TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use EL 'Y Report No. P-1222a-YU REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO "NAFTAGAS" NAFTNA INDUSTRINA-NOVI SAD-ZAJEDNICA RADNIH JEDINICA TRANSPOERA, PREADE, PRIMENE I PROMETA GASA-PRAVI4O LICE-NOVI SAD WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A PIPELINE PROJECT June 7, 1973 | This report was prepared for official use only by the Bank Group. It may not be published, quoted l or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS Us $1 = 17.0 dinars Dinar 1 = US $5.88 Dinar 1,000 = US $58.80 Dinar 1,000,000 = US $58,800.00 Fiscal Year - January 1 to December 31 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO "NAFTAGAS" NAFTNA INIXWSTRIJA-NOVI SAD-ZAJEDNICA RADNIH JEDINICA TRANSPORTA, PRERADE, PRIMENE I PROMETA GAS A-PRAVNO LICE-NOVI SAD 1. I submit the following report and recommendation on a proposed loan to "NAFTAGAS" NAFTNA INDUSTRIJA-NOVI SAD-ZAJEDICA RADNIK JEDINICA TRANSPORTA, PRERADE, PRIMENE I PRIKETA GASA-PRAVNO LICE-NOVI SAD, with the guarantee of the Socialist Federal Republic of Yugoslavia, for the equivalent of US$59.4 million to help finance a pipeline project. The loan would.have a tezn of 20 years, including four years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. An economic mission visited Yugoslavia in October/November 1972, and a basic report on the economy of Yugoslavia is under preparation. A report entitled "Current Economic Position and Prospects of Yugoslavia" (R12-lha) was distributed to the Executive Directors on June 7, 1972. Basic data on the economy of Yugoslavia are given in Annex I. 3. Yugoslavia has had rapid growth and rising living standards during the last decade, with total GDP at constant prices having increased at about 5-1/2 percent per year and per capita GDP at over 4 percent per year. Econ- omic growth has proceeded in an environment of major institutional and organi- zational changes, characterized by the decentralizing of economic management, the creation of a market economy, and the opening up of the economy to inter- national trade, with the objective of increasing economic efficiency and improving the allocation of resources. 4. The population growth rate has averaged 1.0 percent per year in the last ten years, that in the less-developed Republics being 1.6 percent and in the developed Republics 0.7 percent. There is little open unenploy- ment. There is, however, some evidence of growing regional and occupational imbalances in labor demand and supply. This results from the low mobility between labor surplus less-developed regions and labor-scarce developed regions, and a discrepancy between the skills needed in a fast-changing economy and those supplied by the present education system. 5. Economic growth in the less-developed Republics and Provinces has been at about the same rate as that of the more developed, but their per capita income has increased more slowly because of faster population growth. Consequently, regional inequalities have widened. Yugoslavia has kad an active - 2 - regional development policy for more than two decades. The policy aims at reducing region.i inequality by achieving a growth rate above the national average in the less-developed Republics and Provinces, financed by a transfer of resources mainly through the Funcd for the Accelerated Development of Underdeveloped Regions. In addition, Federal budgetary grants are provided to the less-developed regions for current expendi- ture for social purposes such as health and education. Recent Developments 6. Economic development since 1968 has been characterized by a "elatively rapid increase in exports and production (averaging 12 and 7 percent per year, respectively, during 1969-1972),, the emergence of serious inflationary pressures and substantial balance of payments deficits (averaging $220 million during 1968-71). 7. To counter the rising inflationary pressures and improve the external payments position, the Government since 1L970 has adopted measures aimed at restricting monetary expansion, limiting public expenditures, strengthening price controls and developing an incomes policy. In addition, it has adopted a policy of frequent exchange rate adjustment in order to neu- tralize the effect of inflationary pressure on the balance of payments. After a period of unchanged rates, following a major devaluation in 1965, the dinar was dievalued by 16.6 percent in January 1571. In the course of the inter- national currency realignment in December 1971, Yugoslavia devalued again by 18.8 percent against gold and by 11.8 percent against the dollar. Fol- lowing the more recent devaluation of the dollar, Yugoslavia adjusted the gold parity of the dinar to maintain its parity with the dollar. 8. Largely as a result of the policy measures undertaken, export growth picked up, import growth declined, and the investment boom slowed down. In 1972, exports of goods increased by 20 percent and imports by about 5 percent and the trade deficit was $1.1 billion dollars as compared to $1.4 billion in 1971. lWorkers' remittances increased by 25 percent to $780 million in 1972. Consequently, the current account showed a surplus of about $190 million as compared to a deficit of about $320 million in 1971. Foreign exchange reserves, which were equivalent to about one months' imports in 1970 and 1971, have increased, and at the end of 1972 were equivalent to nearly three months' imports. There has been sone slowdown in the rate of price inflation. The cost of living index increased by about 11 percent during the year, as compared to 17 pernent during 1971. Prospects 9. Real GDP is expected to grow by about 6 percent in 1973 (about the same rate as in 1971) reflecting Government policies to control the expansion of investment and consumption. The reduction of excess aggregate demand together with the recent devaluations and continlued economic growth in its main trading partners is expected to lead to export grwth of about 12 per- cent. Reduction of tariffs in mid-1972 and a major import liberalization -3- program effective since January 1973 are likely to encourage import growth of about 12 percent in 1973. Even with this anticipated increase in import growth the balance of payments is expected to show a surplus. Inflationary pressures are to be reduced by a continuation of price con- trols and restrictive demand management. 10. The 1971-1975 Social Plan, adopted in June 1972, aims at an overall growth rate of 7.5 percent per year with gross investments growing at the same rate as production, and private consumption and government expenditure somewhat slower--7 percent and 6.5 percent per year, respectively. Exports are projected to grow at about 11-13 percent per year and imports at about 9-11 percent. Agricultural production is expected to grow at an average rate of 3.2 percent per year as compared with 2.2 percent annually during 1965-70. The acceleration of the agricultural growth is expected to come mainly from an increase in the growth of output in the private sector farns from about 1 percent per year in 1965-70 to about 2.8 percent per year during 1971-75. The Plan stresses the importance of achieving domestic stabiliza- tion, improving resource allocation and increasing productive efficiency in attaining these targets. It also stresses that an increase in the production of electric power and the expansion of the transmission system are preconditions for attaining the plan targets. Domestic savings rates are expected to be maintained at present levels--around 22-24 percent of GDP, and would finance about 80 percent of gross investment. The bulk of the projected external resource gap would be met largely by rising wo xic&irii zeitt ances. 11. The prospects for continued economic growth in the medium term are good. The endowment of natural and human resources, together with the prag- matic and dynamic approach to the solution of economic difficulties, the readiness to consider and undertake necessary institutional changes, and the strong commitment to an open, market7&riented economy, gives ground for a favorable assessment of future prospects. External Assistance 12. Gross capital inflows have more than doubled in the last five.years reaching US$860 million in 1971, and an estimated US$930 million in 1972. Most of these funds are medium-term commercial credits, reflecting the limited assistance coming from governments, and the liberalization of foreign trade and borrowing regulations following the 1965 Economic Refom. The inflow of suppliers' and financial credits has come largely from the United States, Germany, Switzerland, Italy and the United Kingdom. IBRD loans have been the main source of long-term capital since 1968. Yugoslavia has, so far, not been able to place public bond issues on the world's capital markets. However, three private placements (medium-term) of US$115 million have been made in 1972 in the U.S., and other possibilities for raising long-term funds are being explored. In October 1972, an agreement was reached with the USSR for credits of 540 million clearing account dollars for investment financing in the energy, ferrous and non-ferrous metal, cement and shipbuilding industries. - 4 - 13. The Government has tried to encourage private foreign investment through special legislation in 1967, and by October 1972, 68 joint venture agreements had been signed between local and foreign enterprises, involving the investment of about US$100 million. The conditions for foreign partners in joint ventures with Yugoslav enterprises have recently been further improved in an effort to encourage a more rapid flow of foreign investment. External Debt Management 14. The pattern of capital inflow since the mid-1960's led to a deterioration in the maturity structure of external debt. The Government, aware of the dangers in the unregulated growth of external debt, has embarked on an active debt management policy. Since mid-1971 all foreign credits have to be registered with the National Bank to ensure that contracted credits remain within the ceilings detenrined by the Federal Government and the National Bank, and that the terms of borrowing are appropriate to the transaction and to the general economic situation. In connection with the Stand- by Agreement with the IMF in July 1971, the Government decided to limlt out- standing short-tezm credits to 1970 levels, and medium- and long-term loans incu:cred or guaranteed by the banks to US$900 million, and has kept borrowing within these limits. In April 1972, a new system for regulating extermal borrowing was adopted which operates by inmluencing the cost of external borrowing through varying dinar deposit requirements. Moreover, the National Bank has been given authority to veto any credit arrangement. The Government has also embarked on a stabilization program that includes rescheduling or refinancing existing debts and containing longer term credits. The United States agreed to reschedule US$58.5 million of debt payments falling due in 1971 and 1972, and Italy, Germany, France, Japan, Belgium and the Netherlands agreed to extend finarcial credits totalling US$277 million during 1972-1975 (Germany $142 millionp Italy $75 million, Japan $30 million, France $20 million, Belgium $5 million, Netherlands $5 million). The Goverament hopes to secure another $50 million from Western European countries during 1973-75. 15. External public and publicly-guaranteed debt outstanding and disbursed on December 31, 1971, was US$1,413 million. In addition, there was US$1,351 million non-guaranteed externmal debt outstanding on that date. Total debt service payments in 1972 are estimated to be about US$792 million, mostly in convertible currencies. The service of total external debt in 1972 represented 18 percent of foreign earnings. Excluding debts and earnings in non-convertible currenciesy the ratio becomes 24 percent. Debt service is expected to remain at about present le'vels during the next five years. Taking into account Yugoslavia's debt service record and the new measures for improved external debt management, Yugoslavia is credit- worthy for substantial Bank lending. PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA 16. The Bank has made 22 loans to Yugoslavia, totalling about US$691 million. The proposed loan would be the first loan for a pipeline project in Yugoslavia, and the ninth loan for the transportation sector. Bank lending has been concentrated in infrastructure projects such as transpor- tation (five highway loans totalling US$150 million and three railway loans totalling US$155 million), power (three loans totalling US$135 million), telecommunications (Us$40 million) and a multipurpose water project (US$45 million). Loans also have been made for industry (four loans totalling US$47 million), for tourism (two loans totalling US$30 million) and for an agricultural industries project (US$31 million). IFC has made six investments for total commitments of about US$53 million in Yugoslavia. Its most recent investment (LM33 million) in the Belisce/Bell joint venture for manufacturing pulp and paper, was approved by the Executive Directors in January 1973. 17. Execution of projects under most loans has experienced some delays, particularly the Railway Modernization Program of FY65 (Loan 395-YU), the Belgrade-Bar Railway Project of FY68 (Loan 531-YU) and the Babin Kuk Tourism Project of FY71 (Loan 782-YU). Annex II contains a suzmary state- ment of Bank loans and IFC investments as at April 30, 1973 and notes on the execution of on-going projects with particular reference to those which are encountering delays in disbursement. 18. The major objectives of Bank lending to Yugoslavia are (a) to accelerate development in the less-developed regions of the country; (b) to promote structural reforms in major sectors of the economy through improved coordination, the strengthening of institutions and technical assistance; (c) to help provide Yugoslavia with external capital at long term and thus help redress the excessively short-term character of Yugoslavia's external borrowings; and (d) to help alleviate Yugoslaviats shortage of foreign exchange by financing foreign exchange earning projects. These objectives are basically the same as those which guided lending in previous years, but efforts to give special support to the less-developed regions are being strengthened, and a continuing high level of technical assistance will be provided in appropriate cases. 19. In furtherance of these objectives, loans for further support for railway modernization, a tourism project in Jaz (Montenegro), expansion of the port facilities of Bar, river regulation, urban pollution control, roads and highways, and a water and sewerage project (tourism infrastruc- ture) in Dubrovnik are envisaged during the next two years. Also planned for this period are an industrial line of credit, and two or three specific industrial projects of particular importance to the country. IFC is cur- rently investigating several new investment opportunities. 20. In addition to significant help -with the preparation of projects for Barik financing, the Bank'sa recent technical assistance to Yugoslavia has included revievs of the power, tourism and transportation sectors. Other current activities include assistance to a project appraisal training institution, the training of some of its teachers, a study of the Yugoslav capital market., and help in establishing a training program for auditors in Yugoslavia's Social Accounting Service which audits several Bank-financed projects. 21. Bank commitments to Yugoslavia averaged close to US$100 million annually in the last three years. Although this represents only a rela- +-ively small proportion of the country's needs for external finance, it is equivalent to about two-thirds of the long-taeni official capital inflow in convertible currencies. Assuming that Bank lending were to continue at about the same level in the next few years, the outstanding debt to the Bank would rise from 10 percent of Yugoslavia' s total extemal debt in 1971 to 15 percent by 1978. Service on Bank loam; as a propq.rtion of total debt service would increase froz 4 per:cnt to 5 percent. PART III - ME ll1Y S2X2TR &Iergy Recre#aments in Yugoslavia 22. During the last decade, the sustained growth of the yugoa1av economr has been reflected in rapidly increasing demand for energy which, during the second half of the decade, grew at an average annual rate of 5.2 percent from 14.5 million ton petroleum equi:valent (top) to 18.7 million tep. With the expected continuation of the dynamic growth of the industry and service sectors, this growth would further accelerate to an annual rate of 11 percent during 1971-1975, and to stabilize at about 6 percent during 1975-85. 23. Traditionally, Yugoslavia has relied upon domesti: resources of coal and oil to meet its energy requirements.. However, the growth of energy demand during the last decade has been accompani:ed by structural changes in sources, with the demand for refinaed oil producta and natural gas growing at a faster rate than that for other fuels. During 1965-70, the shar of coal in the total demand dropped from 72 percent. to 51 percent, while that of hydrocarbons (petroleum products and natural gas) increased from 22 percent to l2 percent; the share of electric power also slightly increased from 6 percent to 7 percent. This trend is expected to continue in future and by 1985 hydrocarbons are expected to supply 60 percent of the energy demand as compared with 40 percent in 1970. 'The reason] for the change is twofold: (a) locally produced coal is generally of poor quality, making it uneconomical to transport it over long distances; and (b) the Yugoslav policy to refine crude oil locally rather than to import refined products and the rapid increase in demand for lighter oil distillates due to the expansion of road transport have led to production of large quanti- ties of fuel oil, thereby facilitating the displacement of coal by oil products. 24. Given the limited domestic resources of oil, Yugoslavia must rely increasingly on imports to meet the demand, and the share of imports in crude oil consumption is expected to increase from 40 percent to 75 percent in 1980. At the same time, in order to minimize oil import and thus its burden on the balance of payments, the current Social Develop- ment Plan (1971-1975) gives a high priority to the rational development of domestically available energy resources. Yugoslavia has an estimated recoverable reserve of natural gas of 42 billion mi3, but production of gas is less than 1.0 billion m3 per year due to lack of adequate trans- mission and distribution facilities. Efficiency and cleanliness of gas as industrial and residential fuel and relatively easy access to supply from USSR through East European trank lines have given natural gas an increasingly competitive position as an alternative to fuel oil. Sector Organization 25. The energy sector consists of a large number of independent, self-managed enterprises engaged in their own programs of development and supply of various forms of energy, and, until recently, there has been little effective coordination among these enterprises to ensure integrated planned development of national energy resources. The rapid growth of, and the structural changes in energy demand, inadequate pricing policies for various fuels, and the inadequacies in the institu- tional arrangements have strained the sector's ability to meet the demand effectively. In the winter of 1970/71 acute local shortages of electric power and petroleum products developed, leading to importation of 125,000 tons of refined oil products in a crash program to avoid further energy shortages. This made the Federal and Republic Governments as well as energy enterprises keenly aware of the need for a coordinated approach to energy supply and demand. During the last two years, governmental measures were taken to improve the pricing of liquid fuelss internal prices were realigned with the rising prices of imported crude oil and refined oil products so as to enable the enterprises to earn a reasonable level of return and to finance a reasonable portion of their future invest- ments. The Governments and sector enterprises are moving towards a closer coordination in planning expansion programs of energy production, trans- mission and distribution facilities. This is exemplified in the proposed project as well as in the recent agreement by eleven power enterprises to coordinate their future development under the aegis of a Bank financed project (Loan 836 of June 23, 1972) for an integrated transmission system. Energy Demand and Supply in Serbia and VoJvodina 26. Although the economies of Serbia proper (excluding the Autonomous Provinces of Vojvodina and Kosovo) and Vojvodina were traditionally agricultural., the growth of industry and services in the last decade has been faster than the growth of agriculture, and has resulted in a major structural transfomation. This has been reflected in a rapid increase in energy demand in these regions, accompanied, as elsewhere in Yugoslavia, by the trend of replacement of coal by petroleum products and natural gas. The - 8 - energy demand in these regions is expected to grow at 10 percent annually over the period 1970-85, with electricity and hydrocarbons accounting for about 90 percent of the demand by 1985. The structural imbalance between t'ne current energy supply (primarily based on coal) and the expected demand (increasingly dependent on imported oil) has generated increasing concern over the long term development of economical supplies of energy. In 1969, the Government of Serbia, in cooperation with the energy enterprises, undertook a study to formulate a long term energy supply strategy (including fuel pricing policy and coordination within the sector) to meet the projected demand during :1970-85. 27. This study concluded, inter alia, that natural gas (locally produced and imported) could economically replace heavy fuel oil for industrial use, and in particular, if the necessary treatment, trans- mission and distribution facilities were built by 1975-76, n,atural gas could provide 18 percent of net energy supply in 1985. The analysis and conclusions of the study are sound. On the basis of this study, the Goverriaent of Serbia has prepared a long term energy devel,opment plan (1970-85), which has provided the framework for the current five-year investment programs (1971-75) of energy enterprises. The total invest- ment of the sector for the five-year period is estimated at $1,117 million, with 72, 18 and 10 percent of the amount for the development of electric power, petroleum and natural gas, respectively. 28. Vojvodina and Serbia proper together possess about 30 percent of the proven Yugoslav reserves of oil and natural gas, which are believed to represent about half of the potential reserves in these regions. Since 1965, natural gas has been used in Vojvodina primarily through the existing pipeline system of Naftagas (the sole enterprise in Serbia proper and Vojvodina dealing in oil and gas exploration, production, refining and marketing), to supply industrial customers, including a fertilizer plant at Pancevo. The present gas system is linrited: it was ca,pable of supplying less than 700 million m3 in 1971. This repreents an exploitation rate of 30 percent of potential production, which is considered too low. In view of the important advantages of natural gas over alternative fuels, gas would be an attractive source of energy for industrial users. This was confirmed by a market survey conducted in 1971-72 by the Gas Unit of Naftagas. Furthermore, potential users expressed a willingness to participate in financing the necessary gas transmission and distribution facilities. PART IV - THE PROJECT 29. The proposed project was identified durLng an industrial identi- fication mission in April 1971 and was prepared by Naftagas following discussions with Naftagas in the Bank in October 1971. A mission visited - 9 - Yugoslavia in June and July 1972 to review the feasibility study and to assist the enterprise in project preparation. The project was appraised in November and December 1972 but financial and economic information necessary for the completion of appraisal was delayed; it was reviewed by a follow-up mission in January 1973. Negotiations were held during April/May 1973 in Washington, D. C. The Yugoslav delegation was led by Mr. Gavra Popovic, Assistant Federal Secretary for Finance, and included representatives of the Federal Government, the Governments of the Republic of Serbia and the ALtonomons Province of Vojvodina, Beogradaka Banka, Naftagas (sponsor), the Production Unit of Naftagas (sponsor), and the Gas Transmission, Treatment, Application and Distribution Unit of Naftagas (the Gas Unit, borrower). The Borrower 30. Naftagas Petroleum Industry (Naftagas) was established in 1949 as a state-owned enterprise for the exploration and production of petroleum. Today it is an autonomous, self-managed, socially-owned enterprise, dealing in all aspects of the oil and gas industry, from exploration to distribution of finished products. It is one of the three largest oil and gas enterprises in Yugoslavia, operating primarily in Serbia (including Vojvodina and Kosovo). Its organization follows the general Yugoslav concept of decentralized economic decision-making (autonomy of the enterprise)4,andd4wrkers' self- management of social property. The policy-making body is a Workers' Council which is elected by the personnel of the enterprise, and which appoints the general manager as the chief executive officer. 31. Naftagas comprises several "Associations of work units" (Units); the main units are (a) research and production (Production Unit), (b) gas transmission, treatment, application and distribution including LPG (the Gas Unit), (c) three refineries, (d) an engineering and construction unit, and (e) a commercial unit. There is also a common services unit. Each of these units has legal personality with its own Workers' Council and Manager, and is financially and managerially independent. Their policies and plans, however, are coordinated and consolidated into a five-year plan by Naftagas with the approval of its Workers' Council. 32. The relations among Naftagas and its various units are presently regulated by the statute of Naftagas, but are now being redefined by a Self- Management Agreement to be signed among Naftagas and these units, which will replace the existing statute. The Gas Unit is presently protected against liabilities of other units and will also be protected against liabilities of Naftagas as soon as the Self-Management Agreement with specific provisions limiting such liabilities of the Gas Unit will have been registered with the competant court. The effectiveness and registra- tion of this Agreement with the appropriate count would be a condition of effectiveness. - 10 - 33. Tne Gas Unit has legal personality and consists of three sections ("mark units"' with separate management and operational responsibility) for (i) the gas treatment plant at Elemir, (ii) the gas transmission and distri- bution piDeline, and (iii) liquified petroleum gas distribution (LPG). There is also a common services unit. The Gas Unit's management is compe- tent and energetic and its staff is in general sat-lsfactory. Since the project represents a substantial expansion of the present scale of its operations, the Gas Unit plans to increase its staff and is recruiting additional personnel. It also plans to train its personnel to meet the additional workload under the project. The Gas Unit also needs to establish an effective cost accounting system and to improve management and information systems, and the project would provide for consultants' services to design and assist in implementation of such systems. At the request of Naftagas, the Bank has agreed that these consulting services would extend to the whole enterprise. Project Description 34. The proposed project is in line wrth the Social Development Plans (1971-75) for the energy sector of the Republic of Serbia and the Autonomous Province of Vojvodina, and the Governments of both regions have given high priority and substantial financial comTitments to the project. The project comprises facilities necessary to expand the gas transmission and distribution capacity of the Gas Unit from the present 700 million to about 2,500 million Mm3 per anmnur by 1977. It would form the backbone of a natural gas pipeline system in Eastern Yugoslavia, linking gas supply from north- eastern Vojvodina, supplemented in 1977 by import from Hungary, to about 145 industrial consumers in Vojvodina and Serbia. 35. The project includes: (a) installation of field gas compressors (with a total capacity of 5,000 hp); (b) construction of about 1,250 km of pipelines of various sizes (supply pipelines from fields to transmission systems, trans- mission pipelines from the Hungarian-Yugoslav border to Nis via Belgrade, and high pressure distribution pipelines); (c) construction of a gas treatment plant (with a capacity of 3 mil- lion Nm3 per day of wet gas) and a fractionation plant (with a capacity of 160,000 tons of condensate per annum); (d) construction of distribution rings, comprising control and metering stations, and low pressure distribution rings; (e) installation of an automated central dispatch station and control system; (f) technical assistance to provide the Gas Unlit and Naftagas with accounting consultant services; and (g) technical assistance to the Social Accounting Service (SAS) for a train- -rogram in auditing methods (see para. 46 below). The project is designed to cater for peak loada, and slightly higher demand growth than forecast, and would permit further expansion of the system with a minimum of additional main transmission liness with the addition of compressors along the tranamissiQn line, the total future capacity of the system would be 4,75O million Nm) in 1985. The construction program is expected to start in the second half of 1973 and end in the first half of 1976. A Loan and Project Summary is attached as Annex III, The Appraisal Report entitled "A4ppraisal of Naftagas Gas Transmisaion and Distribution System" dated May 25, 1973 is being distributed separately to the Executive Directors. Project Implementation and Management 36. Although the Gas Unit itself has done the preliminary engineering studies, it will-be assisted by consultants and suppliers for the final design of the project. The intensive construction schedule, which envisages 36 months for completion of jipHIUne constructio-_ w.1ll requir- coordina ion in planning and implementing the project which would be beyond the present capability of the Gas Unit. It agreed therefore to ezpla9y a conWulting firm to assist its project implenttion p and has naa Bi&ed a contract with a ftim accdptahle to the Bank on terms and conditions satisfactory to the Bank. In view of the importance of these consultant services to the pro- ject planning and i eiplmentation, it is recommended thait the propoeed loan finance retroactively that part of these services incurred prior to signing of the loan (eastimated at $150,000). The Gas Unit has also agreed that it would synchronize the timing of conversion of its customers, facilities to the use of gas with the pipeline construction. The existing gas transmission and distribution facilities will be integrated in the expanded system, and operation and main- tenance of this system are not expected to pose problems to the Gas Unit. The long-term lease agreement, satisfactory to the Bank, between the Gas Unit and the Production Unit, under which the latter would operate the compressors procured under the project, iias been signed and the effectiveness of this agreement would be a condition of effectiveness of the loan. Supply of Gas 37. Gas required by the system during the economic life of the project (75.5 billion NmJ, in the period 1973-1992) is expected to be supplied from three sourcess 47.5 percent from proven recoverable reserves in Vojvodina, 46 .percent from gas to be iported from Hangary and 6.5 percent from d6mie;stic reserves to be found in the region (or import, or beth). The domestic gas will be supplied by the Production Unit of Naftagas, and the Gas Unit and the Production Unit have already signed a supply contract, satisfactory to the Bank, covering 20 years. The ratification of this agreement by these units would be a con- dition of effectiveness of the loan. About 50 percent of the proposed supply price (Din. 0.270/m3) is intended to cover the costs of future exploration to be undertaken by the Production Unit, which has agreed to have its prod- uction practices and exploration program reviewed by consultants hired by the Gas Unit to ensure the econoaic feaslihility oTTNiFiher exploration. The Bank would be kept informed of the results of these reviews. 38. Gas from Hungary will be imported under a swap arrangement with the USSR: the Gas Unit would purchase gas from the USSR to be delivered to Soviet-Hungarian border for the use of Hungary, which in turn would supply the Gas Unit with an equivalent volume of gas from its field near the Yugoslav - 12 - border. Agreement has been reached between the Governments for the importation into Yugoslavia for the project of up to 35 billion Nm3 of natural gas during the period 1977 through 1992. Actual supply contracts are expected to be concluded by October 31, 1974 and the Bank would have the right to suspend, cancel and pre-mature the loan, if these contracts are not signed by the said date. Tne construction shoedkle is such tha=ItTh an iihlike1y event that importation of the gas did not materialize, the portion of the pipeline system (Belgrad-Nis) which would rely on the imported gas supply could be differed. The other portion of the system, which will be supplied adequately by domestic gas, would be indpendently viable from both financial and economic points of view. 39. The Mokrin field, which straddles the Yugoslav-Romanian border, is expected to supply 24 percent of gas to the system. Romania, however, has been exploiting its side at a faster rate than Yugoslavia, and it is estimated that a substantial quantity of gas has migrated from the Yugoslav to the Romanian side. Naftagas is taking measures to prevent further migration of gas, and in addition Yugoslavia has recently reached an agreement with Romania, satisfactory to the Bank, on joint exploitation to ensure optimal joint utilization of the reserves of the Mokrin field. Project cost 40. The total cost of the project is estimated at US$130.4 million with a foreign exchange component of US$59.4 million, (46 percent of the total cost). The cost estimate was prepared by the Gas Unit and is generally based on the current construction costs (assuming that local contractors will form joint ventures with foreign contractors), costs of imported pipes and treatment pzants, and ex-factory prices of pipes manufactured in Yugoslavia. The physical contingency allowance of 3 percent is considered ample. The price contingency of 11.2 percent assumes a 6 percent annual price increase for foreign exchange costs and annual price increase for local costs of 10, 8, 6 and 6 percent in 1973, 1974, 1975 and 1976, respectively. Financing 41. The proposed Bank loan of US$59.4 million would finance the foreign exchange costs of the project, and the foreign exchange cost of an audit training program estimated at uS$0.4 million (see below para. 46). The local cost of the project, totalling US$71.0 million, equivalent would be financed by: (a,) equity funds provided through the Joint Venture Agreement between the Gas Unit, the Production Unit and Naftagas (21 percent), (b) equity funds from the Governments of Serbia and Vojvodina channeled through Naftagas (37 percent) and (c) a loan from Beogradska Banka, representing a local banking consortium (42 percent). The Joint Venture Agreement is satisfactory to the Bank and the effectiveness of this agreement is a condition of effectiveness of the loan. The Governments of Serbia and Vojvodina already have legislative authorization to make their funds available to Naftagas but additional agreements specifying how these funds would be channeled through Naftagas to the Ga7~ Unit are necessary. Signing and ratification of such agreements satisfactory to the Bank would be conditions of effectiveness of the loan. The proposed terms and conditions (including a repayment period of ten years plus a grace period equal to the construction period, and interest at 8 percent per annum) of the loan agreement between the Gas Unit and Beogradska Banka are acceptable to the Bank, and the execution of this agreement would be a condition of effectiveness of the loan. In view of the multiplicity of financing sources, an Administration and Financing Agreement would be signed between the Bank, Beogradska Banka, Naftagas and the Production Unit to define their several responsibilities in project financing and execution. Financial Position 42. Prior to 1972, the Gas Unit did not accumlate any substantial funds for investment, but the project would lead to a substantial expansion of its operations, and its future financial position would depend primarily on the financial results of the new operations. From late in 1974, when the project begins partial operation, the financial position would improve rapid- ly through additional revenues, and its cash flow would also be improved by increased depreciation. Coverage for interest and total debt services would be satisfactory, with the interest service ratio rising from 1.8 in 1977 to 3.8 in 1982, and the total debt service ratio from 1.9 to 2.6. The financial rate of return on gross fixed assets would be satisfactory, averaging about 13 percent during 1977 to 1982. The debt/equity ratio after the completion of the project would also be satisfactory, falling rapidly from a peak of 62/38 in 1976 to 43/57 in 1982. 43. In order to ensure a satisfactory cash position, the Gas Unit has agreed (a) to establish and maintain such tariffs as will result in a minimum financial rate of return of 10 percent on average gross fixed assets in use, (b) to maintain a depreciation policy acceptable to the Bank, (c) to enable the Bank to review at intervals of no less than one year the Gas Unit's invest- ment program, (d) not to undertake any further investment which in the Bank's judgement would adversely affect the execution of this project or the financial position of the Gas Unit and (e) not to incur any long-term debts if thereby total debt service coverage would be less than 1.5 times. 44. Since the Gas Unit would not generate sufficient funds to pay interest during the construction period, the proposed loan would include US$6.0 million to finance such interest on the Bank loan. The loan agreement with Beogradska Banka would include similar provisions to cover such interest during constructior on its loan. Tariffs 45. Under a general freeze on prices initialed in October 1971, the selling price of natural gas was placed under government control. The Gas Unit's selling prices, barred from any increase, are about 60 per- cent lower than those of competitive fuels. NaftagRa and the Gas Unit have - 14 - requested the Federal Government to allow an increase in gas prices to an average selling price of Din. 0.41/m3, which would cover the cost of produc- tion and provide a reasonable return. The Federal Government has agreed in principle to the price increase as proposed by the Gas Unit and also to allow such tariffs as are necessary in future to achieve a minimum financial rate of return of 10 percent (see para. 43 above). The final decision by the Federal Ebecutive Council, which would authorize the Borrower to increase its average selling price to Din. 0.41/m3, is expected by June 30, 1973. It would be a condition of effectiveness of the loan. The present tariff structure of the Gas Unit is unsatisfactory and it is conducting a comprehensive tariff study with consultants' assistance. This study will be submitted to the Bank shortly for review and would provde the lbasis for a new tariff :tructure to be implemented before the project goes into operation. Audit 46. The Social Accounting Service (SAS) is an autonomous governmental agency responsible for financial inspection of Yugoslav economic enterprises. It audits several Bank-financed projects. The SAS and the Bank have recently agreed upon a training program for selected SAS staff in modern auditing methods designed to enable the SAS to achieve improved auditing standards more accept- able to the Bank and other foreign lenders and invrestors in Yugoslavia. The Federal Government has requested that the foreign exchange cost of the train- ing program, estimated at US$400,000, be included in the proposed loan. The part of the loan allocated to this training program would be on-lent by the Gas Unit to the SAS, and the signing of a subsidiary loan agreement would be a condition of effectiveness of the loan. The training program would begin no later than January 15, 1974 and would be carried out with the assistance of consultants. Procurement 47. All goods and equipment for the project to be financed by the proposed loan would be procured through international competitive bidding except: (a) those items of supply too small to attract international bidding, which are not expected to total more than US$1.0 million; (b) procurement and installation of the operating center building, the control/metering station buildings and distribution ring; and (c) the installation of field compressors. Both of the latter works will be procured locally because they consist of a large number of small scattered projects, requiring individual contracts. The two treatment plants (totalling US$11.6 million) would be procured under turnkey contracts covering design, supply and erection. For the purpose of bid comparison, domestic manufacturers of materials and equipment would be accorded a margin of preference which would be 15 percent of the cif imported price or the existing customs duty applicable to the competing imports, whichever is lower. Yugoslavia has no regional preference treaties. Disbursements 48. The Bank loan would be disbursed against: (a) actual foreign exchange costs of imported pipe., materials, equipment and foreign consul- tants' services; (b) 35 percent of expenditure, representing the estimated foreign exchange costs of (i) construction contracts for pipelines and supporting facilities, (ii) pipes and other domestically-produced goods, and (iii) the supply-erection contract for the Mokrin and the Elemir plants; (c) interest during construction on the proposed loan; and (d) foreign exchange cost of the SAS training program. Disbursements are expected to take place over three years from mid-1973 to mid-1976. A schedule of estimated disbursements is given in the Loan and Project Summary, which is attached as Annex III to this Report. 49. As recommended in paragraph 36, disbursement would be made against expenditures of up to US $150,000 incurred prior to the signing of the loan for engineering consultantst services. Environment 50. Installation of the pipeline would not cause damage to the environ- ment or interfere adversely with land cultivation and natural drainage. As natural gas is a substantially cleaner burning fuel than the liquid fuel or coal which it will replace, it would contribute to alleviating air pollution. Rights of Way 51. The Gas Unit has no legal condemnation rights but in view of the past experience of good cooperation of local authorities and individual land- owners, it expects no problems in obtaining access to pipeline routes. It has also provided for US $2.2 million as part of the project cost for possible crop damage and land easement. The Gas Unit, however, has agreed to obtain all necessary land rights before starting any construction. Phase II of the Gas Pipeline Program 52. The transmission pipeline system under the project is expected to form the basis of an extension of gas supplies to the neighboring less- developed regions: Kosovo, Macedonia and Bosnia-Herzegovnia. At present the construction of this phase is tentatively scheduled for 1977/78-82, at an estimated cost of US$30 million, but the details of this operation remain to be worked out by Naftagas and the Republic and Provincial Governments concernecl Justification 53. Current projections indicate that the demand for energy in Serbia and Vojvodina will continue to grow rapidly and will be increasingly - 16 - oriented towards electricity and hydrocarbons, which together will meet 90 percent of the demand in 1985. Although additional refinery capacity will be established to meet the growing demand for light and middle distallates (65 percent of yield by 1985), residual fuel production (about 25 percent of yield in 1985) will not be sufficient to meet the industrial requirements and will have to be supplemented by imports of fuel oil or by natural gas,or by both. The proposed project is the least cost solution, together with the existing gas supply facilities, to meet the expected energy demand and ensure the supply of energy to about 145 industrial customers in Serbia and Vojvodina. The economic rate of return of the project, taking into account the cost of conversion of consumers' plants, ranges between 16 and 40 percent depending on whether the most pessimistic or optimistic assumptions are employed; the most probable rate is 23 percent. 54. The project would provide other important benefits, which are difficult to quantify and are therefore excludled from the economic analysis. These would include: (a) environmental benefits in minimizing air pollution, (b) improvement in physical and chemical qualities of some industrial products through use of gas (glass, ceramics, refractories and non-ferrous metallurgy), and (c) employment created by (i) the construction work of the project (labor costs of about US$25 million), and (ii) expansion of the Gas Unit and consumer industries. PART V - ICAL INSTRUMENTS AND AUTHORITY 55, The draft Loan Agreement between the Bank and Naftagas Naftna Industrija Novi Sad - Zajednica Radnih Jedinica Transporta, Prerade, Primene I Prometa Gasa - Pravno Lice - Novi Sad, the draft Guarantee Agreement between the Socialist Federal Republic of Yugoslavia and the Bank, the draft Administration and Financing Agreement between the Bank, Beograd- ska Banka, Naftagas and the Production Unit, the Rleport of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposesd loan are being distri- buted to the Executive Directors separately. 56. The draft Administration and Financing Agreement provides for (a) Beogradska Banka's cost overrun commitment; (b) subordination to the Bank loan of the debt and equity financing made available to the GVas Unit by Beogradska Banka, Naftagas and the Production lJnit; and (c) close cooperation among the parties. 57. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 17 - PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 7, 1973 ANNEX I Page 1 of 2 pages COUNTRY DATA - Yugoslavia AREA 2/ POPULATION DENSITY 255,804 kar- 20.55 million (mid-1971) 80 persons per k2i Rate of Growth: 0.9% (from 65 to 71 ) 2030 persons per kiY/of arable land POPULATION CHARACTERISTICS (1071) HEALTH (1970) Crude Birth Rate (per 1,000) 18.2 Population per physician 1164 Crude Death Rate (per 1,000) 8.7 Population per hospital bed 174 Infant Mortality (per 1,000 live births) 48.9 INCOME DISTRIBUTION (1971) DISTRIBUTION OF LAND OWNERSHIP (1970) % of national income, lowest quintile 6.1 % owned by top 10% of owners highest quintile 39.2 % owned by smallest 10% of owners ACCESS TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1961) % of population - urban) 3% of population - urban 92.7 - rural) - rural 36.1 NUTRITION (1967-70) EDUCATION Calorie intake 3151 Adult literacy rate % 82 (1971) Per capita protein intake 91.3 grams Primary school enrollment % 94 (1968) 1/ GNP PER CAPITA in 1971 US $730 GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (., constant prices) US $ MIn. % 1960-65 1965-70 1971 1972 3/ GNP at Market Prices 14,875 100.0 6.0 5.4 9.7 5.6 Gross Durnestic Investment 4,o57 27.3 7.5 3.3 -4.5 4.0 Gross National Saving 3,733 25.1 9.1 2.6 -1.2 Current Account Balance -324 2.2 Exports of Goods, NFS 2,844 19.1 12.0 8.4 9.5 20.7 Imports of Goods, NFS 3,743 25.2 8.6 11.6 12.2 2.2 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 2/ Value Added Labor Force7 V. A. Per Worker USi Mln. % Mln. % US $ % Agriculture 2,193 16.3 3,928 47.4 558 34.4 Industry 6,186 46.o 1,932 23.3 3,202 197.5 Services 5,058 37.7 2,429 29.3 2,082 128.4 Unallocated ._.._ Total/Average 13,137 loo.0 8,298 100.0 1,621 100.0 GOVERNMENT FINANCE C^ntral Govornillenc ( )-. Mln.) o Of (DP 1973. 197' i°v- Current Receipts JA3,362 8.5 .2 Current Expenditure 13,,,37 '7). 7-3 Current Surplus 2.325 1.1 0.9 Capital Expenditures 2,3L$ 1. 0,. External Assistance (net) '- -0.01 1/ The Per Capita GNP estimate is at 1971 market prices, calculated by the same conversion technique as the 197Z World Atlas. All other conversions to dollars in this table are at the current exchange rate prevailing during the period covered. Estimated per capita GNP in 1971 at the current exchange rate would be about67 2/ Total/ia or 'Yorce; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first Job. )/ Preliminary - nil not applicable not available ANNEX I Page 2 of 2 pages COUNTRY DATA - Yu oslavia MONEY, CRFDIT and PRICES 1965 1969 1970 1971 1971 1972 (MlllionDDnrs. outst.andirng end period) Money and Quasi Money 34l44 64.04 74.39 89.56 79.54 99.46 Bank Credit to Public Sector 7 74 6.95 8.38 9.3c 7.69 9.71 Bank Credit to Private Sector 32.25 51.76 68.69 78.35 76.45 83.41 (Percentages or Index Numbers) Money and Quasi Money as 7I of GDP 4il. 39.6 39.5 38.0 General Price Index (1963 = 100) 141 207 227 262 277 31h Annual percentage changes in: General Price Index 29.4 7.3 9.7 15.4 14.5 16.0 Bank credit to Public Sector 96.4 5.8 20.6 12.1 3.4 26.3 Bank credit to Private Sector 11.1 20.4 18.9 14.1 20.4 9.1 BALANCE OF PAYMXENTS MERCHANDISE EXPORTS (AVERAGE 1969-71) 1 1970 1971 1972 US $ Mln % (Millions US $) Exports of Goods, NFS 2,134 2,489 2,810 3,400 Agriculture Products 250 13.4 Imports of Goods, hFS 2,405 3,220 3,720 3,51k Non-ferrous metal ind. 249 13.3 Resource GaP (deficit = -) -2 -731 _T910 5t Metal industry 236 12.7 Ships 1-42 7.6 Interest Payments (net) -90 -110 -130 -150 All other commodities 988 53.o Workers' Remittances. 260 I44o 652 780 Total M3 1iOQ,o Other Factor Payments (net) . Net Transfers 45 61 64 70 EXTERNAL DEBT, DECEMBER 31. 1971 2/ Balance on Current Account -110 -340 -324 13uS $ Mln Direct Foreign Investment) Net MLT Borrowing ) 278 301 353 298 Public Debt, incl. guaranteed 2,670.6 Disbursenents 517 636 857 926 Non-Guaranteed Private Debt 1,S 8 Amortization -239 -315 --04 -628 Total outstanding & Disbursed 4,487.4 Subtotal 278 301 353 9 1/ Capital Grants - - - - DEBT SERVICE RATIO for 197 - Other Capital (net) 2 -26 -114 167 7. Other items n.e.i -92 2.5 - 6 -2 Increase in Reserves (+) 78 -gO -109 W Public Debt. itcl. guaranteed 6.h 5.1 2/ Non-Gu&ranteed Private Debt 15.6 12.b T/ Official Reserves (end year) 253 14a0 212 730 Total outstanding & Disbursed 2 17.5 2/ Net Reserves (end year) RATE OF EXCHANGE IBRD/IDA LENDINIG, March, 1973 (Million US $) Through - 1971 IBRD IDA US $ 1.00 - Dinars 15.00 1.00 e US $0.0666 Outstanding & Disbursed 321. b- Undisbursed 254-1 Since - 1971 Outstanding incl. Undisbur6ed 573 US $ 1.00 X 17.00 l.oo = us $ 0.0588 I/ Based on quarterly averages of money and auasi money. 2/ Service on External Debt to Exports of goods and total services including current transfers. 3/ Includes public debt contracted Jan-Oct. 1972 - nil . not applicable not available March 31, 1973 EFD/PRD ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA A. STATEMENT OF BANK LOANS (as at April 30, 1973)- US$ million Amount (less cancellations Number Year Borrower Purpose Bank Undisbursed Ten Loans fully disbursed 280.2 531 1968 Yugoslav Investment Bank Railways 50.0 30.1 554 1968 Yugoslav Investment Bank Industry 16.0 1.0 608 1969 Social Fed. Republic of Yugoslavia (SFRY) Roads 30.0 4.0 654 1970 Yugoslav Investment Bank Industry 18.5 0-7 657 1970 Yugoslav Investment Bank Telecommunica- 40.0 30.2 tions 678 1970 SFRY Roads 40.0 26.2 751 1971 SFRY Roads 35.0 29.2 752 1971 Hotel "Bernardin," Piran Tourism 10.0 9.4 777 1971 SFRY Multi-purpose 45.0 44.4 Water 782 1971 "Babin Kuk" Hotelsko Turisticki Centar, Dubrovnik Tourism 20.0 19.2 836 1972 Eleven Electric Power Enterprises in Yugoslavia Power 75.0 75.0 659.7 249.4 Total Loans (less Cancellations) 659.7 of which has been repaid 85.6 Total now outstanding 574.1 Amount sold 6.2 of which has been repaid 5.6 o.6 Total now held by Bank 57 . Total undisbursed 249. & 1/ A loan of $31 million (Loan 894) to Stopanska Bankas Skopje for an agricultural industries project was approved on May 15, . 3 1973u i buts 1 nt ytaefSecRiyQ . ANNEX II Page 2 B. STATEM-ENT OF IFC INVESTMENTS (as at April 30, 1973) Type of Amount in US$ million Year Obligor Business Loan Equity Total 1970 International Investment Corpo- Investment - 2.0 2.0 ration for Yugoslavia Corporation 1970 Zarodi Crvena Zastava Fiat S.P.A. Automotive 5.0 8.0 13.0 Industry 1971 Tovarna Automobilov in Motorjev Automotive 7.5 1.9 9.4 Maribor (TAM) /Klockner-Humboldt Industry Deutz A.G. (KHD) 1972 FAP-FA14OS Belgrade/Daimler Automotive 11.5 2.5 14.0 Benz A.G. Industry 1972 Sava/S3emperit Tires 4.0 .4 5.4 1973 Belisce/Aell Pulp and 11.6 - 11.6 Paper Total Gross Commitments 39.6 15.8 55.4 less cancellations, terminations repayment and sales 2.3 1.8 4.1 Total Commitments held by IFC 37.3 14.0 51.3 Total Undisbursed 24 30.1 ~= ANNEX II Page 3 C. PROJECTS IN E2CUTIONI/ Loan 395 Railway Modernization Program: US$70.0 million Loan of December 11, 1964; Closing Date: March 31, 1973. The loan was fully disbursed on October 31, 1972, the Closing Date had been postponed from December 31, 1969. However, completion of the project has been delayed to 1975, due to financial, planning and technical difficulties. After 1966 the Yugoslav Railways suffered a continuous dete- rioration of their financial position and liquidity for a number of related reasons. Project cost estimates increased nearly threefold between 1963 and 1971 because of inflation, devaluation of the dinar, revaluation of some European currencies and as a consequence of additional work following more detailed feasibility studies. Payments for railway freight services were held back by the lack of liquidity in the whole economy. The five Railway Transport Eaterprises which, under the Yugoslav system, are expected to operate on a commercial basis, were restricted by Government regulations in their ability to respond to changed market conditions. Furthermore, the responsibility of the Federal Government to meet railway deficits has been transferred to the Republican Governments, which only now are in a position to assume it. In order to be able to make proposals for dealing not only with the difficulties with the Bank project, but also with the difficulties facing the Yugoslav railways as a whole, it was agreed with the Government that the Bank would undertake a thorough review of the railways' problems. Following this review, which was carried out with the assistance of a consulting team, the Bank discussed its findings with the Federal and Republic Governments and the Railways. The response of the Governments and the Railways was very favorable and they agreed to take concerted action to improve the railways' situation. In view of this, and of the importance of solving the railways' problems to the economy as a whole, the Bank agreed to consider making a further loan in fiscal year 1973 or 1974 to assist completion of the 1964 modernization program, pro- vided that certain conditions could be met. These are the clarification of government responsibility for the railways and an overall plan of action both for the Yugoslav railways as a whole and for each Railway Enterprise (including clear marketing and related operational and financial objectives), a revised tariff policy, investment and disinvestment proposals, and proposals for dealing with labor redundancy problems and for improvement in management. The Govern- ments and the railways are taking measures to meet these conditions, and a Bank appraisal mission visited Yugoslavia in November/December 1972. However, basic changes in the investment and financing plans submitted recently require substantial re-appraisal of the project. which is now under way. Although the final size of the proposed project is Just now being determ1ned, as Republics clarify the availability of local resources, the Bank's financial assistance would be concentrated on the completion of the 1964 modernization program of main lines begun with financing under loan 395-YUJ and related works. Any further delay in carrying out a minimal modernization program could further jeopardize the competitve position of the railways in relation to road traffic and would extend the period in which the economy would not benefit fully from the large investments in the Modernization Program made with Bank assistance since 1964. 1/ These notes are designed to inform the Executive Directors regarding The progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX I I Page 4 Loan 531 Belgrade-Bar Railway: USS50.0 million Loan of March 22, 1968; Closing., ate: December 31, 1973. A delay of over one year in civil engineering work at the Kos Tunnel was caused by the inefficiency of the contractor responsible for the work. The contract has now been placed with another more efficient con- tractor already working for the project. Construction of the permanent way is also behind schedule by about one year due to the time required for the preparation and planning work. Completion of the project is now expected by vnid-l975. As a result of inflation and cost overruns., the total project cost is now estimated to be substantially above the original estimate. The Bank has asked for a revised estimate of the project costs to ascertain the funds required to complete the project. If additional funds should be required; the availability of these funds would be reviewed in conjunction with the negotiations for the proposed fourth Railway loan. A supervision mission is now in the field. Loan 554 Iuceustrial Projects - 1968: US$16.0 million Loan of August 15, 19683 Closing Date: October 31, 1973. Seven of the nine sub-projects under the loan have been completed, but two sub-projects have been delayed. Sub-project Nis (Electronic industries) is behind schedlule up to two and a half year; due primarily to delays in procurement, but is now expected to be completed shortly. Two production ex- pansion schemes under sub-project Sevojno (Copper and Brass Mill) were revised with Bank approval and are now expected to be completed in December 1973 with six months' delay and about two years delay, respectively. The Closing Date was postponed on April 11, 1973 from March 31 to October 31, 1973. Disburse- ment of the loan is in line ith the revised. sub-project completion schedules. Loan 608 Third Highway: USS30.0 million Loan of June 5, 1969; Closing Date: December 31, 1973. Construction works under the loan have been substantially completed, except for the construction of the Karlovac bypass and the access road in Zagreb, which are expected to require several additional months. The Closing Date of the Loan was accordingly postponed from December 31, 1972 to December 31, 1973. In view of increases in costs the disbursement percentage has been reduced from the original 42 percent to 27 percent, in order to continue dis- bursements until the completion of these works. Loan 654 Industrial Projects-1970: US$18.5 million Loan of January 30, 1970; Closing Date: June 30, 1973. All three sub-projects under the loan are making satisfactory pro- gress after experiencing delays of up to 18 months due to slow deliveries of local and imported goods, and are now expected to be completed before the Closing Date. Disbursement is proceeding satisfactorily. ANNEX II Page 5 Loan 657 Telecommunications: US$40.0 million Loan of February 20, 1970; Closing Date: June 30, 1975. Construction work is getting underway. Although there was some initial delay in procurement preparation and placement of orders, this is not expected to delay the completion cf the project since the delivery of equip- ment and materials is expected to follow the original schedule. Disbursement is about 18 months behind the appraisal forecast. Loan 678 Fourth Highway: US$40.0 million Loan of May 28, 1970; Closing Date: December 31, 1973. After an initial delay of about one year in starting work on the Sarajevo-Zenica sections because of difficulties in acquiring the right-of-way, work on all sections is proceeding satisfactorily. The completion of the project, however, is likely to be delayed substantially beyond the present Closing Date: the extent of this delay will be determined in the fall of 1973. Inflation and the delays in starting construction caused an increase over the appraisal cost estimate of about 10 percent. The Federal Government submitted a revised cost estimate of construction work in January 1973 and on the basis of this estimate the disbursement percentage has been revised from 43 to 40 percent, effective March 1, 1973. Disbursement is proceeding in line with the revised projection. Loan 751 Fifth Highway: US$35.0 million Loan of June 18, 1971; Closing Date: September 1, 1976. After a delay of about eight months in fulfilling the conditions for effectiveness of the loan, construction work is making satisfactory pro- gress on all sections, and all are expected to be completed before the Clos- ing Date. A 10 percent increase on the appraisal cost estimate is expected, and the disbursement percentage would be revised when more accurate revised cost estimates are availahle. Disbursement under the Loan is about one year behind the appraisal forecast. Loan 752 Bernardin Tourism: US$10.0 million Loan of June 18, 1971; Closing Date: June 30, 1976. Implementation of the project is about a year behind schedule due to delays in making the loan effective and in organizing the office for project execution. Work on progranmiing of physical facilities and architec- tural designs is making satisfactory progress. The construction of the hotel complex is now expected to start early in 1974, and to be completed by early in 1976. Disbursement is proceeding satisfactorily. ANNEX II Page 6 Loan 777 Ibar Multipurpose Water: US$45.0 million Loan of June 30, 1971; Closing Date: December 31, 1976. Implementation of thae project has been delayed by about one year due to delay in making the loan effective, and the only construction work under way at present is the diversion tunnel for the main dam. Recently the two largest contracts in the project (totalling US$48 million) have been awarded. Disbursement is about one year behind the appraisal forecast, and the complet- ion of the project is now expected to be delayed by one year to the latter part of 1976. Loan 782 Babin Kuk Tourism: US$20.0 million Loan of July 21, 1971; Closing Date: July 31, 1976. Implementation of the project is about one and half years behind schedule due to delays in making the loan effective and in appointing ar- chitectural, engineering and management consultants. The construction of the project was originally expected to start in early 1974 but there have been delays in programming of facilities and architectual designs due to the reluctance of Privredna Banka, Zagreb, the local bank, to disburse its loan. This problem has been solved and design work is continuing. The difficulty encountered in acquiring some of the land from an auto camp located in the project area has threatened to delay further the construction work of the project, since all planning and scheduling of con- struction is based on the assumption of the availability of this site prior to the end of 1973. The Borrower has agreed to solve this problem promptly. Loan 836 Power Transmission: US$75.0 million Loan of June 23, 1972; Closing Date: June 30, 1977. This loan was declared effective on December 29, 1972. After some delays in preparing tender documents, bidding procedures are now under way. A supervision mission is in the field. ANNEX III Page 1 YUGOSLAVIA: Naftagas Pipeline Project Loan and Project Swmrary Borrower: "NAFTAGAS" Naftna Industrija-Novi Sad-Zajednica Radnih Jedinica Transporta, Prerade, Primene I Prometa Gasa-Pravno Lice-Novi Sad (The Association of Work Units for Gas Transmission, Treatment, Application and Distribution, Naftagas, Novi Sad). Guarantor: Socialist Federal Republic of Yugoslavia. Amount: US$59.4 million, equivalent, in various currencies. Terms: Amortization in 20 years, including a 4 year period of grace, through semi-annual installments beginning May 15, 1977 and ending November 15, 1993. Interest rate, 71¼ percent. Project Description: The project forms part of the Social Development Plan (1971-75) for the energy sectors of the Republic of Serbia and the Autonomous Province of Vojvodina. It coririLses facilities necessary to expand the gas transmission and distribution capacity of the Gas Unit from the present 700 million to 2,500 million N m3 per annun to supply about 145 industrial consumers in Serbia and Vojvodina. The project includes: (a) Field Compressors. The procurement and installation of gas compressors at the Mokrin and Tilva fields with a total capacity of about 5,000 hp. (b) Pipelines. The procurement and installation of: (i) Gas Supply: Approximately 30 km of 26 in od and 66 km of d 5/8 in od high pressure pipelines to supply gas from seven fields to the gas trans- mission pipeline. Eight other gas fields are already connected to the existing system. (ii) Gas Transmission. Approximately 390 kn of high pressure pipeline, varying between 30 and 14 in od, and totalling approximately 8900 in km., to transport gas Lfom the Hungaro-Yugoslav border, in a southeasterly direction to the city of Nis, via Belgrade. (iii) Gas Distribution: Approximately 710 kan of high pressure pipelnes, varying in diameter between 20 and 4 ½ in od and totalling approximately 9,800 in In, to transport gas from the transmission line to the consumer areas. ANNEX III Page 2 (iv) Other. Approximately 54 km of 6 5/8 in od pipeline to transport concensate from an absorption plant at Mokrin to a fractionation plant at Elemir, and about 24 km of 12 3/4 in od high pressure supply/ distribution pipeline to transport gas between the Srbobran gas field and the gas transmission line. (c) Distribution Rings. The procurement and installation of approxiZefy 1U control and metering main stations, including buildings, at city limits, with about 270 km of 0lw pressure distribution rings totaling approximately 2600 in km, and control and metering stations for approxi- mately 1h6 industrial constuners. (d) Treatment Plants. (i) The procurement and installation of facilities to treat approximately 3 million N m3 per day of wet gas from the Mokrin field to remove condensable pro- pane, heavier hydrocarbon fractions and water vapors. (ii) The procurement and installation of facilities 0o treat approximrately 160),000 tons per year of con- densate to separate the LPG (propane and butane) from the heavier fractions and the installation of tanks to store products. (e), Control S stem. The procureinent and installation of instrumen ation, telecommnmications and telecontrol and an automated central dispatch sta-tion which mill receive critical operating data from important outlying stations and will regulate operating conditdons automatically or by vcitce and manually as desired. (f) Technical Assistance to provide the Gas Unit and Naftagas with consultant services to set up inxformation and management system.s and to train the staff for the systems. (g) Technical Assistance to Social Accounting Service for a audit taining program. ANNEX III Page 3 Estimated Cost: (including interest during construction) US$ (millions) Local Foreign Total Field Compressors 1.2 1.8 3.0 Treatment Plants 4.8 6.8 11.6 Pipelines 30.7 37.3 62.0 Delivery Systems 12.1 2.9 15.0 Engineering Services 4.3 1.7 6.o Spare Parts - 0.3 0.3 Preliminary Studies and Planning 0.6 - o.6 Accounting Consultants Services 0.1 0.5 0.6 Working Capital 4.1 - 4.1 Training of SAS staff - 0.4 0.4 Contingencies: Physical 1.7 1.4 3.1 Price 8.5 6.3 14.8 TOTAL 68.1 53.4. 121.5 Tnterest du-ng construction 2.9 6.o 8.9 Total & Project Cost 71.0 59.4 137 Financing: (including interest during construction) Sources US$(millions) % IBRD 59.40 45.5 Governments of Serbia and Vojvodina 26.50 20.5 Naftagas 2.95 2.5 Production Unit 8.80 6.o Borrower 2.95 2.5 Beogradska Banka 29.80 29.0 130.40 100.0 Estimated Disbursements: (including interest during construction) US$(millions) CY73 CY74 CY75 CY76 7T 2~T 25.3 37.5 ANNEX III Page 4 Procurement: Through international competitive bidding except for: (a) construction of the control center building, control/metering station buildings and delivery rings; (b) those items of supply too small to attract inter- national bidding which are expected to total no more than US$1.0 million; and (c) installation of field compressors. The two treatment plants (totalling TS$11.6 million) would be procured under turnkey con- tracts, covering designi3 supply and erection. Domestic manufacturer of material.s and equipment would be the existing rate of custox duty applicable to computing imports or 15 percent of c,:L.f. costs, whichever is lower. Consultants: Consultants to be employed to (a) provide supervisory engineering services during project implementation, (b) to design, implement and train the Gas Unit's and Naftagas' staff for, information and management systems, and (c) to provide training in modern auditing methods to the SAS staff. Rate of Return: The most probable economic rate of return is estimated at 23 percent. Appraisal Report: Report No. 117-a-YU Date May 25, 1973 Transportation Division Projects Department Europe, Middle East and North Africa Region IbRD8 10308 GAS IMPORTS FROIM FEdRUPRY 197 13- 19' AINGARY 4iASEGEDN 21- 22 '. H U N G A R Y 4K . r.tarlrr YUGOSLAVIA K ._- -. .APPRAISAL OF GAS TRANSMISSION AND m _, lp DISTRIBUTION SYSTEM OF NAFTAGAS -Ut iS-12 3r4 e Ad gna 1 PPROJECT' Li h~~~~~~~~~ {~~~~~c~~~~- ~~~Main Pipeline ArCrrme '-- CSon o . 3rrrLo p > L IndiloS > 1 |/r$9NIkolincl < Prje P- eod lo S 1975-85 (m ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ot S- 20 lgD 1 44- , ; fi f * . 74, | .1 -.-- , ' ,49\sS_) C' ' n,.''I' °< L. K.,t\ I . I . r;''' ' "' Q~~~~~~~~~~I - 43 -4 a e tE ! - i. ; t v ; -v t - , } 9~~~~~~~~~~~~~~~~~~~~~~~~~~~~d- a -7 1 _ 't' J f ^t 8\ ,1:. - ',, , P ., ., A,- ,.