Estimated Schedule of Loan DisbursementUS$ million

IBRD Fiscal Yearand Quarter Quarter Fiscal Year Cumulative

1979-80June 30, 1980 5.0 5.0 5.0

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

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

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

Source: Bank StaffDecember 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 theexpansion of basic industries which require large volumes of low-value bulkraw materials. Domestic resources of such raw materials are being depleted atan 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 whichcharacterized the past 25 years will continue to be a feature of the Romanianeconomy in the future.

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

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

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

- 35 -

4.05 The economic evaluation of the project has been carried out in twostages: (i) a least-cost analysis of the canal component compared with arailway system as the next best alternative, and (ii) an estimation of therate of return on the total project as defined above. Because construction ofthe canal and its supporting facilities started in 1976 both analyses werecarried out (i) excluding the sunk costs and (ii) including the sunk costs(capital expenditures made to the end of 1978 are considered sunk costs). Inthe first stage of the economic analysis the canal alternative is found to bethe least-cost solution for discount rates considerably higher than thepresently accepted range of opportunity cost of capital in Romania, even withthe inclusion of the sunk costs. The total project yields a satisfactory rateof return, with and without sunk costs, bearing out the economic rationaleunderlying the project. In both cases results were subjected to sensitivityto variations in traffic volumes and cost parameters. Under each of thesensitivity 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 arelargely the results of analysis of data relating to specific industrialprojects, 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 regardingproduction 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 thepurposes of economic analysis is assumed to be 40 years, traffic projectionsare extended beyond the year 2000 on the basis of annual increases of 2% involumes to allow for normal growth. Traffic forecasts for the project aresummarized below.

- 36 -

Traffic Projections 1985-2000(million tons)

1985 1990 2000

ImportsIron ore 13.50 21.60 20.30Coal 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 1.40Fodder .08 .10 .10

Logs .15 .15 .15Chemical raw materials 1.80 2.00 4.50Total 21.25 32.60 39.33

ExportsRolled products 2.00 2.40 2.80

Cement 1.50 1.50 1.50Cereals .50 .50 .70Other agricultural products .30 .30 .60Fertilizers 3.00 3.00 3.00Chemical products .40 .40 .60Faience, marble .70 .80 1.10Others .60 .65 1.4CTotal 9.00 9.55 11.70

Internal traffic 13.60 22.63 37.07Transit 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 volumeand 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 asteady acceleration in the real growth of foreign trade. The ratio of tradeto 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 theimportance of foreign trade has increased the most. The pace cf industriali-

zation has resulted in depletion of domestic supplies of raw materials. Atpresent 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 externalsector 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-importtraffic, domestic traffic is also expected to increase. During the period1970-77, total freight volume, exclusive of own-transport, increased about 72%from 414 m tons to 713 m tons. With further growth and diversification of theRomanian economy in the 80's, the internal freight movement is certain toincrease at rates equaling or exceeding this rate.

4.09 For the above traffic projections the following categories wereanalyzed. 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 ofthe project investment costs. Therefore, before estimating the rate of returnon the project the canal has been subjected to a least-cost analysis bycomparing it with an alternative land transport facility linking the deep-seaport of South Constanta-Agigea with origin and destination points. Given thata preponderant portion of the forecast traffic is low-value bulk commodities,a railway system is used as the next-best alternative. The railway solutionused in the analysis is designed to move the same forecast traffic volume asthe project, excluding international transit traffic which will only occur inthe forecast volume if the canal is built. Therefore, it is assumed thattransport-related benefits resulting from both the project and next-bestalternative are the same, although the canal yields some minor non-transport-related benefits. In the cost comparison these latter benefits are deductedfrom the cost of the project for the year in which they occur. Because of thelong economic life of the canal and its capacity to accommodate a much largervolume of traffic than that forecast, a 40-year period of analysis has beenused. Bearing in mind less severity of indivisibilities in railways comparedto the canal, the railway investment expenditures are phased parallel to thegrowth of traffic volume.

4.11 Economic costs of both alternatives have been arrived at by borderpricing 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 prevailduring the 1980s. All calculations have been based on November 1979 realprices 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 billionlei for barge and pusher tug fleets) than the railway alternative (about 12billion lei for new lines, marshaling yards and other supporting facilitiesand about 11.9 billion lei for locomotives and freight cars). Inland waterwayand railway transport costs have been estimated on the basis of the optimalmodus operandi established for each major origin and destination point,bearing in mind the volume and type of commodity to be transported. In thecase of barge transport, for a predominant portion of forecast traffic, thetype of operation involves the use of convoys consisting of six barges of 3000dwt capacity pushed by a single pusher tug. Similarly, railway transportcosts are estimated on the assumption that the most suitable type of operationwould be used for each origin and destination point. On these bases, inlandwaterway transport costs are estimated to be about 0.045 letu on the averageper ton/km compared to 0.198 leu by rail. Cost streams on the canal and thenext-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 - 30171984 907 1276 249 - 34211985 410 1505 336 1011 35231990 1026 2068 466 1435 49441995 587 2397 537 - 55882000 1092 2811 621 3000 63932005 90 3088 702 1074 70552010 90 3393 794 1148 77852015 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 tointernational 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 fordiscount rates at or below 24% without the sunk costs. Even if the sunk costsare included in the analysis the canal alternative remains the least-costsolution 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 resultsare tested for their sensitivity to variations in traffic volumes as well asthe cost parameters of the alternatives examined. In these tests the sunkcosts are excluded from the analysis. The results obtained are summarizedbelow.

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 railcost stream 15.2

4.14 In all the sensitivity tests carried out assumptions used areconditions that are adverse to the canal alternative. The above results showthat even under these rather unlikely situations the canal solution remainsthe least-cost alternative for discount rates which are above the opportunitycost of capital. These results confirm the strong economic case for adoptingthe 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 enterpriseswill receive their raw material requirements at the lowest cost. The avail-ability of a deep-sea port adequate to handle large bulk carriers will enableRomania to have access to a larger number of overseas suppliers of raw mate-rials than it presently has. The project will generate substantial benefitsfor the economy in the form of significant savings in ocean freight costsresulting from the use of large bulk carriers for imports of raw materials,and, by enabling the economy to utilize the Danubian waterway system to itsfull potential, will generate substantial transport cost savings in internalmovement of bulk commodities. The benefits accruing from the project willalso extend beyond the borders of Romania to the riparian countries. Theavailability 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 costsavings for these countries in importing bulk raw materials and exportingfinished products. It is expected that an adequate part of the benefits

accruing to the international transit traffic will be captured by Romania inthe form of canal transit dues and port charges.

Assessment of Benefits

4.16 Because the existing transport facilities along the routes to beserved 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 inlandtransport routes leading to progressively longer travel times and delays indeliveries, and (c) ultimately complete stoppages in growth of productionactivities which would use the project. Under these circumstances it wouldnot be possible to estimate meaningfully the economic benefits of the projectwith reference to transport cost savings resulting from it. Therefore, forthe purpose of quantifying the project benefits and estimating its rate ofreturn, a "without project" situation has been defined.

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

4.18 Given the traffic distribution between the waterways and railwaynetworks, 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 variousparts 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 ofBraila/Galati river ports to handle both seagoing vessels and barges as wellas 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 alongCuilnica-Constanta route and provide adequate rail terminal facilities atConstanta, an additional capital expenditure of 4.5 billion lei or US$250million is required. With the addition of 7.3 billion lei or US$404 millionfor barge and pusher tug fleets and rail rolling stock, the total capital costof 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 throughthe Sulina Canal, imported bulk cargo can only be brought in by ships of15,000 dwt maximum partially laden. The project will enable Romania to

utilize large bulk carriers of up to 150,000 dwt primarily on a charterbasis 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 willaccrue 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 SouthConstanta/Agigea. These benefits are estimated, on the basis of additional

distances involved between Galati/Braila and upriver ports, at barge transportcosts of 0.045 leu per ton/km.

Savings in Transport Differential

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

Reductions in Ship-waiting Time

4.24 Without the project a part of the export traffic would be handled atthe 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 and2320 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 beshared by several of the Danubian countries. These benefits, similar to thoseenjoyed 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 inthe form of canal toll charges and port dues. Even with these charges, thetransport cost reductions resulting from the proposed project will make itadvantageous for the riparian countries to utilize the new transport facilitiesand encourage transit traffic.

4.26 The following summarizes the quantified benefits accruing to Romaniafrom the project:

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

International TransportTransit Cost

Years Traffic Savings Total

1979-82 - - -1983 203 6,077 6,2801984 249 6,892 7,1411985 336 7,032 7,3681990 466 9,301 9,7671995 537 10,782 11,3192000 621 12,479 13,1002005 702 13,437 14,1392010 794 14,468 15,2622015 899 15,579 16,478

Distribution of Project Benefits

4.27 The project benefits arising from internal and export-import trafficwill accrue to Romania in full and will pervade the whole economy. Transportcost reductions for imports of industrial raw materials, both in terms ofocean freight rate savings as well as in terms of lower inland transport costs,will ultimately be reflected in the realization of the development plan goalsand reduced prices for Romanian industrial products. The project will alsoenhance the competitive position of Romania in international markets forindustrial products. Given the increased reliance on imported raw materialsfor maintaining industrial production of the country, the improved exportposition of Romania will be an important factor in its future developmentefforts. 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 thebenefits accruing to international transit traffic may not be wholly passed onto 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 2,5731985 - - 410 3,0351990 - - 1,026 4,4101995 - - - 5,1112000 - - 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 thesunk costs. With the inclusion of the sunk costs the rate of return is about19%. The first year rate of return, based on transport costs savings, isestimated 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 variationsin the cost and benefit parameters. The results are summarized below.

Rate of Return

Without WithSunk-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 strongeconomic case for the project.

Risks

4.33 The risk of not attaining project objectives due to shortfallsin forecast traffic, cost overruns or delays in project implementation isconsidered 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 trafficis certain to use the proiect because existing facilities are already fullyutilized and because barge transport is the most efficient mode moving thispredominantly low-value bulk cargo. One risk is the vulnerability of exportprospects of the project's principal user industries -- steel and chemicals.Failure to realize the targets set for steel exports will not greatly affectthe forecast traffic volume as these will be mainly in the forir of manufacturedgoods using other transport facilities. For the chemical industry, risk ofexport shortfalls is much greater. As this group of commodities represents asmall portion of the total traffic, it will have negligible effect on totalproject benefits. Moreover, such shortfalls wculd not necessarily reduce theproject traffic volume as there is a domestic demand for chemicals in thecanal area and a fair proportion of them would be transported using projectfacilities. A second possible risk would be a shortfall in the volume oftotal 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 exportestimates 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



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 forabout 59% of import-export traffic and about 41% of domestically generatedtraffic in 1985 (18 m tons); for 1990 the respective share of steel-relatedimports are: 67% and 43% (28.4 m tons) and for year 2000: 65% and 39% (32.3 mtons). These traffic forecasts have been based on steel production targetswhich have been recently reviewed by the Bank and found to be economicallyviable. Production of raw steel is planned to reach 20.4 m tons in 1985 andabout 24.5 m tons in 1990 after which no major expansion in steel capacity isexpected. It is assumed that after 1990 steel output would be increased by1% per annum to keep up with the growth in demand parallel to populationincreases. In order to sustain the production level in 1985, it is estimatedthat Romania will import 8.0 m tons of coal, 1.2 m tons of coke and 27.7 mtons 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 theirraw 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 mtons of which will be imported) and 6.4 m tons of iron ore (6.0 m tons of whichwill be imported). All 8.0 m tons of the imported raw materiaLs will utilizethe 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 tonsof raw materials. Of this amount 18.9 tons will be imported. It is estimatedthat about 15 m tons will be transported by the facilities of the project, theremainder being supplied through other sources. The Hunedoara plant willreceive 1.5 m tons of its 14.3 m tons of raw material requirements--of which8.9 m tons will be imported--through the use of the canal. Steel-relatedtraffic projections for 1990 are arrived at by increasing the volumes ofimported raw materials by 20% parallel to the planned increase in output.It must be noted that this is a conservative assumption as Romania's relianceon imported raw materials will continue to increase. The project, which bringsabout considerable transport cost savings for imported bulk materials, will becertain to attract this additional traffic.

(b) Imports of Ferrous and Nonferrous Metals. The Romanian ferrous andnonferrous metallurgical industries have been growing at an average annual rateof 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 forecastimports of metals needed to sustain this growth rate are estimated to be 1 mtons in 1985, 1.2 m tons in 1990 and 1.4 m tons in year 2000.

-47 - ANNEX 4.1Page 2

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

(d) Exports of Steel Products. Romania is expected to increase itsexports of raw steel, mainly rolled products. In the forecast figures, steelexports amount to two million tons in 1985, 2.4 m tons in 1990 and 2.8 m tonsin 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 realisticexpectations.

(e) Exports of Cement. The construction materials industry has been oneof the fastest growing subsectors of the country with output often exceedingdomestic demand. This has permitted Romania to export a significant proportionof its output, particularly that of cement, for which it has established asteady 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 annumfor the whole analysis period is a continuation of the existing condition andtherefore represents a conservative estimate of traffic in this commodity.

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

(g) Miscellaneous Export and Import Commodities. Other items which areincluded in the import forecasts are fodders and exotic woods. Wide variationsin 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 benecessary to supplement local production of animal feed with some feedgrainsand protein needs. Exotic woods, on the other hand, will supply woodworkindustries with essential raw materials. These two import items are projectedto 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 bearound 0.5 m tons in 1985, 0.6 in 1990 and 0.8 in 2000. Other export itemsinclude cereals, livestock products and commodities of a general cargo nature.

Internal Traffic

Traffic forecasts for internal traffic, similar to export-importtraffic, have been based largely on individual project developments withinthe area of the project and along the routes which will be served by it. Inaddition, 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 alongthe 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 consistedof construction materials, i.e. gravel and stone from the banks of the RiverDanube; about 11%, coal and coke, and the remainder, general cargo and agri-

cultural commodities. In the forecast traffic volume, construction materialscontinue to be important, about six m tons in 1985, eight m tons in 1990 and12 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 stagesuntil year 2000. Moreover, several public works, mainly roads, are in theplan for the canal area and will require substantial volumes of constructionmaterials. The planned thermal power station at Medgigia will also receiveits coal supplies through the waterway network, adding about 5 m tons to thetraffic volume in 1990, increasing to 6.7 m tons in 1995 and 10 m tons in year2000. The Medgidia cement factory will generate an additional 1.4 m tons oftraffic in 1985, 2.0 m in 1985 and about 3.3 m in year 2000. The remainder ofthe 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 essentialraw materials for their industries as well as exporting finished products tothe Middle East and the rest of the world. At present traffic originatingfrom or destined to these landlocked countries is hampered by inadequatecapacity 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 aresult, Romania is not, at present, in a position to accept several offersthat have been made by Danube riparian countries for the transshipment oftheir cargo. To date Romania has received firm and long-term contracts fromseveral of the riparian countries amounting to some 7.5 m tons by 1985. Thisinternational 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 soyabean 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 downstreamtraffic are rolled steel products from Hungary and Czechoslovakia, 0.5 m tonsand 0.1 m tons from Austria; and chemicals, ceramics, timber and glasswarefrom Austria and Czechoslovakia, 0.3 m tons. The traffic projections basedon specific contracts that have been negotiated by the Romanian authoritiesand the Danubian riparian countries do not take into account the effects ofthe Rhine-Mainz-Danube Canal. The completion of this canal will extend theinfluence area of the proposed project to the Western European countries andwill certainly add substantial amounts to the volume of international transittraffic. Accordingly, forecast volumes of 10.4 m tons in 1990 and 13.8 m tonsin 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 approximatelevel of canal tariff dues that it will be necessary to levy in order to coverthe direct operating costs, the liabilities in respect of the investment andbenefit (described below). It will also relate these tariffs to prices underalternative routes, thus supporting the economic return. In Romania's cen-trally planned economy all net benefits of an economic enterprise accrue tothe State. Prices are therefore fixed at levels designed to cover costs witha small margin (benefit) for specific purposes, largely according to theannual or other plans for each enterprise. Financial rates of return oninvestment are meaningless as an indicator of investment performance, whichis 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 investmentby 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 willbe MTTc.

5.03 In a more normal industrial project for an ongoing enterprise inRomania, where the economic life more nearly approximates borrowing terms, thebeneficiary 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 tothe 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 investmentfunds are being provided by the State, including external financing, i.e.,the proposed Bank loan and any co-financing that might be obtained. Althoughthe IB is the borrower, the MTTc is primarily responsible for providing thefunds to service the external debt, which would be relatively short-term. Theeconomic life of the civil works in the canal is probably between 60 and 100years, but for the purposes of this analysis the average economic life ofthe project is assumed to be 65 years, which is reasonable. This means thatthe administration will repay the total investment by paying one sixty-fifthcommencing with the first year of operations (1983). This is not depreciationin the Western accounting tradition but a formula for amortization of invest-ment funds. It does mean, however, that the Administration may not necessarilybe able to provide sufficient funds to repay external debt as the liabilityarises. In addition, the Administration will pay the total interest onexternal debt, starting from the commencement of operations. Since tariffshave to cover these liabilities, interest becomes, for this purpose, anoperating cost.

B. Canal Dues

5.04 Dues will be assessed on barge tonnage, irrespective of the cargotonnage, or whether they are loaded, partially loaded or in ballast. Althoughdues will be cost-based, they will be related to the economic benefits bydemonstrating that total prices for canal transit (including barge tariffs andcanal dues) will be less than comparable existing prices via Sulina. Althoughthe 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 trafficit is expected to handle will be less than comparable rail prices for theAgigea-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 andbetween upstream and downstream internal cargo movements, anumber of barge transits will be in ballast. A convoy mayinclude loaded and empty barges;

- 51 -

(b) Different cargo categories require different storage spaceand/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. Thiswould be difficult to levy and administer; and

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

5.06 In order to calculate the levels of barge transit dues necessaryto cover costs and provide a margin of benefit, it is necessary to calculatethe 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 intorequired barge capacity. However, there is no mathematical correlationbetween cargo tonnage and vessel capacity, so an approximate ratio has beencalculated, based partly on the Suez Canal appraisal report ratio and partlyon Romania's own tariff coefficients for various commodities. This gives acoefficient of about 1.0 barge ton per kilometer (bt/km) for 0.65 cargo metricton per kilometer (cmt/km). In considering the financial analysis it must beborne 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, forfive-year periods in advance. This has the advantage of providing cost stabil-ity for industrial financial forecasts. They may be changed in exceptionalcircumstances such as, for example, substantial unexpected inflation.

5.08 The canal is a highly capital-intensive investment with a very longoperational life. The pricing policy will be the pragmatic one of enablingthe Government to recuperate the investment cost over time, including intereston external financing, while enabling the economic benefits to accrue, as faras possible, to the user industries by way of reduced inland transportationcharges. 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 tobe covered by canal dues, comprise three principal categories, apart frombenefits:

(a) Cash operating costs (labor, repairs and maintenance, andmiscellaneous). In this analysis they represent only about8% of the total.

- 52 -

(b) Amortization of investment funds, which extends through the economiclife of the investment (in lieu of depreciation). It would beequivalent to about 52%.

(c) Interest on external debt through the term of the debt, about40%. 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 externaldebt, however, is related to debt maturity, interest rates and repayment terms(e.g., fixed equal payments of interest plus capital), and has no relationshipto the economic aspects of the investment. It is variable, the highest chargeoccurring at the beginning of operations and rapidly decreasing over the termof 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 yearsbecause of insufficient price incentives to use the canal as compared withexisting routes. As regards domestic traffic, the effect may well be toreduce the economic incentives to industrial growth that the canal is designedto foster, while it would be likely to inhibit the growth of internationaltransit traffic, for which substantial demand remains unmet. Transit trafficmay be regarded as marginal and dues from any increase in such traffic wouldrepresent economic benefits accruing directly to the State. It is clear,therefore, that debt interest is the most critical item of cost to be coveredby dues.

5.11 Considering the foregoing, three possible alternative formulae forthe 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 toloan maturity; and

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

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

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

(iii) economic benefits would be distributed directly to theuser industries, this being an important aspect ofRomania's economic structure;

(iv) it would enable MTTc the better to plan its own budgetaryrequirements 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 includingthree years grace. The interest rate is assumed to be 8% per annum, which

approximates the Bank's current lending rate. The number, amount, interestrates and maturities of possible co-financing loans are not known. It isassumed 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 uniformmaturities 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 separatelyinterest during construction, or before commencement of operations, andinterest after operations begin. Total interest is therefore amortized inequal 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 bargetransit dues and cash flow statement has been prepared, based on the foregoingreview 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 introductorystart-up years, and traffic will not reach its normal growth pattern until1985. Because of this and since canal dues will be set for the five-yearperiod 1983-87, this period should be considered as a whole in assessing thedues. This means that dues should be set at a level that will provide, overthe period, sufficient cumulative benefits to meet the requirements detailedin para 5.03. The level of dues to meet all criteria has been calculated atleu 0.195 per btk. This, however, will result in deficits being incurredduring 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, whichamount to about 92% of the total costs to be covered by dues. Since the debtservice dates are not yet known, working capital requirements have been assumedat about six months annual costs, or lei 375 million. Annual repayments, out ofbenefit, would be lei 25 million for 15 years. During negotiations it wasagreed that the Administration would be provided with sufficient workingcapital for the normal course of operations of the canal and other facilitiesincluded in the Project. This is as provided by law and covers the Adminis-tration's liabilities as regards amortization of investment funds and paymentof interest on external loans.

5.15 During the second five-year period, 1988-1992, traffic growth wouldenable 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 andafter.

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 Agigeato Cernavoda, through the canal, via Sulina and by rail:

- 54 -

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

Assumed canal transit duesper btk - leu 0.195 0.165 0.140 0.090 0.080

Equivalent dues per cmtkCoefficient = 0.65 leu 0.300 0.254 0.215 0.138 0.123

Total price per cmt - lei

By Danube-Black Sea CanalCanal dues - 64 k 19.2 16.3 13.8 8.8 7.9Freight 11.0 11.0 11.0 11.0 11.0

Total 30. 777 24.8 18 .

Via Sulina and LDN

Dues - LDN 10.9 10.9 10.9 10.9 10.9Freight 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 21.0Transshipment atCernavoda 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 about28% in the first five years, rising to about 40% in 1994. Thereafter, withthe elimination of the annual charge for interest on external debt, thesavings are more than 50%. Savings over the rail route are somewhat greater.Even in the early years the savings are substantial and give an adequatemargin for higher levels of dues if necessary. These figures also indicatethat dues are relatively insensitive to traffic volumes since, for the totalcanal transport price to reach parity with the Sulina route, traffic volumeswould have to be about 35%, 45%, 55%, 70% and 75% lower than forecast for therespective periods.

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

- 55 -

5.19 This analysis demonstrates that the Administration can, with arational formula for setting canal transit dues, be a financially viableenterprise, conforming with the laws regarding financial self-sufficiency,and in a manner acceptable to the Bank, while ensuring the optimum retentionwithin Romania of the economic benefits of the project. During negotiationsit 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 regardingamortization of investment funds and payment of interest on external loans.As regards any necessary adjustments of tariff levels, this is satisfactorilycovered 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 isgiven 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 Romanianeconomic financial system, any such financial statements would add nothing tothis analysis.

F. Accounts and Audit

5.21 In addition to the financial control and audit functions exercisedby the IB, as the agency responsible for financial and economic aspects ofinvestment 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 contentand presentation of financial accounts differ from those normally submitted tothe Bank, but it is possible to adjust them to provide sufficient informationfor the Bank adequately to monitor project implementation and operations.During loan negotiations it was agreed that the Bank will be provided, notlater than six months after the end of each fiscal year, with a certifiedcopy of the financial statements of the Danube-Black Sea Canal Administrationfor such fiscal year, together with an audit report thereon by the Ministryof Finance.

- 56 -

ANNEX 5.1



ROMANIA

Danube-Black Sea Canal AdministrationCapitalization of Canal Operations

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

A. Project Cost 31,500

Add: Cost of administrativebuildings 7

31,507Deduct: Cost of canal ports:

Civil works 1,343Equipment 6Contingencies 237 1,586

29,921Residual values:

Construction workers'housing 97

Basarabi workshops 145 242Net fixed assets taken over 29,679

Recuperation - 65 years 456.6 p.a.

B. Preliminary Expenditure

Training 2Wages and salaries 53Social security 9Miscellaneous 49

113

Recuperation 65 years 1.7 p.a.

Source: Bank Staff

December 1979

STAFF APPFRAISL £IUORT

DAWUBE-BLACK SEA CANAL PROJECT

ROMAN IA

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. [rafficCargo metric tons (cmt) - millions 40.7 48.0 56.4 58.5 61.6 65.6 70.7 76.9 85.7 88.1 101.9

Cargo metric ton kilometers (cmtk) - millions 2,226 2,665 3,169 3,294 3,468 3,738 4,003 4,352 4,756 4,862 5,681

Barge ton kilometers (btk) equivalent(coefficient = 0.65) - millions 3,425 4,100 4,875 5,068 5,335 5,751 6,158 6,695 7,317 7,480 8,740

B. Annual Costs to be Covered by Transit Dues - million lei

Amortization of Investment Funds:Cost of investment, including preliminary expenditure 412.4 449.8 459.2 459.2 459.2 459.2 459.2 459.2 459.2 459.2 459.2

Interest on external loans, including interestduring construction 350.1 350.1 350.1 350.1 350.1 350.1 350,1 350.1 349.5 - -

Subtotal 762.5 799.9 809.3 809.3 809.3 809.3 809.3 809.3 808.7 459.2 459.2

Recurring ExpensesLabor costs: Cross wages 21.0 22.1 23.3 24.5 25.6 26.8 29.1 30.3 32.1 32.6 35.0

Social security 3.2 3.3 3.5 3.7 3.8 4.0 4.4 4.5 4.8 4.9 5.3

Repairs and maintenance 20.0 20.2 20.4 20.6 21.0 21.5 22.1 22.8 26.1 26.9 32.3

Miscellaneous 18.7 18.9 19.1 19.3 19.6 20.0 20.4 20.8 23.4 24.0 27.3

Subtotal 62.9 64.5 66.3 68.1 70.0 72.3 76.0 78.4 86.4 88.4 99.9

Total 825.4 864.4 875.6 877.4 879.3 881.6 885.3 887.7 895.1 547.6 559.1

Add benefit (say) 107. of total annual costsexcluding interest 47.5 51.4 52.6 52.7 52.9 53.2 53.5 53.8 54.6 54.8 55.9

Total revenue required (nominal) 872.9 915.8 928.2 930.1 932.2 934.8 938.8 941.5 949.7 602.4 615.0

C. Revenue Required per btk - leu 0.2549 0.2234 0.1905 0.1835 0.1747 0.1625 0.1525 0.1406 0.1298 0.0805 0.0704

Assumed Transit Dues per btk - leu 0.195 0.195 0.195 0.195 0.195 0.165 0.165 0.165 0.140 0.090 0.080

Revenue - million lei 667.9 799.5 950.6 988.3 1,040.3 948.9 1,016.1 1,104.7 1,024.4 673.2 699.2

Benefit (deficit) - million lei (157.5) ( 64.9) 75.0 110.9 161.0 67.3 130.8 217.0 129.3 125.6 140.1

Cumulative (222.4) (147.4) ( 36.5) 124.5 191.8 322.6 539.6

D. Cash Flow - million leiWorking capital - opening 375.0 192.5 102.6 152.6 238.5 374.5 416.8 522.6

Benefit (deficit) (157.5) ( 64.9) 75.0 110.9 161.0 67.3 130.8 217.0

Amortization of working capital ( 25.0) ( 25.0) ( 25.0) ( 25.0) ( 25.0) ( 25.0) ( 25.0) ( 25.0)

Working capital - closing !/ 192.5 102.6 152.6 238.5 374.5 416.8 522.6 714.6

1/ Subject to other allocations of benefits.

Sources: Ministry of Transport and Telecommunications and Bank Staff

December 1979



ROMANIA

Cash Flow Statement - Ministry of Transport and Telecommunications

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

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

Annual CumulativeDebt 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 63.81996 - 459.2 25.0 484.2 484.2 548.01997 - 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 StaffDecember 1979

- 59 -

VI. AGREEMENTS REACHED AND RECOMMENDATIONS

6.01 During loan negotiations, agreement was reached with the Governmentand IB on the following:

(a) Timely completion of other essential investments necessary forthe canal (para 3.01);

(b) (i) Necessary construction equipment will be made available onsite by the end of 1981; (ii) 50% of bitumen and reinforcing steelfinanced by the Bank will be made available before the end of 1981,25% before the end of 1982 and 25% before the end of 1983, and (iii)equipment to be incorporated in the project will be made availableby mid-1982. The implementation schedule and critical path (para3.15);

(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 submitted quarterly (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 theirreview (para 5.19);

(i) Submission of annual audited financial statements (para 5.21);

6.02 Based on the above agreements the project is suitable for a Bankloan of US$100 million to the Investment Bank with the guarantee of theRepublic of Romania on standard Bank terms for a term of 15 years includinga grace period of three and one-half years. It is recommended that theapproval of the loan is not deferred pending or made conditional on theobtaining 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 19792. List of construction equipment under contract, July 19793. Agreed list of construction equipment for project completion,

July 19794. Layouts and designs for canal locks5. Theoretical and actual performance indicators for principal

construction equipment used on site6. List of spare parts for principal construction equipment used

on site7. Volumes of excavated materials by types and location8. Schedule for excavation by location, type of materials, and volumes

C. Organization

1. Laws relating to financial self-sufficiency and organizationand 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 destinationpoint by barge transport

3. Transport cost estimates for each origin and destinationpoint by railway transport

4. Capital cost estimates for railway alternative5. 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-servicingand financial analysis

2. Present tariff structure for subsector

______________n_______________ IBRD 14312

SOCIALIST REPUBLIC OF ROMANIA

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DANUBE-BLACK SEA PROJECT SCHEME

A C ernavoda_ __~~e° 8@o, / _ Danube- Black Sea CanalU Locks

\RNAVODA LOCK'_ _,0. / -X <Naodari Overhead bridges, road or railwoy/7' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Hydrographic basin of the canal

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World Bank Document...IPTANA Road, Water and Aerian Design Institute ISP,IF Land Reclamation Design...

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Transcript of World Bank Document...IPTANA Road, Water and Aerian Design Institute ISP,IF Land Reclamation Design...