CIRCULATING COPY #3 Report No. 359a-RO m BE REURNE TO REPORTS DESK Appraisal of the RETURN TO Otelinox Special Steel Project REPORTS CS{ Romania ONE WEE,s - May 21, 1974 Industrial Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared tor official use only by the Bank Group. It may not be published, quoted or cited without Bank Group aijthorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. G CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Romanian Lei. For all calculations, the following conversion rate has been used: US$1 Lei 20 Lei 1 = US$0.O5 Lei 1,000 = US$50.00 WEIGHTS AND MEASURES All units are metric. 1 metric ton = 1,000 kilograms (kg) 1 metric ton = 2,204.6 pounds 1 kilometer (km) - 0.62 miles 1 cubic meter (m3) = 35.32 cubic feet (cu.ft.) ABBREVIATIONS AND ACRONYMS AISI - American Iron and Steel Institute HSLA Steel - High-,Strength Low-Alloy Steel (High Tensile Steel) _B - Banca De Investitii (Investment Bank) IPROLAM - Institute for Eagineering of Rolling Mills METAROM - Equipment Export-Import Agency under the Ministry of Metalbrghical Industries NB - Banca Nationala a Republicii Socialiste Romania (National Bank) Otelinox, the Enterprise, the Project - Second Stage of TirgoviFte Alloy Steel Complex Fteel Central - Centrala Industriala de Prelucrari Metalurgice Tirgoviste I - First Stage of Tirgoviste Alloy Steel Complex TPY - (Metric) Tons Per Year ROMANIAN FISCAL YEAR January 1 - December 31 Industrial Projects Department March 11, 1974 ROMLANIA APPRAISAL OF THE OTELINOX SPECIAL STEEL PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ...............................*... i - iii I. INTRODUCTION ..................... 1 II. THE ENTERPRISE ................... 1 A. Background ............... ....................... 1 B. Enterprise ......... ............................. 2 C. Relationship with Government Agencies .... ....... 2 1. Steel Central ...... 3 2. IPROLAM and METAROM ...... ....... .......... 3 3. Investment Bank - The Borrower .... ......... 3 4. National Bank ................................... 4 D. Management ................4..... .... ...........* 4 III. THE MARKET . 5 A. Introduction ..... ......................... .. 5 B. Overall Market ....................... 6 C. Market for Otelinox Products .................... 7 D. Production of Special Steels ............ .......... 8 E. Product Mix ....................................... 9 F. Imports and Exports ........ 10 G. Steel Prices .............................................. 11 H. Location, Distribution and Transportation *..*..* 11 IV. THE PROJECT .................... ,... 12 A. Physical Description of Project ................. 12 B. Processes to be Utilized ........................ 13 C. Project Execution--Division of Responsibilities . 13 D. Staffing ......... .............. 14 E* Ecology ......... *6...... .*..**.......... 14 F. Future Expansion Plans .......................... 15 This report was prepared by Messrs. W. P. O'Neil, S. P. Nayar, Y. T. Shetty and Miss Judith Graves. Table of Contents (Cont'd) Page No. V. CAPITAL COST AND FINANCING PLAN ...................... 15 A. Project Cost . ................................... 15 3. Working Capital ............ ............ 17 C. Financing Plan .................................... 0...... 17 VI. ALLOCATION OF BANK LOAN, DISBURSEMENT AND PROCUREMENT 18 A. Allocation of Bank Loan . ........ 18 B. Disbursement . ................ ................... 19 C. Bidding Procedures ...............a.... *. .... 19 D. Bidding Consortia ......*............. ... 19 E. Local Supply ............... * .................... * * * * * * * *, 20 F. Procurement Responsibilities .......... .......... 20 G. Implementation Schedule ...... # .................. 20 VII. RAW MATERIALS, PRODUCTION COSTS AND REVENUE ........ .. 21 A. Raw Materials and Utilities ................... . . 21 B. Production Costs ..................... ........ 21 C. Revenue ...................... 22 VIII. FINANCIAL ANALYSIS .................. .. 23 A. Romanian System .............. 23 B. Profitability ...................... 23 C. Allocation of Benefits . ......... 24 D. Financial Position ...... ... ... 24 E. Reporting Requirements ... ....................... 25 F. Auditing Requirements ........................... 25 G. Financial Rate of Return ........................ 25 H. Break-even Points ... ........ ..... ........ 26 IX. ECONOMIC JUSTIFICATION .. .................. . , , 26 A. Economic Rate of Return . . 26 B. Foreign Exchange Rates .......... 26 C. Sensitivity Tests and Risks ........... 27 D. Competitiveness ...#, .... .................o... 28 E. Employment .. ...... ... -.ooooo, ... .... .. 28 F. Estimated Foreign Exchange Effects 28 G. Transfer of Technology ................. 28 X. AGREEMENTS ............. 29 Table of Contents (Cont'd) ANNEXES 1 Description of Technical Terms 2-1 Organizational Chart and Functions of the Ministry of Metallurgical Industries 2-2 Role of the Enterprise, Central and Ministry 2-3 Enterprise Management and Organizational Chart 3-1 Market for Steel in Romania 3-2 Special Steel Prices 4-1 Types and Grades of Special Steel to be Produced 4-2 List of Basic Facilities 4-3 Description of Processes and Processing Sequences 4-4 Process Flow Charts for Cold Mill and Bar Mill 4-5 Employment and Training 4-6 Ecology 4-7 Long-Range Planning and Future Expansion 5-1 Capital Cost Estimates 5-2 Working Capital Requirements 5-3 Investment in New Projects 6-1 Equipment and Services to be Financed by the Bank 6-2 Estimated Disbursement Schedule 6-3 Implementation Schedule 7-1 Raw Materials 7-2 Production Cost Estimates 7-3 Romanian Pricing System 7-4 Revenue Forecast 8-1 Cash Flow and Allocation of Profits 8-2 Projected Income Statements 8-3 Sources and Application of Funds Projections (1974-1984) 8-4 Balance Sheet Projections 8-5 Major Accounting Practices 8-6 Control and Audit System 8-7 Financial Rate of Return 8-8 Break-Even Point 9-1 Economic Rate of Return and Sensitivity Tests 9-2 Foreign Exchange Savings MAP IBRD - 10895 ROMANI-A APPRAISAL OF THE OTELINOX SPECIAL STEEL PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the proposed Otelinox Special Steel Project, the independently-managed second stage development of the Tirgoviste Alloy Steel Complex, located some 80 km northwest of Bucharest, the Romanian capital. The project will include a cold-rolling mill, the first of its kind in Romania, to produce 30,000 tons per year (TPY) of stainless steel sheet and strip, and a bar mill to make 120,000 TPY of rod and bar products. The main raw material for the cold mill (40,500 TPY of hot-rolled coils) will be supplied from the country's largest integrated steelworks at Galati (capacity: 7 million TPY by 1980), and the main input for the bar mill (146,500 TPY of billets) will come from the adjacent Tirgoviste (Stage I) alloy steel plant, which by 1975 is expected to have a capacity of 600,000 TPY. Total financing required for the project, including interest during construction and working capital, is nearly Lei 3.7 billion (US$185 million equivalent), of which the foreign exchange component is about 52%. ii. The proposed Bank loan of US$70 million equivalent will be made to the Investment Bank, which is involved in the preparation and execution of all industrial projects in Romania. The beneficiary of the loan will be Otelinox, the Enterprise that is to carry out and operate the project. Another industrial project for the production of fertilizer has recently been presented for Board review (Report No. 459-Ro). The loan will be for 15 years, including 5 years of grace, at the prevailing interest rate of 7-1/4% plus a guarantee fee of 1-3/4%, bringing the total cost to the Enterprise to 9%. The Bank loan will cover about 38% of the total financing required for the project, with the rest -- U.S.t115.3 million equivalent including US$25.8 million in foreign exchange -- to be provided by the Government in the form of interest-free advances. The Government wqill also cover any cost overrun, operational losses, and working capital requirements as and when necessary. iii. The loan will cover the entire cost of competitively bid equipment and spares, including technical assistance, know-how and engineering, (US$40 million) of the cold mill and 65% (US$30 million) of such costs of the bar mill, as well as the foreign exchange cost of foreign consultant services for the project. Tenders are intended to be issued for two large equipment packages, one for each mill, including the technical assistance, know-how and engineering; procurement will follow Bank guidelines. While no Romanian sup- plier is expected to be prequalified as consortium leader for any of the two contracts, it is possible that a Romanian firm might become a member of a consortium as a sub-supplier for the bar mill. Civil construction will not be part of the bid packages; it is to be carried out by a specialized Romanian construction firm on the basis of fixed unit prices. Implementation of the project is about to commence and production is to start early in 1978 with full capacity to be reached in 1980. - ii - iv. The project is crucial for the development of a wide range of indus- tries including engineering and metal-transforming, industrial consumer goods and chemicals. Engineering and metal-transforming industries are among the fastest growing sectors in Romania with a substantial export orientation. They grew at an impressive rate of close to 16% annually between 1966 and 1970 and, during the current Five-Year Plan (1971-1975), are planned to expand at 15% a year. The performance of the first half of the current Plan indicates that this target is likely to be reached. In 1972, machinery and equipment exports accounted for about 25% of the country's total export earnings of US$2.6 billion equivalent. Next to machinery and equipment, the leading exports of Romania are industrial consumer goods and chemicals which together accounted for about 27% of total exports in 1972. Exports in general expanded by 23% in 1972 compared to about 13.5% in each of the preceeding two years. Romania has also succeeded in diversifying its markets abroad while maintain- ing a high export growth. For example, in 1972 the share of its total exports to outside the COMECON countries was nearly 53% compared with 44% in 1966. V. The Otelinox project is primarily oriented towards the domestic market for substituting for importg. Nevertheless, exports may reach a maxi- mum of 7,000 tons annually during the early operating years, until local demand will have caught up with production. However, the overall surplus available from Otelinox for exports would be hardly 5% of its production and although no specific plans exist yet as to where these exports will go, no major problem is foreseen in disposing of this moderate amount. The domestic market to which the bulk of the project output is to be directed, appears assured mainly be- cause of: (i) expected continuing high growth of the major special steel con- suming industries; and (ii) increased local supply of special steel will help meet the existing latent demand on account of current foreign exchange con- straints. Also because of the modern technology used in the project, an effi- cient and hard-working labor force, low wage costs and labor incentives in Romania, Otelinox is expected to be able to produce special steel competitively with industrialized countries elsewhere. vi. Otelinox has been established and its General Manager has already been appointed and recruitment of other key personnel is underway. In addition to him, the management of the Enterprise will consist of the Workers' General Assembly (includes all employees), the Working People's Committee, and the Management Committee. The Working People's Committee will be the decision-making body of the Enterprise on general matters, while the General Manager, who will be chairman of both committees, will make all day-to-day decisions on their behalf. This decision-making process allows a satisfactory implementation of the project and its subsequent operation. No difficulties are foreseen in obtaining adequately trained manpower, in part because it will be drawn from other existing steel mills in the country and in part due to the specific training that forms part of project execution. vii. The financial results of Otelinox are expected to be satisfactory after the first year of operations (1978) when the Enterprise will incur losses. However, the usual Bank standards to measure the Enterprise's financial via- bility have limited significance in the Romanian context because all fund flows - ili - in and out of the Enterprise are handled and controlled by the Government and all inputs and outputs are traded at prices also set by the Government. The financial rate of return, which is 13%, is, therefore, not a guide to investment decisions. The economic rate of return -- probably the most meaningful indicator of the soundness of an investment decision in Romania although rather difficult to determine - is fairly high for Otelinox; it would exceed 14% and the proba- bility of its falling below 10% is low under moderately adverse conditions. Net foreign exchange earnings and savings to the economy at full production are estimated at US$59 million equivalent, offsetting in less than two years the project's entire foreign exchange cost. Further, the project would provide direct employment to about 1,600 persons, while opening up many more job oppor- tunities indirectly in the special steel consuming industries; these industries are expected to grow at a faster rate than if dependent on controlled and re- stricted imports of special steel. viii. The project was appraised prior to the recent sharp increase of petroleum prices in the world. However, this increase in fuel prices is not likely to affect Otelinox financial results to an appreciable extent not only because of the administered prices of all goods and services in Romania but also because the country's dependence on petroleum imports is low (20%) and, if necessary, local production could be stepped up. Therefore, with respect to fuel costs and, possibly, availability, Otelinox will enjoy a significant advantage over most European and Japanese special steel producers as long as the present level of oil prices persists. As for meeting oil-induced future increases in imported equipment prices, adequate price contingency provisions have been made. ix. There is no other country in which the Bank has lent for industry where the Government has such a direct and major influence on the conception, preparation, financing and operations of industrial projects as in Romania. However, while investment decisions are seemingly made primarily to meet pro- duction targets, economic considerations are also taken into account when determining the scope, size and location of industrial enterprises and so are social factors. Romania has succeeded in developing its industry in a reasonably efficient manner and in locating it fairly evenly throughout the country rather than have it concentrated only in major population centers. But with so different an approach to industrial planning and project execu- tion from what Bank staff had been accustomed to and with all its ramifica- tions on such matters as the industrial structure, management, the control mechanism, financial accounting and auditing, there had first to be establish- ed a common basis for concepts and words that often have meanings in Romania different from those in market economy countries. Still some gaps in the Bank's knowledge of the working of the complex decision-making process and planning mechanism in Romania's industry remain and will need to be closed as the Bank does more industrial lending in the country. While meeting foreign exchange needs on a long-term basis, Bank lending to industry in Romania would also help adopt modern technologies, improve product quality and make better use of factors of production. x. Based on the agreements reached on necessary conditions for the loan as summarized at the end of this report, the project is suitable for a Bank loan equivalent to US$70 million. I. INTRODUCTION 1.01 This report appraises the proposed Otelinox Special Steel Project at Tirgoviste, an industrial town (population: 35,000) located some 80 km northwest of the capital city of Bucharest, Romania (Map IBRD-10895). The project, an independent enterprise within the new Tirgoviste Special Steel Complex, will have (1) a cold-rolling mill--the first of its kind in Romania -with an annual production capacity of 30,000 tons of stainless sheet and strip; and (2) a bar mill with an annual capacity of 120,000 tons of alloy rod and bar products. Construction of the project is about to begin and would be completed in early 1978. 1.02 Total financing requirements of the project, including interest during construction and working capital, are estimated at about Lei 3,706 million (US$185 million), of which Lei 1,729 million (US$86 million) would be the cost of imported equipment and spares, and foreign technical know-how and training. The proposed Bank loan of US$70 million would cover about 73% of the project's total foreign exchange requirements. This loan would result from the first Bank appraisal initiated in Romania, which became a member of IBRD in December 1972. The borrower would be the Investment Bank (IB) which is involved in the preparation and execution of all industrial pro- jects in Romania (para. 2.08). The loan would be guaranteed by the State, which controls all enterprises in the country. 1.03 The project is considered vital for the development of a broad spectrum of special steel consuming industries whose projected annual growth rates exceed 15% for the near future. Currently, the country's entire requirements of stainless sheet and strip and part of its needs of alloy rod and bar products are met from imports. The project would help Romania achieve self-sufficiency in these products by 1980, thus easing the burden of the country's scarce foreign exchange resources. 1.04 The project was identified in March 1973; in August 1973, a mission assisted the Romanian authorities in preparing the project, followed by an appraisal mission in November 1973 consisting of Messrs. O'Neil, Nayar, Shetty and Miss Graves of the Industrial Projects Department and Messrs. Shields and Gibbs, Consultants. Technical terms used in this report are explained in Annex 1. II. THE ENTERPRISE A. Background 2.01 The project represents the second stage of the Tirgoviste Special Steel Complex. Work on Stage I - the so-called Tirgoviste I - which con- sists mainly of a plant to produce 600,000 tons per year (TPY) of raw alloy steel, was begun in 1971 and part of the plant started production in -2- late 1973, slightly ahead of schedule. Otelinox will receive its principal raw material--semi-finished steel--from two sources: Tirgoviste I will supply 146,500 TPY of billets across the road to the project's 120,000-TPY alloy bar mill, and the Galati Steelworks will supply about 40,500 TPY of hot-rolled bands to feed Otelinox's 30,000-TPY stainless sheet and strip mill (cold mill). The Galati Steelworks, which is some 270 km away, is the country's largest integrated plant and is expected to have an annual production capacity of about 7 million tons of raw steel by 1980. 2.02 Under the Romanian system, a project becomes the State Plan for execution only after financing arrangements are completed and the final technical and economic study of the project is approved by the Council of Ministers, the supreme administrative body in the country. This study which is prepared after receipt and evaluation of equipment tenders and subsequent award of contracts, is ex- pected to be completed by early 1975. However, the Romanian authorities have accelerated this procedure for this project and the implementation of the project is underway on basis of a preliminary technical and economic study approved by the Council of Ministers. B. Enterprise 2.03 The Enterprise has been established, and although it is part of the Tirgoviste complex, is planned to be a separate, autonomous entity, at least initially. This is intended to give the new plant particular management attention and facilitate project implementation and control as well as loan processing. The possibility of a future merger of Otelinox with Tirgoviste I, however, can- not be precluded. Although such a merger in the context of the Romanian centrally- planned economy, may not have the same significance as in most other Bank member countries, the Bank wishes to be assured that such a merger would not adversely affect the project. Moreover, agreement has been reached that the Enterprise will not be dissolved without the prior consent of the Bank. 2.04 Otelinox, as all enterprises in Romania, will be essentially a pro- duction-oriented organization whose principal function is to meet the output targets set in the annual plan. Any major changes in production volume, product mix, organizational structure and enterprise's investments have to be approved by higher authorities. Furthermore, an enterprise's financial requirements are met from State funds and its net benefits (net profits after statutory and other allocations) are, in turn, transferred to the State Budget. In short, an enterprise has only limited independence. C. Relationship with Government Agencies 2.05 Various government bodies are concerned with the development and coordination of industry in Romania. In the case of Otelinox, the Ministry of Metallurgical Industries is the main authority. A detailed description of the organization and functions of this Ministry is given in Annex 2-1. - 3 - The main agencies of that Ministry concerned with the project are the Steel Central, IPROLAM and METAROM. Other organizations actively involved in the implementation of the Otelinox project and its operations are the Investment Bank and the National Bank. The role of these various organizations is ex- plained below. 1. Steel Central 2.06 Otelinox falls under the Steel Central which is the planning, coor- dinating and supervisory agency and thus, in a sense, the holding company for all steel plants in Romania. The responsibilities of the Steel Central are given in Annex 2-2. It has competent and experienced management experts, engineers, scientists, technicians and other specialists to perform those services including research and development, which the seven individual enterprises belonging to the Steel Central cannot efficiently support by themselves. More recently, the Steel Central as well as Centrals for other industries have gained in importance, thus reducing somewhat the detailed control that the technical ministries concerned have traditionally exercised over the member enterprises. Usually, the General Manager of the Central is also the General Manager of the largest enterprise under it. The Steel Central coordinates the annual production plans of its members, monitors their performance and, after consolidation, forwards their annual financial statements to the Ministry of Metallurgical Industries and the Ministry of Finance. Although it deals with all matters of the steel sector as a whole and is thus involved in major facility planning decisions and supervision of enterprise operations, the Steel Central does not play a significant role in the physical execution of projects. 2. IPROLAM and METAROM 2.07 IPROLAM, the Institute for Engineering of Rolling Mills and one of the design institutes of the Ministry of Metallurgical Industries, has pre- pared the basic engineering designs for the project, and will act as Otelinox's technical consultant. METAROM, the Ministry's equipment import and export agen- cy, will deal with commercial aspects relating to the import of equipment for the project on the basis of instructions received from Otelinox and IPROLAM. 3. Investment Bank - The Borrower 2.08 The Investment Bank is the channel for all sources of major domestic investment financing including (a) budget allocations; (b) depreciation funds; and (c) the share of earnings of enterprises allocated for investment. Recently, IB has also started to make credits on its own, though funds avail- able for this purpose are still relatively small. However, IB administers and controls all investment funds of the State Budget (except for agriculture and food processing) and acts as the main fiscal agent of the Government. The President of IB reports directly to the Ministry of Finance which has compre- hensive authority in the planning and financing of all projects. - 4 - 2.09 The Investment Bank is a competent organization and has wide-ranging responsibilities in the implementation of projects. It plays a key role in the preparation, evaluation, procurement, execution, disbursement of investment funds and supervision of all enterprises (para. 2.08). For all projects, IB reviews the technical and economic study before submission to the Council of Ministers for formal approval. Thereafter, IB ensures that the project is executed according to the approved plan. In the case of Otelinox, it will check, with the assistance of IPROLAM and METAROM, all orders for equipment--domestic and foreign--before they are placed, will comment on any change in contracts, and can impose penalties on defaulting parties. Its inspectors check the appropriate- ness of equipment deliveries and whether the projects are progressing according to schedule. All local project-cost financing is channeled through and author- ized by IB which also keeps complete accounting records for each project until completion and which is therefore well suited for reporting to the Bank on the progress in the implementation of Otelinox Project. 2.10 During the operational phase of a project, IB's functions are limited to checking whether the enterprise is meeting the targets set in the Investment Plan. IB has no legal authority to bring its views to bear directly on the management of an enterprise. In practice, however, IB can recommend necessary operational action to the Ministry of Finance, which, in turn, can act through the Ministry concerned with the project. It is for reason of the important and broad role that the Investment Bank is playing in the industrial field, particularly in the project's implementation, that it has been chosen as the Borrower of the Bank loan. 4. National Bank 2.11 The National Bank (NB), which combines the functions of a Central bank and a commercial bank, is responsible for planning, coordinating and meeting the working capital needs of enterprises once they go into operation. Every operating enterprise maintains its current accounts with NB and is re- quired to do all transactions through these accounts. Each year, enterprises have to negotiate with NB their working capital needs for the coming year. D. Management 2.12 The management of Otelinox will consist of the Workers' General Assembly, the Working People's Committee, and the General Manager who will be assisted by a Management Committee composed of three to seven key personnel of the Enterprise. The Workers' General Assembly, which will include all the workers of Otelinox will meet twice a year to examine the operating results of the Enterprise and review the performance of the Working People's Committee, which will consist of 13-15 members of whom 4-5 will be elected by the Assembly and the rest will be those who hold specific positions within the Enterprise. The Committee will be the decision-making body of the Enterprise on general matters. The General Manager, who will be chairman of the Committee, will make all day-to-day decisions. For details of management responsibilities see Annex 2-3. -5- 2.13 In Romania, General Managers are usually appointed by the Ministers of the relevant Technical Ministries for an indefinite period. In the case of Otelinox, the Minister of Metallurgical Industries appointed Mr. Constantin Gingarasu, 42, as General Manager in 1973. A graduate in mechanical engineer- ing of the University of Bucharest, Mr. Gingarasu has had about 15 years experience in steel plant operations. For the eight years prior to his new assignment, he was Plant Manager of the Heavy Plate Mill of the Galati Steel- works. He is well-trained and experienced and is considered capable of managing Otelinox efficiently. 2.14 Most of the key personnel to support him are expected to be drawn from the existing steel plants under the Romanian system of transferring selected employees from existing to newly-created enterprises. The Romanian authorities have confirmed that they will appoint well-qualified personnel to fill these other key positions according to a time schedule which is satisfactory to the Bank. No problem is foreseen in getting adequate trained manpower for the project. During project implementation, the primary respon- sibility of the General Manager is to coordinate the functions of IPROLAM, local contractors, and other entities involved to ensure the plant's proper and timely execution. After the commissioning of the plant, his major concern will be to provide operating management under the guidance of the Working People's Committee to see that Otelinox meets the production and efficiency targets set in Romania's annual plans. II. THE MARKET A. Introduction 3.01 The Romanian steel market and prices are described in detail in Annexes 3-1 and 3-2. This chapter deals with these subjects only insofar as they specifically relate to the types of steel to be produced by Otelinox, i.e., stainless steel sheet and strip and alloy steel rod and bar products. The main consumers of these products encompass a broad range of industries such as producers of equipment for food processing, chemicals, paper, glass textiles, ship-building, power distribution as well as industries producing cutlery, domestic appliances, machine tools, motor vehicles, farm implements and tractors, railway rolling stock, electronic and electrical equipment, precision instruments, construction machinery and cranes. These industries have been growing rapidly--at over 13% a year on average--during the past two decades (1950-1970) and are planned to maintain the momentum. 3.02 Certain heavy consumers of special steel, with a substantial export orientation primarily towards the COMECON countries, are targeted to expand at an accelerated pace. For example, during the current Five-Year Plan (1971-1975), machine tool production is to grow at an average rate of 32%; electrical equipment, at 27%; precision instruments, at 39%; and chemicals, -6- at 16-18%. Engineering and metal-transforming industries as a whole are planned to expand at about 15% a year compared to about 15.8% per annum during 1966-1970. At the halfway point of the current Plan, indications are that the above goal will be met. For example, engineering and metal-transforming industries actually exceeded the targets in 1971 and 1972 by growing at 15.9% and 16.1% respectively. These industries have attained high significance both as domestic capital goods suppliers and as earners of foreign exchange through exports. B. Overall Market 3.03 Romania is one of the fastest growing economies in Eastern Europe and is likely to remain so in the near future. Per capita steel consumption (in crude steel equivalent), which may be considered as an indicator of the economic advancement of the country, has increased from 132 kg in 1960 to 318 kg 1/ in 1970, reflecting an annual growth rate of 11%; it is projected by the Romanian authorities to reach the high level of 682 kg in 1980, com- parable to the U.S. consumption in 1969. This is an ambitious target but, considering the rapid pace of industrial development in Romania, that level may be reached. If so, total steel consumption in crude steel equivalent would rise to 15.8 million tons in 1980 from about 7 million tons in 1970. During the same period, crude steel production is planned to jump from 6.5 million tons to 17 million tons, with Romania becoming a small net exporter of steel. 3.04 Total consumption of special steels (in crude steel equivalent) grew from about 238,000 tons in 1965 to 668,000 tons in 1970, or by about 16% per year. Further, with industrialization, the share of special steels in total crude steel consumption in Romania increased from 5.8% to 9.1% during1965- 1972, when total steel usage nearly doubled. In 1980, special steels are expected to account for about 2 million tons or about 12% of total crude steel consumption. Due to differences in the classification standards for special steels in various countries and their very wide variety, inter-country comparisons of special steel consumption are difficult. However, the pro- jected proportion of special steels in total steel consumption in Romania in 1980 appears to be more or less in line with that at present in the U.S. but lower than that in Sweden. In terms of finished products, domestic special steel consumption is likely to reach about 1.37 million tons 2/, with high-alloy steels (including stainless) and high-strength low-alloy (HSLA) steels each accounting for about half. 1/ U.N. figures. The Romanian authorities estimate is 348 kg. 2/ Assuming 1.46 tons of crude steel is required to produce 1 ton of special steel products. -7- 3.05 Special steels can be divided into two broad categories: (1) stainless steels; and (2) alloy steels. In 1970, total consumption 1/ of stainless steel in Romania was about 17,700 tons, entirely imported. Con- sumption rose significantly during the next three years, by about 15% annually reaching 26,600 tons in 1973, i.e. 1.25 kg per capita. This is still a relatively low consumption compared to recent levels of about 4 kg in Italy and over 20 kg in Sweden. 2/ In the developed countries as a whole, the average present per capita consumption is estimated at around 5 kg. 3.06 Consumption of stainless steel in the world is increasing at about 8-10% a year and of special steel as a whole at a lower rate of 5%. However, in countries such as Romania with low current consumption levels and in the process of rapid industrialization, consumption can be expected to grow sig- nificantly faster. In Romania it is forecast to increase by an annual rate of 19.5% during the current decade reaching 104,000 tons in 1980; however, this seems somewhat optimistic judging from the actual growth rate of 15% during 1970-1973. In the case of alloy steels, Romanian authorities have projected that consumption would increase by 15% annually, in line with the expected expansion rate of the engineering and metal-transforming industries, the main consumers of alloy steels; this appears realistic. C. Market for Otelinox Products 3.07 As mentioned previously, Otelinox is to produce stainless sheet and strip 3/ (30,000 TPY) and high-alloy (110,000 TPY) as well as RSLA (10,000 TPY) rod and bar products. The following table shows the past and projected trend in consumption (1968-1980) of Otelinox's products: Consumption of Products of the Type to be Made by Otelinox, 1968-1980 (in 000 tons) 1968 1970 1973 1980 /a Growth Rates (x) actual Proj. 1968-73 1970-80 Stainless Sheet and Strip 3.9 4.7 8.7 23.0 17.5 17.0 Rod and Bar Products: - High alloy (incl. stainless) 43.0 52.0 73.0 209.0 11.2 15.0 - Low Alloy (HSLA) 32.0 35.0 49.0 211.0 9.0 19.5 Total 78.9 91.7 130.7 443.0 % of All Special Steel n.a. 27% 28% 32% /a By the Romanian Ministry of Metallurgical Industries. 1/ The past consumption trend in Romania does not reflect actual demand, mainly because of restricted imports due to foreign exchange difficulties. However, with increased local production, the consumption will be gradually freed from the foreign exchange constraint. 2/ It is one of the major exporters of industrial goods containing stainless steel. 3/ Up to 3 mm thickness. Stainless plates will be produced at the integrated Galati Steelworks. -8- 3.08 Total consumption of stainless sheet and strip in 1973 was about 8,710 tons, representing some 32% of total consumption of stainless steel pro- ducts that year. During the last five years (1968-1973), consumption of stainless sheet and strip, based entirely on imports, increased at an annual rate of 17.5% and even at 22% between 1970 and 1973 and thus considerably faster than stainless steel as a whole in spite of the general foreign ex- change constraint. Still, the consumption level is low compared to that in developed countries. In the future, because of the rise in domestic production and thus increased availability of such products, consumption could be expected to grow at a faster rate than in the past; however, the Romanian authorities have assumed that the future rate would be more or less in line with the past rate and that consumption, therefore, would reach about 23,000 tons in 1980. Considering the Romanian record of exceeding planned targets, particularly in the stainless steel consuming industries, it is likely that the requirements for stainless sheet and strip will grow at a higher rate of 19-20%. On this basis, total consumption of such products in 1980 might be expected to range between 27,000 and 29,000 tons, i.e. 4,000 - 6,000 tons above the Plan projec- tion. 3.09 In the case of high-alloy rod and bar products, demand is projected by the Romanian authorities to increase, during the present decade, in step with the production growth envisaged in engineering and metal-transforming industries, i.e. at 15%. As for HSLA rod and bar products, total consumption is forecast to rise at an annual rate of 19.5% which appears high when com- pared to the 9% annual rate during 1968-1973. However, any shortfall in domes- tic demand for HSLA steels is not expected to have much of an adverse impact on Otelinox due to its small share in the domestic market (about 5%); good demand prospects internationally; and export incentives that the State would be prepared to give, if necessary. Furthermore, it must be realized that any temporary demand shortfall in special steels can be countered by shifting production of certain special steels away from the less efficient Romanian producers to Otelinox and, in extreme situations to even roll ordinary carbon steels. D. Production of Special Steels 3.10 Otelinox would be the first and only producer of stainless sheet and strip in Romania and, since its production is expected to cover demand through the early 1980's, no further capacity is planned to be added for the time being. For alloy rod and bar products, however, there are already three other producers in existence and new production capacities, besides that of Otelinox, will come on stream as shown in the following table: -9- Production of Alloy Rod and Bar Products in Romania (tons) Year of Start of Plants 1970 1977 1980 /1 Alloy Steel Production Resita 21,000 25,000 25,000(20,000) 1913 Cimpia Turzii 22,000 30,000 30,000(26,000) 1956 Braila 10,000 20,000 20,000(17,000) 1968 Tirgoviste I - 143,500 190,000(105,000) 1975 Otelul Rosu - 30,000 35,000(33,000) 1977 Otelinox - - 120,000(10,000) Total 53,000 248,500 420,000(211,000) /1 Shown within brackets is the quantity of HSLA steel variety in the total. 3.11 In conceiving the Tirgoviste complex, i.e., Tirgoviste I and Otelinox, several other alternatives for expanding special steel capacity were considered, including the possible expansion of Galati and other existing steel plants having production facilities for special steels. However, it was found preferable to establish a new, large, modern and efficient mill at Tirgoviste because of good location with respect to its proximity to principal markets; good rail and road connections to the rest of the country, and other suitable infrastructure facilities; and the availability of trained manpower in the area. Otelinox would primarily produce high-alloy grades, accounting for about 53% of Romanian production of these grades in 1980, and together with Tirgoviste I would contribute nearly three-fourths to Romania's total production of alloy rod and bar products. There will be very limited com- petition among the special steel producers not only because their production is fully planned but their product mix and dimensions largely differ, with Otelinox concentrating on the smaller, and thus more difficult to produce, dimensions of higher-grade steels. E. Product Mix 3.12 In the case of stainless sheet and strip, Otelinox's product mix appears at variance with that commonly used in industrialized countries. For example, in the U.S., the most popular grade of stainless steel is AISI 304, 1/ while in Romania it is envisaged to be AISI 321, a higher-quality product, which at present sells for about 35% more than the former. Other high-value grades also seem to have been given more emphasis in the product mix than is usual in other countries. 1/ Grade numbers as given by the American Iron and Steel Institute (AISI). - 10 - 3.13 Therefore, Otelinox intends to employ metallurgists with experience in product applications to review the proposed end uses and advise the Enterprise on the appropriate grades for production from both technical and economic consideration and will submit to the Bank a report on the principal findings of the metallurgists by March 1976. It should be noted that any resulting modification in the Otelinox product mix will have no effect on equipment selection of the project and only a minor impact on its financial and economic viability, but may avoid the use of higher grade, and therefore more expensive, steels where lower grades would suffice. 3.14 The product mix of the Enterprise's 120,000 TPY alloy rod and bar mill output in 1980 is projected as follows: Product Mix of Otelinox Rod and Bar Mill tons % High-Alloy Steels Alloy Steel for Machine building 48,340 40.0 Ball bearing steel 26,300 22.0 Spring steel 23,300 19.5 Tool steels 8,300 6.9 High-speed steels 2,550 2.1 Stainless and heat-resistant steels 1,210 1.0 HSLA Steels 10,000 8.5 120,000 100.0 This product mix is based on the input requirements of the engineering and machine-building industries and appears realistic. F. Imports and Exports 3.15 As already noted, the Romanian demand for stainless sheet and strip is at present met almost entirely from imports and this situation will con- tinue until 1978, when Otelinox goes into production. In 1972, the import of such products reached 8,120 tons and is forecast to nearly double by 1977. However, with the commissioning of Otelinox, Romania is expected to become a net exporter of stainless sheet and strip from 1979 to 1982, with net exports peaking at 7,000 tons in 1980--equivalent to about 23% of the Enterprise's planned stainless steel production -and tapering off thereafter. It is not yet clear where these exports would go, especially in the face of possible keen competition from Japan, France, Sweden and Italy. Furthermore, Otelinox will have no control over such exports; they will be handled by Metal Import- Export, a government agency in charge of foreign trade in semi-finished and finished metal products. However, these exports are not a major factor in the project as at most they would account for only 5% and 14% of Otelinox's - 11 - total volume of output and net sales revenue respectively in 1980 and would by mid-1980's be fully absorbed by increasing domestic demand. Moreover, the exportable surplus may be lower than projected by the Romanian authorities as their domestic demand projections for stainless sheet and strip appear to be conservative (para. 3.09). 3.16 In the case of the alloy rod and bar products, net imports are ex- pected to rise from 51,000 tons in 1972 to 100,000 tons in 1975, but decline gradually during the following years with the commissioning of Tirgoviste I, Otelul Rosu and Otelinox until 1980 when Romania will have reached self-suffi- ciency in these products. It is likely that a small part of production will be available for exports (para. 3.10) while some quantities of specific alloy rod and bar products, which cannot be produced economically in the country, will be imported. The Ministry of Metallurgical Industries has agreed to carry out a study of the export potential for Romanian special steel with a view to developing an export strategy in market economy countries and submit a report to the Bank by March 1976. C. Steel Prices 3.17 In Romania, steel products are sold at constant prices fixed by the State. Prices are established by type, grade, shape and dimension of the products. In addition, there is an extensive system of additional charges for special characteristics such as heat treatment, higher strengths, degree of finish, and packing. In fixing prices for steel products, consideration is given to production costs and economic benefit (profit) levels as recom- mended by the Steel Central. 3.18 The established prices for alloy rod and bar products have remained virtually unchanged since they were fixed in the mid-1960's. In the case of stainless sheet and strip, which are not yet locally produced, comprehensive prices were set only in 1973, when IPROLAM prepared its feasibility study for the Otelinox project. In establishing these prices, the Romanian authorities have used the actual import prices (c.i.f. Romanian border) of early 1973, when steel prices in general were rising steeply and exporting countries were charging export premiums because of steel shortages in many parts of the world. As a result, compared to 1973 listed basic domestic prices in Western Europe and the U.S., the Romanian prices 1/ for stainless sheet and strip are considerably higher and those for alloy rod and bar products are considerably lower than in Western Europe, Japan and the U.S. Details are given in Annex 3-2. H. Location, Distribution and Transportation 3.19 Tirgoviste is in a favorable location with respect to major indus- trial centers such as Arad, Bucharest, Brasov, Braila, Constanta, Craiova, Jassy, Ploiesti and Timisoara among others. Most of Otelinox products are expected to be marketed within a radius of 200 km, and most of the transporta- tion to consuming industries is expected to be by rail. According to the 1/ Based on a conversion rate of Lei 20= 1 US$. - 12 - distribution system in Romania, consumers are obligated to take deliveries from steel plants in accordance with predetermined quantities established by advance contracts and to maintain on the average, a two-week inventory. Any consumer failing to accept delivery in time is liable for penalties. 3.20 There are, at present, no warehouses or service centers for special steel products. However, for efficient distribution and service, the establish- ment of warehouses-some with shearing and finishing equipment--for Otelinox products and possibly others, near major centers of consumption may become advisable. Further, it is to be noted that Otelinox tentatively plans to ship 50% of its stainless flat products and 58% of its alloy rod and bar products in the form of coils, with the rest in cut lengths. In the absence of intermediate warehouses or coilhandling facilities near consuming industries, it may be necessary to ship more of Otelinox products in the form of cut lengths than is currently foreseen. This aspect and the future establishment of intermediate warehouse facilities will therefore be examined in detail by the Steel Central and Otelinox with prospective technical know-how suppliers before equipment orders are placed (para. 4.03). IV. THE PROJECT A. Physical Description of Project 4.01 The project consists of two rolling mills with related finishing equipment and support facilities designed to produce 150,000 TPY of finished products. Otelinox will not be an integrated steelworks; it will receive semi-finished products (billets and hot-rolled coils) from other enterprises and will roll these semis into finished steel products for sale. The project consists basically of two separate plants which will operate independently: a cold mill to produce annually 30,000 tons of stainless steel sheet and strip; and a bar mill to produce 120,000 tons of alloy rod and bar products per year. 1/ The types and grades of steel to be produced are shown in Annex 4-1. 4.02 The cold mill consists of a coil preparation line, pickling and annealing facilities, a grinding line, a Sendzimir-type cold reduction mill, and a two-high temper mill. The bar mill consists of one 70-ton/hour billet reheat furnace, one single-strand continuous two-high hot-rolling mill with up to 28 stands, cooling beds, coilers, and equipment for heat treatment. In addition, the project will have grinding, polishing, slitting, shearing, levelling, inspection, packaging and shipping facilities. Suitable support facilities, including offices, maintenance shops, laboratories, roll shops, utilities and transportation will also be provided. A more detailed list of processing equipment in each plant as well as general facilities is given in Annex 4-2. 1/ The basic rolling mill will be scheduled for effective operation for only 6,000 hours/year in the operating plan for the project as against about 7,000 hours/year ultimately attainable, indicating that additional poten- tiai capacity does exist for increased production. - 13 - B. Processes to be Utilized 4.03 The basic processes selected for Otelinox in the course of studying its feasibility are judged to be efficient, modern and economically competi- tive among world producers of special steels; they will not be altered except that specifications of some equipment may be modified after the selection of equipment and technical know-how suppliers to take advantage of the latest technological improvements. A detailed description of the processes and pro- cessing sequences selected for both mills is given in Annex 4-3 and process flow charts are shown in Annex 4-4. C. Project Execution - Division of Responsibilities 4.04 Although responsibilities for the execution of the project will largely be delegated to various Government bodies, the Enterprise will have overall responsibility for the coordination of the project and related activ- ities of the other agencies and for ensuring an acceptable plant from the operational viewpoint. The Enterprise will also be responsible for review and approval of final acceptance tests and commissioning of the plant, in addition to its subsequent operations. 4.05 The principal organizations responsible for project implementation will be IPROLAM and METAROM, two agencies of the Ministry of Metallurgical Industries, working closely with the Ministry of Industrial Construction and the Investment Bank. The basic division of their functions in project exe- cution is described below: IPROLAM acts as a technical consultant for the project and as such is responsible for general process engineering, detailed civil engineering, engineering for part of the local equipment and for support (including infrastructure) facilities, preparation of bid documents and techni- cal aspects of bid evaluation. It will coordinate construction and erection schedules, and carry out technical supervision through start-up and follow-up until production targets are achieved. It will also supervise the progress of civil works and equipment supply. Inasmuch as IPROLAM has the right to make certain changes in project design in consultation with the Government, it was agreed that major design modifications can be made only with the prior consent of the Bank; METAROM is responsible for the importation of machinery and equipment. It also looks after commercial aspects of bid evaluation and contract negotiations with foreign suppliers; the Ministry of Industrial Construction or the Ministry of Metallurgical Industries will be in charge of plant construction and erection in accord with the contracts; the Investment Bank (the Borrower) will provide the accounting functions for the project, arrange for funds for project completion and supervise disbursements and utilization of project funds in line with their broad role described in para. 2.08. 4.06 The above agencies are staffed with adequate, qualified and experi- enced personnel to carry out these responsibilities within the established organizational framework and have done so on numerous previous occasions. Overall, the arrangements are adequate to assure satisfactory project imple- mentation. - 14 - D. Staffing 4.07 The Otelinox plant is expected to employ about 1,612 persons, of whom 625 will work in the cold mill, 673 in the bar mill and 314 in plant management and services common to both plants. More detailed manning tables are given in Annex 4-5. The above staffing proposed by the project sponsors appears to include a rather generous workforce compared to similar plants in Europe and it may be possible to eventually reduce this level by approximately 20%. But even if such a reduction were not made, economics of the project would not be significantly affected since prevailing Romanian wage scales are low. However, as labor costs increase in the future, this factor could become more important. 4.08 The project is in a favorable position with respect to staffing and training due to: (1) existence of a large, relatively experienced industrial work force in Romania, especially in the basic steel/metal processing fields; and (2) the Government practice of transferring skilled and experienced per- sonnel from existing enterprises to new plants as required. Otelinox may, therefore, be able to achieve a somewhat faster production buildup than other similar new steel plants in the less developed countries. Training and recruitment plans have already been worked out in some detail; they are de- scribed in Annex 4-5. Personnel selection for management positions has also started: many key managers will be hired by the end of 1974. 4.09 Specific training arrangements have been worked out. Training activities both in Romania and abroad and their proper coordination will be included in the scope of the technical assistance and know-how to be provided by one or more foreign operating steel companies as a part of major equipment supply contracts. The training program will cover all operations at Otelinox including specialized operating and maintenance techniques and standard prac- tices, training at selected facilities at Galati and Trigoviste (to assure maximum and most efficient utilization of the project's rolling mills) and the supply of training manuals, standard practice manuals, and a continuing interchange of information. Operational assistance is expected to last for at least five years after project completion. In general, the plans for staffing and training are considered satisfactory. E. Ecology 4.10 Otelinox, being a rolling operation, presents fewer ecological hazards than an integrated steel plant. However, Otelinox does have pickling operations which result in effluents containing sulfuric, nitric and hydra- fluoric acids. Acids released by pickling will not be regenerated as in some larger operations, but will be neutralized in a special facility built for that purpose. Liquid effluents will be treated for removal of oil, grease, suspended solids, and scale prior to dumping. A description of these facili- ties and their expected costs, along with pertinent ecology legislation, is contained in Annex 4-6. - 15 - 4.11 The plan to neutralize and treat pickling line effluents and, other liquids is generally acceptable. However, the release of neutralized acids with fluorine compounds may still pose some health hazards including toxic side effects. Since the final selection of processes for the project has not yet been made, additional review will be necessary to evaluate the over- all ecology aspects, particularly the reasonableness of the existing standards and degree of compliance thereto. Assurances were obtained, that Otelinox carry out such additional review and take whatever subsequent action is necessary to comply with environmental requirements. F. Future Expansion Plans 4.12 The Bank is satisfied that the project sponsors have carefully considered the relationship between the present project and subsequent expan- sion stages, thus providing for economic expansion in the future. The basic plan is to double the capacity of the bar mill and to increase the flat pro- duct capacity by about 30% in the second stage of plant development, probably in the early 1980's. Additional details on long-range facility planning are given in Annex 4-7. These plans appear to be technically sound. However, Otelinox will exchange views with the Bank prior to any expansion of its plant. V. CAPITAL COST AND FINANCING PLAN A. Project Cost 5.01 Capital costs of the project, detailed in Annex 5-1, are summarized below: - 16 - Summary of Capital Cost Estimates Lei Million US$ Million Local Foreign Total Local Foreign Total % Equipment & Spares /1 381.6 1,247.5 1,629.1 19.1 62.4 81.5 46.8 Engineering, Know-How and Technical Assistance 122.2 102.8 225.0 6.1 5.1 11.2 6.4 Construction and Installation 905.7 - 905.7 45.3 - 45.3 26.0 Supervision and Start-up 33.5 - 33.5 1.7 - 1.7 1.0 Preoperating Expenses 14.1 4.0 18.1 0.7 0.2 0.9 0.5 Sub-total 1,457.1 1,354.3 2,811.4 72.9 67.7 140.6 80.7 Contingencies: Physical 138.4 149.0 287.4 6.9 7.4 14.3 8.2 Price - 225.2 225.2 - 11.3 11.3 6.4 Total Fixed Assets 1,595.5 1,728.5 3,324.0 79.8 86.4 166.2 95.3 Working Capital Requirement 156.3 3.7 160.0 7.8 0.2 8.0 4.7 Total Project Cost 1,751.8 1,732.2 3,484.0 87.6 86.6 174.2 100.0 Interest During Construction /2 38.5 183.4 221.9 1.9 9.2 11.1 Total Financing Required 1,790.3 1,915.6 3,705.9 89.5 95.8 185.3 /1 CIF plant site. This project will be exempted from all duties on imported equipment and spares. /2 Entirely attributable to the Bank loan. 5.02 The original capital cost estimates prepared by IPROLAM in mid-1973 on the basis of preliminary discussions with prospective equipment suppliers were revised upward by the Bank in early 1974 anticipating the expected price level of late 1974 to arrive at the above estimates; they reflect consultation with prospective suppliers and evaluation of the capability of Romanian equipment manufacturers. Local equipment as well as civil construction and installation costs are based on Romanian estimates prepared by using published fixed prices. Local cost estimates in Romania are usually very accurate, not only because they use fixed prices, but also because the volume of civil works and the materials used are assessed in great detail. While in the case of this project, such detailed assessment will only be made at the time the final technical and economic study is prepared (i.e., in early 1975), they are sufficiently accurate now to serve as a basis for a reasonably firm estimate of costs. Costs of technical assistance, know-how and engineering are based on U.S. and European experience, and supervision, start-up and preoperating expenses reflect past experience in Romania on similar works. - 17 - 5.03 A physical contingency of 10% has been added to total fixed cost, and a 10% per year price escalation is included in the foreign exchange costs of equipment and technical assistance. Compared with past Bank practice, this is an unusually high price escalation provision but is considered justi- fied in view of expected added cost increases due to some delayed effects of the higher energy costs, and also near-full order books of steel equipment manufacturers. No price escalation has been added to local costs, since they are based on fixed prices. In all, the contingency provisions - accounting for 15% of total project cost - are considered adequate and the capital cost estimates realistic. 5.04 Of total financing required for the project of about Lei 3.7 bil- lion (US$185 million), nearly Lei 1.9 billion (US$96 million) -- about 52% of the total - is in foreign exchange, including about Lei 183 million (US$9 million) for interest during construction. Project costs are about equally divided between the cold mill and the bar mill. B. Working Capital 5.05 Permanent working capital requirements (Annex 5-2) are estimated at Lei 160 million (US$8 million), of which only about Lei 4 million would be needed in foreign exchange. They are comparatively low partly because de- livery of raw materials and finished products is strictly planned and coordi- nated by the State and partly because funds are required only for operational and not for commercial needs. Moreover, since the National Bank, which on behalf of the State is in charge of working capital financing for industry, provides prompt credits to cover accounts receivable, no provision for such credits has been made in the above calculation. Adequate funds for working capital will be made available by the State as and when required. C. Financing Plan 5.06 The financing plan is as follows: Financing Plan Lei million US$ million Local Foreign Total Local Foreign Total Loan Funds IBRD - 1,400.0 1,400.0 - 70.0 70.0 State Funds for: Fixed Capital 1,595.5 328.5 1,924.0 79.8 16.4 96.2 Working Capital 156.3 3.7 160.0 7.8 0.2 8.0 Interest during Construction 38.5 183.4 221.9 1.9 9.2 11.1 1J7903. :1,915.6 3,705.9 89.5 95.8 185.3 - 18 - 5.07 The proposed Bank loan of US$70 million equivalent will be made to the Investment Bank (para. 1.02) and guaranteed by the State. The loan will be for 15 years, including 5 years of grace, at the prevailing interest rate of 7-1/4% per annum. Otelinox will receive the loan proceeds at a cost of 9% and on otherwise identical terms, with a guarantee fee of 1-3/42 accruing to the State. 5.08 The Bank loan would cover about four-fifths of total foreign exchange requirements of the project. The rest of the foreign exchange and all the local financing requirements would be met by the State by way of budget allo- cations and in the form of interest-free advances. Details on the type of financing and the procedures used in making it available for investments in Romania are given in Annex 5-3. All funds for fixed investments for projects are channelled through the Investment Bank and those for working capital through the National Bank. Any funds, whether in foreign exchange or local currency, needed to (1) complete the project; (2) cover any possible cash losses in the initial operating years; and (3) provide adequate working capital, will be met promptly as needed by the State. VI. ALLOCATION OF BANK LOAN, DISBURSEMENT AND PROCUREMENT A. Allocation of Bank Loan 6.01 The project is to be bid in two large single-responsibility packages -- cold mill and bar mill -- with the engineering, know-how and technical as- sistance, including training, attached to them (para. 4.09). The Bank loan is to be used to meet the costs of a major portion of equipment (mostly im- ported) and engineering, know-how and technical assistance, including training, of these two packages and the foreign exchange component of foreign consultant services. Detailed information on the specific equipment packages and other items to be financed by the Bank is given in Annex 6-1 and summarized below: Allocation of Bank Loan (US$ million) Cold Mill Bar Mill Total % Equipment and Spares 26.2 23.5 49.7 70.0 Engineering, Know-how and Technical Assistance 4.1 /1 0.8 4.9 7.0 Contingencies 9.5 5.9 15.4 22.0 Total 39.8 30.2 70.0 100.0 Z of total internationally bid packages /2 100% 64.8% 73.1% /1 Includes consultant services for procurement (para. 6.06). /2 Excludes the foreign exchange component of working capital and interest during construction. - 19 - 6.02 The Romanian authorities have requested the Bank to finance 100% of the cost of the internationally-bid cold mill package with the balance of the loan to be utilized for the bar mill package. With respect to the latter, the Bank loan would finance 65% of the cost of internationally bid equipment and spares, technical assistance, know-how and engineering. All foreign pro- curement for both mills will be in accordance with Bank guidelines. While no Romanian supplier is expected to participate in the cold mill package, local sub-supply in the bar mill is possible. B. Disbursement 6.03 The Bank loan would be disbursed against the cost of eligible categories of the cold and bar mill packages as mentioned above (para. 6.01). A schedule of estimated quarterly disbursements is given in Annex 6-2. Although the current cost estimates indicate that the proceeds of the Bank loan will be fully needed for these eligible categories, it was agreed that any undisbursed loan portion, on account of cost savings, could be used for interest during construction on the Bank loan. Also, in order to avoid any delays in the exe- cution of the project the Bank has agreed to disburse up to US$3 million for downpayment on each of the two contracts but make subsequent disbursement con- tingent on the formal approval of the final technical and economic study (para. 2.02). C. Bidding Procedures 6.04 As noted above, only non-Romanian Consortium leaders are expected to be pre-qualified for the two mill packages although there may be some additional Romanian sub-supplies in the bar mill package (para. 6.02). A modified two stage bidding procedure will be utilized for the two packages: initially, preliminary technical offers are to be submitted and discussed at pre-bid meetings; subsequently, firm technical proposals and separate price bids will be submitted followed by consultation and modification of the technical bids to achieve reasonable uniformity among the final technical bids; and finally, (and only at this stage) will the original price bids be opened accompanied, where necessary, by supplemental price bids to reflect the technical changes. Any Romanian equipment which is to form part of these two mills but which will not be included in the two foreign bid packages will be prescribed to all foreign bidders alike. D. Bidding Consortia 6.05 Each bidding consortium will be asked to supply a complete equip- ment package together with detailed engineering, process know-how, and technical assistance and will be composed of one or more suppliers of major equipment associated with a suitable operating steel company. The bidder will also supply supervision during equipment manufacture and erection, and provide performance guarantees for at least one year after the commissioning of the plant. Responsibility for supply and performance guarantees will fully rest - 20 - with the consortium leader. Although this procedure is satisfactory, there is a likelihood that the number of bidders will be low because of the stringent guarantee requirements in Romania coupled with the higher cost of preparing single-responsibility bids on account of a high degree of engineering work required to prepare bids of this type and the current uncertainties in the equipment supply market. E. Local Supply 6.06 Local equipment 1/, unless forming part of the internationally bid packages, will not be financed by the Bank nor will civil works and building construction which will be executed by the Ministry of Industrial Construction or the Ministry of Metallurgical Industries, the latter having accumulated highly specialized experience in the construction of metallurgical industries. The Bank is satisfied that the type of equipment specified to be supplied locally can be produced in Romanian shops and within the time required, and that the quality of civil construction is adequate. F. Procurement Responsibilities 6.07 As mentioned earlier (paras. 4.05 and 4.06), responsibility for procurement will rest with IPROLAM for technical aspects and METAROM for comnercial aspects under the supervision of Otelinox's General Manager. In view of the past experience of the agencies involved in procurement, these arrangements are generally sound. However, since the cold mill will be the first of its kind in Romania involving the production of light gauge flat-rolled stainless steel products, additional specialized expertise may become neces- sary to assist IPROLAM in ensuring optimal design and equipment selection. Since the need and extent for such additional expertise cannot be determined until the technical offers are received, an understanding was reached that con- sultants will be employed for this purpose, unless the Borrower and the Bank agree that such assistance is not needed. G. Implementation Schedule 6.08 The expected timing of key events in project implementation is given in Annex 6-3. It calls for the receipt of initial technical offers in September 1974, with the award of contracts to begin in March 1975 and mechanical completion of the project in the second quarter of 1978. 1/ Foreign engineering required for local equipment as well as Romanian components included in foreign bids woild be financed by the Bank. - 21 - VII. RAW MATERIALS, PRODUCTION COSTS AND REVENUE A. Raw Materials and Utilities 7.01 At full production, the project would require about 40,500 TPY of hot-rolled coils (from Galati) and about 146,500 TPY of billets (from Tirgo- viste I). Otelinox is well assured of these two main raw materials and their quality is to be controlled through adherence to strict standards with tech- nical assistance to be supplied, as needed, by the same firm giving such assist- ance to Otelinox (para. 4.09). 7.02 Most of the auxiliary materials such as chemicals, refractories and rolls, which are required in small quantities, will be procured locally and no problem is foreseen in their availability. Further details are contained in Annex 7-1. The necessary infrastructure facilities -- principally elec- tricity, natural gas, water and transport -- have already been installed as part of the development of the Tirgoviste complex, with the exception of the steam supply which needs to be expanded. B. Production Costs 7.03 Production cost estimates are based on an overall material yield of 74% in the cold mill and 82% in the bar mill. These assumptions should be conservative, in the light of experience in similar plants in Western Europe and the U.S., as well as the skilled labor force availability in Romania. The following table summarizes the direct production cost for the cold mill and the bar mill as given in Annex 7-2. Otelinox - Direct Production Cost at Planned Capacity /1 Otelinox Total Cold Mill Bar Mill (Weighted Average) (Lei/T) ( TT7 (%) (Lei/T) (%) Main Raw Materials 25,263 82.1 5,353 85.8 9,335 83.8 Auxiliary Materials 2,280 7.4 141 2.2 569 5.1 Labor 723 2.4 198 3.2 289 2.6 Utilities 767 2.5 170 2.7 303 2.7 Maintenance 1,730 5.6 380 6.1 650 5.8 Total 30,763 100.0 6 242 1000 100.0 US$ Equivalent 1,538 - 312 - 557 - /1 At assumed product mix. Excludes depreciation, overheads and financial charges. - 22 - 7.04 In both mills, material costs would account for about 90% of total direct production costs - the high percentage level being a particular fea- ture of special steel rolling mills. Labor costs as a percentage of total production costs are low in both mills partly due to the nature of proces- sing - only rolling operation - and partly due to low direct wage costs in Romania. Overall, Otelinox direct production costs per ton of products are comparable to similar plants in Western Europe and the U.S. and reflect a modern operation. The above production costs are those presently in force (May, 1974) with the exception of labor costs which have been escalated by 7% per year between 1973 and 1980 to reflect increases in real wages. C. Revenue 7.05 All prices - of both input and output - are set and controlled by the Government and reflect the average cost of production of all units in a particular industry plus a margin of profit 1/ which is determined by the State. Details of how these prices are determined are given in Annex 7-3. Some price revisions are scheduled before the end of 1975 to reflect: (1) recent technological innovations and productivity increases which have led to cost reductions; (2) possibly higher costs of energy; and (3) elimination of relative price distortions among various commodities (Annex 7-3). 7.06 However, it is not known at this time what new level of prices will be set by the Government and which prices will be affected. Therefore, in the financial projections, the presently established prices for Otelinox products have been used. For Otelinox these prices are the same for domestic and export sales, with the State either gaining from or subsidizing export prices, as the case may be, depending on the differential between domestic and export prices at a given time and the exchange rates applied by the Government. Whatever adjustments in Otelinox input and output prices may be made, these should not affect the financial viability of the Enterprise in view of the procedure of considering costs of production plus a reasonable profit in fixing prices and the expected efficiency of Otelinox production relative to other existing producers. 7.07 Revenue forecasts are based on completion of the project in the first half of 1978 and gradual production build-up until full production is reached in 1980, when total revenue is estimated at about Lei 2.22 billion (US$111 million). To this revenue, based on the proposed product mix, the cold mill would contribute 56% and the bar mill 44% (Annex 7-4) despite the fact that the tonnage output of the bar mill would be four times that of the cold mill. This reflects the great difference in raw material costs and sel- ling prices between the two mills. 1/ This varies from industry to industry and is a function of capital intensity. - 23 - VIIIo FINANCIAL ANALYSIS A. Romanian System 8.01 Under the Romanian system, targets are set in the Plan for each enterprise with respect to annual production volume, revenue, production costs, and benefit (profit) along with those for allocations of an enter- prise's earnings (Annex 8-1). As a result, the primary responsibility of an enterprise is to meet these targets and operate in such a way as to optimize utilization of resources. This includes achieving the planned benefit, any upward deviations from which reflect higher than normal efficiency of an enterprise's operations. Generally, enterprises in Romania have limited scope to change the product mix to maximize benefits and benefits are not a guide for future investments, which are determined by the State. As all investment financing and key operational decisions are centrally coordinated and necessary funds are provided by the State or other sources of financing, the financial viability of a Romanian enterprise cannot necessarily be judged by its benefits. Consequently, the usual conventional financial ratios as applied to Romanian enterprises have limited significance. B. Profitability 8.02 Detailed income and cash flow forecasts through 1984 are given in Annexes 8-2 and 8-3 respectively. Selected items are summarized below: Otelinox - Selected Income Statement Items (Lei million) 1978 1979 1980 1984 Capacity Utilization (X) 40% 93% 100% 100% Net Sales 631 2,030 2,221 2,221 Benefits -99 257 350 350 Benefits after financial charges -162 135 237 271 % of net sales -25.7 6.7 10.7 12.2 7 of production cost -22.0 7.6 12.6 14.4 Cash Generation /1 -14 311 413 447 /1 Depreciation plus benefits after compulsory deductions. 8.03 Net benefits after compulsory deductions as a percentage of net sales are expected to increase from a loss in 1978 to 10.7% in 1980 and then increase gradually because of reduced financial charges. Cash generation does not actually reflect the funds available to the Enterprise because the depreciation allowance automatically goes into a depreciation fund held by the Investment Bank, and even the remaining net benefits are distributed according to predetermined criteria set by the State (para. 8.04). The funds actually available to an enterprise are the amounts predetermined in the allocations for so-called non-centralized investments 1/ and for the reserve funds. 1/ Mainly for repairs and replacements. - 24 - C. Allocation of Benefits 8.04 Allocation of benefits is planned on the following basis and in the following order of priority as explained in detail in Annex 8-1: (i) mandatory allocation to the State budget (10% of total planned benefits); (ii) bonus payments to employees, up to 2% of the actual total wages and salaries; (iii) repayment of short-term loans; (iv) allocation to centralized investments approved by the State; (v) allocation to non-centralized invest- ments 1/; (vi) allocation to reserve funds; (vii) certain appropriations to the Central; and (viii) the remainder is allocated to the State budget. During the actual allocations, obligations to the State - items (i) and (viii) -- have first priority and are based on the planned benefits ir- respective of whether an enterprise actually realizes them or not. The mandatory depreciation remittances and annual benefits will be sufficient to cover the payments of interest and principal on the Bank loan. 8.05 In the early years of operations (1978 and 1979), profitability is expected to be negative or low and funds available to the Enterprise from operations may not be adequate to meet all its cash, including debt service, obligations (para. 8.04). Therefore, as also mentioned in para. 5.08, agree- ment was obtained that the State will provide funds necessary to cover any shortfall and maintain an adequate level of working capital. D. Financial Position 8.06 Balance sheet projections put into the usual Bank format are con- tained in Annex 8-4 and are summarized below: Otelinox - Selected Balance Sheet Items (Lei million) 1978 1979 1980 1984 As of December 31: Net Working Capital - 45.6 51.0 17.8 Equity /1 2,021 1,995 1,941 1,755 Long-term Debt 1,351 1,248 1,137 606 Ratios: Current Ratio 1.1 1.4 1.5 1.1 Long-term Debt/Equity Ratio 40:60 38:62 37:63 26:74 Debt Service Coverage - 3.2 3.0 2.8 /1 All State funds (interest free) to the Enterprise are considered as equity. The drop in equity is because the initial advances for the project are recouped through depreciation. 8.07 The above ratios, based on the Bank's usual standard measurements, are satisfactory except during the first two years of operation when they are low or even inadequate. However, since the State will guarantee to provide 1/ Mainly for repairs and replacements. - 25 - Otelinox sufficient cash to allow it to meet its obligations at any time (para. 8.05) and all funds required for the Enterprise's operations are provided by the State, there is no danger of financial stringency. E. Reporting Requirements 8.08 Romanian enterprises in general have elaborate reporting requirements including weekly, monthly, quarterly, and annual reports to their respective Centrals and the National Bank and the Investment Bank. On the whole, these reports provide adequate information except that, as explained in Annex 8-5, funds on the liability side of the balance sheet are identified by their applications rather than by sources. Therefore, for the Bank to keep abreast of the financial position of Otelinox, it is necessary for the Enterprise to submit balance sheets in sufficient detail giving a breakdown of liabilities by major sources and type of funds, e.g., credits from the National Bank and the Investment Bank, State advances, the Bank loan and other borrowings. Types, formats and frequency of reports were agreed upon with the Guarantor and the Borrower. P. Auditing Requirements 8.09 Romania has a fairly elaborate control and audit system as detailed in Annex 8-6. The primary objective of these audits is to ensure that the activities of commercial enterprises dovetail into the national plan and are in conformity with the set targets and allow any deviations to be brought to the attention of the appropriate authorities. Nevertheless, the information provided in the audit reports (submitted quarterly) is adequate for Bank purposes. The Enterprise's financial statements will be periodically audited by the Steel Central, the Ministry of Metallurgical Industries and the Ministry of Finance. There is no separate organization as such for auditing although the Court of Superior Control established in May 1973 may perform this function in the future. The audits performed by the Steel Central and the Ministry of Metallurgical Industries may not be completely independent as they are also responsible for operations of the enterprises. The Ministry of Finance which monitors activities of all Ministries and their enterprises, is in a better position to conduct an impartial audit. Therefore, it was agreed that the annual audit and report on the accounts of the Enterprise be carried out by the Ministry of Finance. G. Financial Rate of Return 8.10 All the projections are based on constant prices as is the normal practice in Romania. Thus, in constant value terms, the project provides a suitable financial return of about 13%. Details of assumptions used are given in Annex 8-7. The financial rate of return for the cold mill separately would be somewhat higher and for the bar mill slightly lower than the overall return. For reasons stated earlier (para. 8.01), the rate of return calcul- ations in the Romanian context are no guide for investment decisions among various projects. Therefore, no sensitivity tests have been made for the financial analysis. - 26 - H. Break-Even Points 8.11 The profit break-even point in 1980, after reaching full production, would be at about 62% of the effective capacity of the plant. Considered separately, the break-even point for the cold mill would be at 55% and for the bar mill at 73%. The comparatively low break-even for the cold mill is partly due to the fact that the fixed cost for the cold mill as a percentage of its revenue is only 15% and thus lower than for the bar and partly due to relative price distortions between the products of these two mills (para. 3.18). Further details on break-even are provided in Annex 8-8. IX. ECONOMIC JUSTIFICATION A. Economic Rate of Return 9.01 The economic rate of return for the cold mill is about 14.9%, slightly higher than that of the bar mill - approximately 14.3%. As a result, the rate of return for the project as a whole is satisfactory at about 14.6% Prices used for this calculation and the economic sensitivity analysis as well as the basis for calculation of input costs and revenues are given in Annex 9-1. International prices (CIF Romanian border) for 1972, when the strong upswing in steel prices had not yet started but prices had recovered from the slump of 1970 and 1971, have been used as the base for calculating the accounting prices for valuing Otelinox inputs and outputs. As for labor, no shadow rate has been assumed because the share of labor cost in total operating cost is insignificant (para. 7.04). 9.02 The effect of the recent upward movement of petroleum prices on the project is limited because: (a) Romania is relatively independent of petroleum Imports (imports account for only about 20% of consumption) and is in this respect more favorably placed than other major special steel producers in Western Europe and Japan; (b) it can be assumed that prices of special steel, the production of which is concentrated in developed countries, will eventually reflect such increases in input costs; and (c) the fact that even if one were to assume that energy costs would go up to the same extent as the recent petroleum price hikes (i.e., by three times), Otelinox's direct production costs would not increase by more than 4%. B. Foreign Exchange Rates 9.03 The official rate of Lei 4.97 US$1 is used only for accounting purposes. Since 1970, the rate frequently used for invisible and capital transactions has been Lei 14.38 per US$1. Under a new system introduced in January, 1974, the prices of all traded goods are converted at a uniform rate of Lei 20 per US$1.00, a rate which is considered by the Romanians as being representative of the cost of convertible foreign exchange. For imported goods, the domestic Lei price is found by adding to the converted foreign price a tariff rate which varies - 27 - for different types of goods. The rate of Lei 20 per US$1.00 has also been used to convert national income statistics from Lei to dollars. Consequently, this rate has been used as the base rate for calculations in the appraisal. Sensitivity analysis has been conducted on the conversion rate by also using a rate of Lei 25 - US$1.00. If this higher rate is used the economic rate of return for the project increases to about 18% from 14.6%. C. Sensitivity Tests and Risks 9.04 The economic rates of return are higher than the financial rates for both cold and bar mills because the prices for major inputs and outputs fixed by the Romanian authorities are at variance with the world prices as shown in Annex 3-2. Sensitivity tests have been made to determine the effects of various events on the economic rates of return; they are shown in Annex 9-1 and are summarized below: Sensitivity Tests on Economic Rates of Return (%) Case Description Rate of Return 1. Base Case 14.6 2. Sales Revenue Decrease 5% 11.7 3. Operating Cost Increase 10% 10.3 4. One Year Project Delay plus 15% Cost Overrun 8.8 5. Sales Revenue Decrease 5% and Operating Cost Increase 5% 9.8 6. Project Cost Increase 10% and Operating Cost Increase 10% 9.2 9.05 Since Romanian authorities have not provided sufficient data to fully justify their proposed product mix (para. 3.12), the Bank has assumed a modified product mix reflecting the commonly used product mix in Western Europe to test the sensitivity of the rate of return. Even under this assump- tion, the project provides a satisfactory return of about 12.6%. The rates of return are, however, slightly understated due to the excess capacity built into the bar mill. Nevertheless, the project is sensitive to moderately adverse conditions, particularly delays in project completion. Considering the past Romanian experience in implementing projects successfully, the return for Otelinox is expected to be satisfactory. 9.06 There are basically three major risks that this project could face. First, unfamiliarity with the international bidding procedures of the Bank may prolong the project implementation period somewhat with a resulting in- crease in project costs. However, the Romanian authorities are aware of this problem, and continued close contact between them and the Bank during pro- curement should minimize such delays. Second, indirect impact of continuing high energy costs may cause the demand abroad for Romanian goods using special steel to be lower than now expected. However, in such a case, the project will have sufficient in-built flexibility to temporarily roll special steel products usually rolled in less efficient mills or roll some ordinary carbon - 28 - steels and thus counteract any serious fall in demand for special steel in Romania because of external factors. Finally, the present situation in the equipment supply market coupled with the high costs in preparing bids of this type may result in reduced competition for equipment supply. D. Competitiveness 9.07 The supply of raw materials and utilities seems assured to the project and so is the provision of well-trained labor. Wage costs are much lower in Romania than in developed countries, the average direct wage cost being about Lei 8.0 (US$0.40) an hour. Further, labor is relatively efficient and hard-working, the scale of operation planned for the project is economic and the machinery proposed for Otelinox is up-to-date. Based on all these factors, the project is expected to be able to produce special steel compe- titively with Western Europe. E. Employment 9.08 The project would generate employment directly for about 1,600 persons. It will also help open up a large number of jobs in the consuming industries, especially engineering and metal-transforming industries which are projected to grow at the rate of 15% a year during the current decade. But for the project, Romania would be importing much less than the production envisaged by Otelinox over the years because of its continuing foreign ex- change shortages, with corresponding reduction in the rate of growth of the above-mentioned industries and employment generation in them. However, the impact of the project on employment creation upstream is limited because mDst raw materials (barring scrap) required for the production of main inputs - hot-rolled bands and billets - are imported. F. Estimated Foreign Exchange Effects 9.09 One of the most important benefits from the project is the annual net foreign exchange earnings to the economy after deducting all foreign operating costs and debt service payments associated with the project. As shown in Annex 9-2, such net annual savings at 1973 adjusted world prices would be about US$59 million after the project achieves full production in 1980. In other words, the total foreign exchange financing required for the project - US$96 million - would be more than covered in two years of opera- tion of the plant at full capacity. Thus the project has a significant and beneficial impact on Romania's foreign exchange situation. Even at the lower world prices in effect in 1972, net annual savings would still be US$53 million. G. Transfer of Technology 9.10 Transfer of technology is also an important aspect of the project as Romania does not have previous experience in operating cold-rolling mills for stainless sheet and strip. Further,-under the project, it is envisaged to help adopt new technology in the existing steel plants which are proposed to provide semi-finished products for rolling at Otelinox. - 29 - X. AGREEMENTS 10.01 The Loan Agreement and Guarantee Agreement will record the following major agreements and assurances: (a) the Enterprise will not be dissolved without prior consent of the Bank (para. 2.03); (b) well-qualified personnel to fill key positions will be appointed in a manner which is satisfactory to the Bank (para. 2.14); (c) the proposed product mix will be reviewed (para. 3.13); (d) a study of export markets for special steels will be carried out (para. 3.16); (e) possible establishment of steel service centers will be examined (para. 3.20); (f) any major modification in project designs will only be made with prior consent of the Bank (para. 4.05); (g) arrangements for adequate training will be made (para. 4.09); (h) adequate measures will be taken for environmental protection (para. 4.11); (i) expansion of Otelinox plant will be done only after exchange of views with the Bank (para. 4.12); (j) funds to ensure project completion, cover any possible operational losses and maintain adequate working capital will be provided (paras. 5.05 and 5.08); (k) Disbursement of Bank loan beyond US$3 million for any one contract will be subject to approval of final technical and economic study (para. 6.03); (1) procurement consultant will be appointed, if necessary (para. 6.07); (m) Annual depreciation remittances and benefits will be sufficient to cover payments of interest and principal on the Bank loan (para. 8.04); (n) reports will be submitted in agreed form and substance (para. 8.08); and - 30 - (o) annual audit and report on accounts of the Enterprise will be carried out by the Ministry of Finance (para. 8.09). 10.02 Based on the foregoing agreements and assurances received the project provides a sound basis for a loan for the Otelinox-project equivalent to US$70 million for 15 years, including a 5-year grace period. Industrial Projects Department May 21, 1974. ANNEX 1 ROMANIA: OTELINOX STEEL PROJECT DESCRIPTION OF TECHNICAL TERMS Hot-Rolled Coil: This is the basic semi-finished flAt rolled steel product from which cold-rolled products are produced. It is rolled hot from semi- finished steel in the slab form. The hot-rolling operation is usually done on a continuous or semi-continuous casting basis at temperatures frequently exceeding 12000 C. The hot-rolled coil used at Otelinox will weigh approxi- mately 6-12 tons with thicknesses ranging from 3-5 mm and width, 0.6-1.5 m. Cold-Rolled Sheet: This is a general term for a flat-rolled steel product which is hot-rolled first and, subsequently, cold reduced. Typical size for Otelinox cold-rolled sheet will be 1 to 1.5 mm thick and 1 m wide. Cold-Rolling: This rolling operation is done initially at ambient tempera- ture without additional heating; during this operation, the product fre- quently reaches temperatures exceeding 1700 C. Pickling: It is a process of removing oxide, mill scale, and oil by subjecting strip to flexing, and processing withshot blast, and with acids such as hydrochloric, nitric and hydrofluoric acids in the Otelinox opera- tion. Sendzimir Mill Processing: The cold reduction of steel on a cluster-type cold- rolling mill. This mill frequently has small work rolls of 50-60 mm dia- meter. Multiple processing is frequently required on stainless steel with maximum possible reduction of about 70% without intermediate annealing. Cold Roll, Anneal and Pickling Line: The process line wherein strip is heated to approximately 8OO° C, with controlled cooling and subsequent acid pickling. Bright annealing, wherein little or no oxide surface coating is forned, can be performed on this line using inert, ntmospheric gases. Coil Grinding and Polishing Line: A process line utilizing abrasive belts to obtain desired surface finish. SLitting Line:: A process line for trimming edges of coils and/or multiple slitting into as many as 8-10 narrow stripsdepending on product dimensions required. Cold-Rolled Shear Line: A process line designed to cut sheets into desired lengths from cold-rolled coils. Typical sheet lengths at Otelinox would be 2-4 m. Stretcher Leveller: A device wherein packs of cold-rolled sheets can be stretched in length to achieve desired flatness. Billet: The input for the bar-rolling mill will be billets which are semi-finished steel products, generally square in cross section, with dimensions of 150 mm x 150 mm or less. Typical billet dimensions for Otel- inox will be 90 mm x 90 mm, and 100 mm x 100 mm, weighing between 300 and 700 kg. ANNEX 1 Page 2 Rod and Bar Products: For Otelinox these products will be mostly round rods and bars with some square sections, hexagons, and small flats. Typical dimensions for rods will be 5.2 to 12 mm and for bars, 13 to 30 mm. Hot-Rolling Bar Mill: Billets will be heated in a reheat furnace of the mill at temperatures -which frequently exceed 13000 C. The heated billets are rolled into rod and bar products in a set of rolling mill stands. Cooling Beds: Large horizontal tables at the exit end of the bar mill designed to receive hot rod and bar products immediately after rolling, for air cooling and later transfer for assembling and bundling for storage and shipping. In-iustri3l Projects Department January 1974 rANzIZDIahxL CIIaU s IHRllU5 ICAL IDUSTUIES Council of Minhisters State Planning Comission M of Ministry of Finance (Planning of Material Balances) Na| Induicea1 Foreign Trade Enterprises: Design and Engineering Steel Central Other Centrals: Conetruction National Iavestnt Others (1) IThAROI - import and export Institutes: Bucharest (1) Metallurgical Process- Trusts: Bank Baok of equipmet (1) IP}lQT - Iron & stel ing, Bucharest (I) Galati (2) M1ALIDKcM-EPOR1 - import als (2) Non-ferrous and rare (2) Bunedoara and export of finished (2) IPOIM - roling mnsa Steel Central, metals, Slatina products (3) MIM - noaferrn- Bucharest (3) Refractories, Brasov (3) IMIE D4OM - import of projote (4) Scrap, Bucharest raw materials (4) IOU - metauvgioa (4) ALUROK - Import and export research of aluminum products Integrated Steel Integrated Steel Integrated Steel Alloy Steel C- Otelinox5 Victoria Otelul Hasu, Iron Enterprise Works, Gal-ti Works, Hunedoara Works, Resita plex,Tirgeriste Tirgo-ist. Enterpris Calen Vlahita Industrial Projects Department January 1974 ANNEX 2-2 ROMANIA: OTELINOX STEEL PROJECT ROLE OF ENTERPRISE, CENTRAL AND MINISTRY 1. Within the Romanian industrial sector, planners', not consumers', preference determines what is produced. All major policy decisions are made by the Romanian Government. The framework within which all techni- cal and economic activities are carried out is outlined in laws passed by the Grand National Assembly. Actual administrative work begins at the level of the technical ministry, under the supervision of the appropriate vice minister of the Council of Ministers. The technical ministry then delegates considerable responsibility to the Centrals, which directly sunervise enter- prises under them. A. ENTERPRISE 2. The industrial enterprise in Romania is primarily a production- oriented organization with only limited decision-making responsibilities outside that area. It becomes a legal entity at the time it is approved by the Council of Ministers and registered at the Ministry of Finance and as such has its own production plans (based on targets set by the plan for the Central), prepares financial statements, has its own bank accounts, and can borrow money from appropriate banks. It maintains economic, financial and legal relations with other organizations (e.g. the Central). Organizational modifications, such as merger, relocation and major output changes, must be approved by the Council of Ministers. 3. Ehterprises are given fixed assets and working capital when they are first established. The fixed assets cannot be mortgaged or pledged, but can be used, transferred or liquidated as need be and in accordance with the law. The initial working capital endowment comes from the Central, MiniEtry or Ftate budget. Excess supplies of materials and fuels can be sold, but debts can only be repaid in the form of cash. Temporary working capital surpluses can be used to finance other short-term needs. Rhterprises deal with the State budget through the Central except in the case of turnover and regularization taxes which are directly remitted. Each enterprise has at its own disposition funds for modernization, research and development, bonuses, and social investment, while the Central holds all the other funds established by law. 4. In accordance with Law Number 11/1971, each enterorise has a number of responsibilities as described below: Planning and Plan Fulfillment - draws up annual and five-year plans based on available capacity and resources; - attempts to fulfill or hopefully overfulfill the physical output target and other indicators, such as value of output, profitability, labor productivity, and material costs per unit value of output, agreed for the enterprise; - transmits bi-monthly, monthly, quarterly and yearly reports to the Central; - determines the utilization of facilities and attempts to increase overall capacity utilization. ANNEX 2-2 Page 2 Research and Development - draws up its own research and development plan if it has its own research facilities; - can propose research topics to be included in State plans; - can prepare and apply studies, documentation and designs for new products, modernization of equipment, and techniques, suitable substitutes for materials in short supply, etc.; - encourages the development of patentable inventions. Investment and Construction - can draw up detailed investment and investment financing plans; - can assure the preparation on schedule of necessary technical- economic studies; - determines the technical-economic indicators that fall within the competence of the enterprise; - can conclude construction contracts; - can conclude contracts with local equipment suppliers and draw up delivery schedules jointly with these suppliers. In the case of imported equipment, the enterprise can deal with the foreign suppliers only through the appropriate fcdi n trade enterprise, that draws up all necessary contracts 1/; - supervises the portion of investment financing that comes from the enterprise's own resources. Organization of Production of Labor - can introduce modern methods of management, information retrieval, computation, etc.; - can determine work norms and programs to increase labor productivity; - can determine norms for the consumption of material inputs and utilities; - draws up and applies plans for small-scale mechanization; - can guarantee quality control; - arranges for the production of new products; - can assure adequate utility supply and efficient maintenance; - can assure the fulfillment of safety and health regulations. Supply of Materials - concludes long-term, yearly or short-term contracts with material suppliers; - informs the Central of its need for foreign exchange; - proposes inventory levels that must ultimately be approved by the National Bank. Marketing - can participate in market research in ordor to learn about consumers' needs and can vary the composition of output to satisfy these needs as long as quantity or value of output does not decrease; 1/ Thus for the Otelinox project, only METAROM will handle foreign equipment contracts. ANNEX 2-2 Page 3 - concludes contracts with customers, assuring the necessary level of sales and meeting export goals set by the Central or Ministry; - can prepare advertisements, packaging and catalogues; - can participate in exhibitions and fairs; - services output when so required. Financial Planning and Bookkeeping - prepares annual and five-year financial plans on the basis of internal analyses and advice from the Central; after the approval of these plans, the enterprise must assure their fulfillment; - functions within the flow of funds specified in Annex 8-1; - keeps accounting records; - sets prices for minor products produced only by the enterprise. Personnel Responsibilities - hires, promotes and evaluates personnel; - can determine future manpower requirements; - can prepare training plane and can org-anizs such training in collaboration with other organizations; - can apply general principles to determine salaries and material incentives; and - can provide canteens, nurseries, etc. B. CENTRAL 5. The Central becomes a legal entity at the time it is registered at the Ministry of Finance. It can be established, reorganized or dissolved only by a decision of the Council of Ministers. It is responsible for the fulfillment of the plan indicators handed down by the Ministry and prepares financial statements, has bank accounts, can borrow money from appropriate banks and carries on economic and financial relations with both domestic and foreign organizations. Funds for centralized investment, non-centralized investment, unplanned modernization and repairs, contingencies (reserve fund) social investments, research and development and workers' protection are held by the Central. In addition, the Central can hold a special reserve fund of foreign exchange to cover urgent import needs. 6. In addition, the Central has the following responsibilities specifi- cally delegated to it: Planning - draws up annual and five-year plans based on the potential of subordinate enterprises; - supervises plan implementation and takes measures to insure plan fulfillment and resolvesproblems; - maintains a reserve salary fund that cannot exceed 1.5% of the total amount approved for wages; for seasonal activities and con- struction, the reserve salary fund cannot exceed 2% of the total amount approved for wages; - can modify up to a limit of 2% the work norms established by the Ministry. ANNEX 2-2 Page 4 Research and Development - can prepare studies for the expansion and modernization of the entire Central; - can arrange for foreign research cooperation; - analyzes foreign bids, when necessary. Investment and Construction - draws up investment plans for the Central; - redistributes depreciation and profit funds received from subordin- ate enterprise in order to finance centralized investment; - approves the financing ofnai-centraJized investment projects from itsnon-crtralizedinvestment fund; - arranges for technical-economic studies, concludes contracts, determines delivery schedules in certain cases, in particular when a new enterprise is to be constructed; - can arrange for the transfer of equipment between enterprises. Organization of Production and Labor - can divide labor among various locations, offices, projects and shifts; - can establish plans for inter-enterprise cooperation; - can locate additional skilled and unskilled workers when the enterprise is unable to do so. Supply of Materials - can conoludn contracts for foreign supplies; - can transfer supplies between enterprises; - can request foreign exchange from the Ministry and prepare the necessary import documents; - can locate materials when the enterprise is unable to do so. Ma'ketling- - can draw up export plans; - can maintain sale representation abroad; - can approve the use of trucks and other transport vehicles; - can help enterprises to find potential customers, especially foreign customers. Financial Planning and Bookkeeping - draws up financial plans; - sets annual and quarterly financial norms for each enterprise; - distributesplanned profits; - aggregates and approves credit needs of each enterprise; - analyzes uses of and requests for funds in excess of those planned; - insures the periodic recalculation of working c pital norms; - audits each enterprise's financial statements; - redistributes funds obtained from enterprise allocations; and - helps set prices for products. ANNEX 2-2 Page 5 C. THE MNISTRY 7. Each Ministry receives annual plans from all its Centrals, consoli- dates them after appropriate revisions, and forwards them after approval to the State Planning Commission. After the balancing is completed, the State Planning Commission sends finalized plans down to the Ministries Where they are disaggregated by Centrals and sets production targets for each of them. The Ministry is directly in charge of design institutes, foreign trade enter- prises and construction trusts and the Minister appoints the heads of new enterprises and Centrals. 8. At present there are 10 Ministries which deal with the industrial sector. Each of these Ministries is directly in charge of the Centrals foreign trade enterprises, research and design institutes and construction trusts I fiunctioning within its area of responsibility. The Ministry itself can contain 3 or 4 divisions -- economic-financial, technical, control and personnel -- and a nuwber of directorates or directorate-generals that deal with the sub- ordinate Centrals and problems such as material supply and marketing. The Minister appoints the heads of all new subordinate units. 9. The Ministry has the following delegated responsibilities: Planning - acts as the only legal holder of the State plan (t"titular de plan") for its entire branch; - reviews, checks and aggregates proposed plans received from the Centrals; - adds additional proposals onto central plans, in particular for higher targets in cases where plans have been overfulfilled; and - translates plan objectives (once the plan has become law) into goals and indicators for its Centrals. Research and Development - supports and encourages the introduction of new technology and products; and - prepares studies for expansion and modernization. Investment and Construction - compiles and draws up investment plans; - arranges for technical and economic studies; - gives final approval to investment projects valued up to 70 million lei; and - ensures that investment projects are completed on time, and that they have reached the projected parameters. ANEX 2-2 Page 6 anization of Production and Labor arranges for spacial training programs; and assumes ultimate responsibility for the proper managem,ent of production and manpower. Supply of Materials coordinates and projects material balances for a product or group of products; establishes sources of supply of inputs for subordinate units when necessary; and settles disputes which arise in the pre-contractual period between Centrals and enterprises. Marketing assists in identifying customers for tha output of its subordinate units; and aims to cover the costs of imports received within the Ministry by exports from the Ministry. Financial Planning compiles and tri.es to balance the financial plans of its subordinate units; sets financial norms for each Gentral; audits each Central's financial statements; and helps set prices for major products. Industrial Projects Department May 197h ANNEX 2-3 ROMANIA: OTELINOX STEEL PROJECT ENTFRPRISE MANAGDMNT 1. All Romanian enterprises are owned by the Romanian people and managed by the workers of respective enterprises. ^Authority is delegated from the Wbrkers' General Assembly down through the Working People's Committee and the Management Committee to the General Manager of the enterprise (see Chart 1). General Assembly of Workers 2. The Wbrkers' General Assembly consists of all workers in the case of small and medium enterprises, but of workers' elected representatives in the case of large enterprises. The assembly meets twice a year, although special sessions can be called on the request of one-third of the members. This body discusses ways to fulfill State plans, and reduce costs. It approves work contracts signed by management and the labor union, statistical reports, distribution of part of profits among workers, and technical-organizational changes. Working People's Committee 3. The Working Peopee's Committee consists of 9 to 25 members, depending on the size of the enterprise. The general manager, chief engineer, chief accountant, chief of quality control, secretary of the local Communist Party organization, president of the labor union and secretary of the Union of Com- munist Youth must be members of the committee. In addition, heads of important sections, specialists and/or scientists can be appointed to the Committee by the Central. Three to 11 of the members are elected from lower echelon posi- tions by the Workers' General Assembly. The Committee meets once a month or more frequently if requested by the general manager, or one-third of the members. It approves State plans, material balances, local work and material norms, fuids Lo be spent on publications and advertising, and investnent and moderniza- tion programs. In addition, the Committee can modify producticn plans, rationalize inventory levels and organize recruitment, orientation, training and promotion of personnel. In case a majority in the Committee is in disagreement with the manager, who is also the chairman of the Committee, the problem is referred to the Central. Management Committee 4. The Management Committe consists of 3-7 members, including the general manager of the enterprise, who serves as chairman, and other key management personnel. It generally meets once every 10 days and is concerned with the implementation of decisions taken by the Nbrking People's Committee. It can recommend modifications in annual and quarterly targets. It approves repairs and small-scale investment projects, strives for maximum capacity and labor utilization, and arranges for the payment of basic salaries and bonuses. If the manager is in disagreement with a majority of the members, the Working People's Committee reviews the situation. Gen.eral Manager 5. The general manager is appointed by the appropriate ministry for an indefinite period. He represents the enterprise in its dealings with other entities and thus contracts for the purchase of raw materials and the sale of final output. Industrial Projects Department January 1974 ROMANIA: OTELINOX STEEL PROJECT OTELINOX ORGANIZATIONAL CHART Workers' Geaeral Assembly (meets twice yearly) Working People's Committe (meets once a month) Management Committee Gener I |Chief Engineer| |Chief Accountant] Quality Control esne Production Log-ang CodMl a ilShipig Supply Bokkeeping lProgrammingI Planing O Industrial Projects Department January 1974 Annex 3-1 ROMANIA: OTELINOX STEEL PROJECT MARKET FOR STEEL IN ROMANIA World Situation 1. During the last decade (1962-1972), world steel production in crude steel equivalent increased from 362 million tons to 626 million tons, reflecting an average annual growth rate of 5.6%. In 1973, as a result of the booming world economy, the steel industry was operating close to full capacity with the production level estimated at approximately 692 million tons. In spite of this surge in production, steel is in short supply in many parts of the world, and this situation is not expected to change radically during the rest of this decade. The latest demand forecasts for steel indicate that the world would need about 1.1 billion tons of steelmaking capacity by 1980 compared to the present capacity of approximately 800 million tons.Jl Therefore, to meet the world demand, an additional steelmaking capacity of about 300 million ingot tons is required by the end of the decade. Taking into consideration the investment plans of various countries, it is not certain that the required additional steel capacity would be created by the end of this decade. Romanian Expansion Program 2. Romania is one of the countries which has ambitious plans to boost its steel production from the present (1973) level of about 7.5 million tons in crude steel equivalent to 17 million tons by 1980 (Table 1). Alloy steels (including stainless) are being given increased emphasis in the expansion program to meet the needs of the country's industry which has been expanding at about 13% a year since 1950--one of the fastest growth rates in the world--and is expected to maintain the momentum in the future as well (Table 2). The production of alloy steels is planned to increase from 525,000 tons in crude steel equivalent in 1973 to about 2.2 million tons in 1980 (Table 3), when the percentage share of alloy steels in total steel production is expected to reach 13% compared to 9% in 1972. 3. Tirgoviste, an industrial town 80 km from the capital city of Bucharest, is being developed as a center of alloy steel production because of its potential for rapid industrial growth, the availability of infrastructure facilities and its favorable location for supply with respect to a number of industrial centers such as Arad, Braila, Brasov, Bucharest, Constanta, Craiova, Jassy, Ploiesti and Timisoara (Appendix I). The Tirgoviste SciPL Steel Complex is being developed in stages. The Stage I of the complex (Tirgoviste I) has already begun initial production and is expected to achieve full production of 600,000 tons of billets in 1977. It will supply about 146,500 tons of billets to the Otelinox Steel Project (Tirgoviste II) to roll annually 120,000 tons of alloy rod and bar products by 1980. The Otelinox Project will also roll annually about 30,000 tons of stain- less sheet and strip for the first time in Romania, using about 40,500 tons of hot-rolled coils from the Galati Steel Plant, the country's biggest integrated steelmill located about 270 km from Tirgoviste (Appendix II). j Iron and Steel Engineer, December 1973. Annex 3-1 page 2 Past Trends in Steel Production 4. In 1950, the total crude steel production in Romania was only about half a million tons. During the 1950s, crude steel production increased at an annual rate of 13% and during the following decade, the annual growth rate was slightly higher at 13.7%. During the present decade, the average rate of increase in steel production is projected at 10%. The following table shows the trend of steel production (see also Tables 1 and 4) since 1965: Trend of Crude Steel Production (000 tons) Special Steel Other Steel Total Steel 1965 193 3,233 3,426 1970 414 6,103 6,517 1973 525 7,000 7,525 1980 (proj.) 2,200 14,800 17,000 Production by Process 5. While expanding steel production, Romania has also been modernizing its existing plants. For example, in 1972, the country produced about 33.5% of its steel through the modern LD basic oxygen-blown process compared to the corresponding share of 20.5% in Poland. However, the percentage in Romania is low compared to 39% in Italy and 79.5% in Japan as shown in the following table: Crude Steel Production by Process (1972) (in percentages) Romania Poland Italy Japan Open Hearth 57.6 70.9 20.1 2.0 Electric 8.9 8.7 40.8 18.6 LD Process 33.5 20.4 39.1 79.4 Total: 100.0 100.0 100.0 100.0 Total Production (in million tons) 7.4 1344 19.8 97.0 Source: Quarterly Bulletin of Steel Statistics for Europe, U.N. Rolled Steel Products 6. In terms of rolled steel products, the production in Romania increased from 2.3 million tons in 1965 to 5.7 million tons in 1973 (Table 5). The follow- ing table shows the share of flat and non-flat products in total rolled steel production: Annex 3-1 page 3 Rolled Steel Production (in 000 tons) 1965 $ 1973 % 1980 (proj.) % Total Production 2,313 100.0 5,717 100.0 13,150 100.0 of which: -Flat Products 507 22.0 2,727 47.7 6,970 53.0 -Non-flat Products 1,806 78.0 2,990 52.3 6,180 47.0 7. In common with the experience of industrialized countries, the share of flat products in total production has increased in Romania over the years and is expected to rise further, reaching 53% of the total in 1980 compared to about 48% at present. Trade in Steel Products 8. Romania is a significant trader in steel products. It has been making concerted efforts to bridge the gap between imports and exports to ease the burden on its scarce foreign exchange resources. In 1972, for example, exports of steel products totalled 1,197,000 tons while imports were about 1,396,000 tons, with the imports exceeding exports by 199,000 tons. The following table shows the trend in Romania's steel trade during 1970-1972: Steel Trade of Romania (in 000 tons) Exports Imports Deficit 1970 1,278 1,361 83 1971 1,095 1,544 449 1972 1,197 1,396 199 Apparent Steel Consumption 9. Apparent steel consumption--production plus net imports of steel--in crude steel equivalent increased from about 2.4 million tons in 1960 to nearly 7 million tons in 1970 (Table 1), reflecting an average annual rate of growth of about 11%. During the current Five-Year Plan (1971-1975), the consumption is projected to increase at a lower annual rate of 6%, reaching 9.3 million tons in 1975. However, during 1976-1980, it is forecast to expand at an accelerated pace of 11% a year, touching the level of 15.8 million in 1980. The projected 1980 consumption is nearly double that of 1972 when the total consumption was 7.6 million tons. Per Capita Steel Consumption 10. Per capita steel consumption is considered a good indicator of the level of economic development of a country. In 1960, the per capita steel consumption in Romania was only 132 kg. But, during the 1960s, it increased at an average annual rate of 9.2%, reaching 318 kgi in 1970, slightly lower 1/ U.N. figure. The estimate by the Romanian Ministry of Metallurgical Industries is higher at 348 kg. Annex 3-1 page 4 than half the per capita steel consumption of the US that year (Table 8). During the 1970s, according to the Romanian authorities, the per capita steel consumption would increase at the rate of 7% a year, reaching 682 kg in 1980, comparable to the consumption level of the US in 1969. 11. The steel consumption level comparable to that of Romania in 1970 was reached by the Democratic Republic of Germany (321 kg) in 1959, by the USSR (314 kg) in 1961 and by Poland (313 kg) in 1967. In the decade folloing that achievement, the annual rate of increase in consumption was 5% in the Democratic Republic of Germany, and 4.2% in the USSR. But in Poland during the five-year period following 1967, steel consumption has been growing at a higher annual rate of 6.2%. Against the experience of these three countries, the Romanian projection of 7% annual growth rate in steel consumption during the 1970s may appear high but seems achievable in view of the fact that its planned annual rate of industrial growth (about 12%) during 1970-1980 is higher than that achieved by the Democratic Republic of Germany during 1959-1969 (5.5% a year), in the USSR during 1961-1971 (9.5% a year), and in Poland during 1967-1972 (about 8.5% a year). Consumption of Special Steels 12. Internationally, the demand for special steel products is increas- ing by an average of nearly 5% a year.1/ Today special steels are produced by all the leading industrial countries, and are used largely in machine building and engineering industries. 13. Though the world demand for special steels on an average is growing at 5% a year, the increase in demand in less developed countries is growing at a much higher rate from a low base. For example, in Romania, the consumption of special steels including high-strength low-alloy steel products (HSLA steel or high tensile steel) has been increasing as follows: Trend of Consumption (tons) Production Net orts Total Cons tion 1965 133,770 29,0P70 -162SU40O 1970 286,940 52,960 339,900 1971 325,755 89,020 414,775 1972 366,650 90,780 457,430 1973 (Est.) 363,875 100,740 464,615 14. The above table shows that the gap between production and consumption has widened from about 29,000 tons in 1965 to 100,740 tons in 1973. The annual rate of growth in consumption was about 16% during 1965-1970. For the current decade as a whole, the total consumption of special steels could be assumed to grow at the rate of about 15%, the same rate as that projected for the engineer- ing and machine-building industries. On this assumption, the total demand for 1/ "The EEC Challenge for the UK Independent Alloy Steel Producers" by N.S. Maconochie, in Steel Times Annual Reviewy 1972. 2/ Derived by assuming l.46 tons of crude steel is equivalent to 1 ton of finished special steel products. Annex 3-1 page5 speaK steels in 1980 would be about 1,375,000 tons. However, the Government projection is slightly higher at about 1,600,000 tons. 15. In the past, the share of high-alloy and high-strength low-alloy (HSLA) steels in total consumption of special steels has been about 60% and 40% respec- tively. The Romanian authorities have assumed that the share of HSIA steels in total consumption would increase to 50% while that of high-alloy steels would decline from 60% to 50% by 1980. On this basis, of the total projected demand of 1,375,000 tons for special steels, by the end of the decade, the HSLA steels would account for 687,500 tons and the rest high-alloy steels (including stainless). The HSLA steels are finding increasing use in structural applications because of their durability. They are used mostly in transportation equipment including railroad cars, bridges, tower construction, high-rise buildings, oil storage tanks, oil-drilling rigs, automobile bumpers, air-conditioning equipment, earth-moving equipment, shipping containers, agricultural machinery parts, etc. High-alloy steels find extensive use especially in machine tools, electrical and electronic equipment, cutlery, domestic appliances, precision instruments, and equipment for food processing, chemicals, etc., because they have greater hardenability and resistance to softening on tempering. High-speed tool steel, one variety of high- alloy steels, is used in equipment for operations involving relatively high temperature such as heavy cuts or high-speed machining. Consumption of Stainless Steels 16. As the name implies, stainless steels are more resistant to rusting and staining than are plain carbon and lower alloy steels. The former has superior corrosion resistance because of high chromium content. The American Iron & Steel Institute (AISI) has chosen 4% chromium as the dividing line between "alloy" and "stainless" steel. 17. Stainless steels are grouped into three classes: austenitic, ferritic and martensitic. The austenitic stainless steels are iron-chromium-nickel alloys not hardenable by heat treatment. They bear numbers (under the American Iron and Steel Institute classification) such as AISI Types 301, 302, 302B, 303, 304, 304L, 305, 308, 309, 310, 314, 316, 316L, 317, 321, and 347. The ferritic stain- less steels are iron-chromium alloys not hardenable by heat treatment and they include AISI Types 405, 430, 430F, 446 and 502. The martensitic stainless steels are iron-chromium alloys that are hardenable by heat treatment and include AISI Types 403, 410, 414, 416, 420, 431, 440A, 44GB, 440C, and 501. 18. The austenitic variety which costs significantly higher than the ferritic and martensitic varieties is in greater demand all over the world. For example, in Romania, the respective shares of austenitic, ferritic and martensitic stainless steels in total consumption are b06, 156 and 5A respec- tively. The Romanian authorities think that these percentage shares would hold good in the future as well. Annex 3-1 page 6 19. The main users of stainless steels by order of importance are: (1) agricultural implements (excluding tractors) and equipment for food pro- cessing and chemical industries; (2) industrial consumer goods; (3) electro- technic, electronic and optical equipment; and (4) motor vehicles, tractors and railway rolling stock. At present, about 70% of the total consumption of stain- less steels is accounted for by the first three subsectors and their consumption is expected to increase rapidly in the future (Table 6). 20. The trend of consumption of stainless steels in Romania in recent years is shown in the following table: Consumption of Stainless Steel (tons) Sheet and Strip Others Total 1968 3,885 8J.315 12,200 1970 4,735 12,965 17,700 1973 8,710 17,890 26,600 21. The total consumption of stainless steels in Romania in 1968 was 12,200 tons. It increased at the annual rate of 17% during the last five years, reaching 26,600 tons in 1973, in spite of foreign exchange constraints. 22. The folloving table compares the per capita consumption of stainless steel in selected countries: Comparison of Stainless Steel Consumption in Selected Countries Total Consumption Per Capital Consumption (tons) (kg) Romania (1970) 17,700 0.80 Spain (1972) 35,000 o.94 Australia (1971) 25,000 1.95 Italy (1970) 187,000 3.7 Sweden (1971) 187,200 23.o Source: Stainless Steel, World Survey, 1972, Metal Bulletin. 23. The per capita consumption of stainless steel is hardly 1 kg in Romania compared with about 2 kg in Australia, 4 kg in Italy and 23 kg in Sweden. The demand for stainless steel is growing at about 8-10% a year in the world, But in Romania, where the consumption level is low, the total consumption could be expected to grow at a higher rate. At present, Romania does not produce stainless steel. As a result, it has been depending entirely on imports to meet its needs. Annex 3-1 page 7 24. The total consumption of stainless sheet and strip in 1973 was 8,710 tons -- about 32% of the total stainless steel consumption that year -- compared to 4,735 tons in 1968. During 1968-1973, the average annual rate of growth in the consumptionof stainless sheet and strip was around 17.5% in spite of the foreign exchange constraint on imports. The Romanian authorities have forecast that the total consumption of such products would increase at more or less the same rate during this decade as a whole, reaching 23,000 tons in 1980. However, considering the Romanian past record for exceeding targets, especially for industry, it seems likely that the consumption of such products would expand at a higher level of 19-20% a year during the present decade. On this basis, the total consumption of stainless sheet and strip might range between 27,000 tons and 29,000 tons in 1980. Major World Producers 25. Japan, the US, France, the Federal Republic of Germany, Sweden, Italy, the UK and Austria are some of the important producers and exporters of stain- less steels. The following table shows the trend of production in those countries during 1960-1971: Production of Stainless Steel Ingots (in 000 tons) 1960 1970 Average Annual Growth Rate (%) Japan 183 2,050 28.0 US 907 1,158 i/ 2.5 Germany 259 503 7.0 France 191 467 9.5 Sweden 176 394 8.5 UK 223 257 1.2 Italy 62 237 13.0 Austria n.a. 66 - j Production dropped from the peak of 1,421,000 tons in 1969. 2/ Includes small tonnage of liquid steel for castings. Source: Stainless Steel, World Survey, 1972, Metal Bulletin. 26. While the stainless steel production increased slowly in the US and the UK during the 1960s, noteworthy expansion of capacity has been taking place in Japan, Sweden, the Federal Republic of Germany, Italy and France. France has proved to be the most aggressive of the European stainless steel producers, and has recently emerged as the second largest exporter after Japan. Ugine Aciers, Europe's leading stainless producer, has proved a formidable competitor in the world and its flat products project at Fos is expected to help France overtake production of Germany where stainless steel producers as in Sweden, the UK and the US are mainly preoccupied with rationalization and consolidation. Annex 3-1 page 8 Sweden has already fallen behind France as Europe's leading exporter. Further, Italy, next to Japan, has experienced the biggest growth rate in the 1960s in stainless production. Though Italian producers are facing stiff competition from imports, they are still set on expanding stainless steel production in the future. Among other countries, Australia and Canada have established stainless production facilities, but are facing increased competition from abroad. Mean- while, Belgium, South Africa, South Korea and Spain have entered the stainless steel field. In Eastern Europe, apart from Romania, Poland and Yugoslavia have plans to produce stainless steel. 27. According to the Metal Bulletin World Survey of stainless steel (1972), the scope for expanding stainless steel capacity in the world is not very bright because of the phenomenal growth of capacity in the world during the past two decades and the existing overcapacity of between 250,000 tons and 300,000 tons. The survey indicates that in spite of impressive growth in demand for stainless steel, the expansion programs underway or being planned will still leave the world with a surplus capacity of between 200,000 and 250,000 tons by the second half of the 1970s. 28. As a result of this situation, some existing small producers in the world with old production facilities may well decide to give up the production of stainless or concentrate on non-flat stainless production in which the small specialist producer can survive. The mills that are likely to continue in the flat product field are those with modern Sendzimir mills which have transformed stainless sheet into a tonnage product. 29. Flat products are the most important sector of the stainless steel trade, accounting for almost three-fourths of total sales. Of the 1970 produc- tion in the market econony countries of 3 million tons, about 1.6 million tons (approximately 53%) were cold-rolled sheet and strip, 550,000 tons hot-rolled sheet and plates; and 200,000 tons of wire rods, bars and bar-like products and 600,000 tons of other stainless non-flat products. Market for Otelinox Stainless Steel 30. In spite of the competitive world situation for stainless steel, Romania has decided to establish a cold mill to produce 30,000 tons of stainless sheet and strip a year as part of the proposed Otelinox project which is sche- duled to start production in 1978. The cold-rolling facility will have a modern Sendzimir mill which should help Romania produce stainless steel competitively. Moreover, the facility is mainly oriented to meet the domestic needs for stain- less sheet and strip which have grown rapidly from about 3,460 tons in 1965 to 8,710 tons in 1973 (Table 9). The Romanian authorities have forecast that in 1980 the demand for such products would reach 23,000 tons, which appears to be an underestimation. As noted earlier (para. 24), the demand in 1980 is likely to be at least 27,000 tons. But for the cold mill of Otelinox, Romania will have to import this quantity which, at the average stainless import price of 1972,2/ would cost a total of about US$55 million. In the context of continuing 2/ In 1972, Romania imported 8,116 tons of stainless sheet and strip at a total cost of US$16.6 million (Table 9), with the average import price per ton accounting for about US$2,045. Annex 3-1 page 9 serious foreign exchange difficulties, it is highly unlikely that Romania would be able to meet from imports all its requirements of stainless sheet and strip of its fast-growing industrial sector. Market for Otelinox Alloy Bar Mill Products 31. As already noted (para. 15), the demand for high-alloy and low-alloy steels is likely to be 687,500 tons each. The Otelinox Steel Project will have a bar mill to hot-roll 120,000 tons of rod and bar products, including 110,000 tons of the high-alloy variety (90% of its total production) and 10,000 tons of the low-alloy variety (10% of the total). 32,. The following table (see also Tables 9 and 11) shows the trend of consumption of high-alloy rod and bar products and the projection for 1980 by the Romanian authorities: Consumption of High-Alloy Rod and Bar Products (in tons) Average Annual Rate of Growth (%) 1968 1973 1980 196M-7- 1973-78 Alloy steel for machine building 26,000 44,000 120,000 11.0 15.5 Ball-bearing steel 8,200 15,000 45,000 13.0 17.0 Spring steel 5,400 8,700 25,000 10.0 16.5 Carbon tool steel 800 1,300 6,680 10.2 26.0 Alloy tool steel 700 1,220 4,300 12.0 20.0 Stainless and heat-resistant steel 630 820 3,360 5.5 22.0 High-speed steel 1,270 1,960 4,660 9.0 13.0 Total: 43,000 73,000 209,000 11.2 15.0 33. The above table shows that the consumption of bar products of alloy tool steel,and stainless and heat-resistant steel is at present very low. It is expected to grow at a faster annual rate than the consumption of other varieties of bar products. For the bar products of high-alloy steels as a whole the demand is projected to grow at an annual rate of 15.0% during 1973-80 com- pared with 11.2% during 1968-73. This projection of the Romanian authorities appears realistic, especially in view of the fact that machine tools, electrical equipment, oil-drilling equipment, chemical plant equipment, and agricultural machinery industries are some of the fastest growing alloy steel consuming indus- tries in Romania (Tables 2 and 7). 34. In 1980, the proposed Otelinox production of 110,000 tons of high- alloy rod and bar products would account for 53% of the total consumption of such products. The following table (see also Table 12) shows the market share of Otelinox with respect to various types of high-alloy rod and bar products: Annex 3-1 page 1 0 Otelinox Share in Total Projected Consumption of High-Alloy Rod and Bar Products in 1980 (000 tons) Projected Total Otelinox Otelinox Market Consumption Production Share (%) Alloy steel for machine building 120,000 48,340 40.3 Ball-bearing steel 45,000 26,300 58.4 Spring steel 25,000 23,300 93.2 Carbon tool steel 6,680 5`700 85.3 Alloy tool steel 4,300 2,600 60.5 Stainless and heat-resistant steel 3,360 1,210 36.o High-speed steel 4,660 2,550 55.0 Total: 209,000 110,000 53.0 High-Strength Low-Alloy Steels 35. The consumption of HSLA rod and bar products were 32,000 tons in 196$. It increased at an annual rate of 9% during the next five years, reaching 49,000 tons in 1973. During the following seven years (1973-1980), according to the Romanian authorities, the consumption would grow at the rate of 23% a year, reaching 211,000 tons in 1980. This projection appears to be on the high side considering the annual growth rate in recent years. However, any shortfall in the demand for HSIA steel is not likely to adversely affect Otelinox for the following reasons: (1) the share of HSIA steel in total Otelinox bar mill pro- ducts is small (hardly 5%); (2) export markets for HSLA steel are promising; and (3) the Romanian authorities could reduce the production of HSIA steel bar pro- ducts and increase the production of other alloy steel bar products, if necessaiy. Other Producers of Otelinox-Type Products 36. The existing steelmills at Resita, Cimpia Turzii, and Braila currently produce about 53,000 tons of alloy bar mill products. Their production is expected to be expanded to 75,000 tons by 1980. Three more steel plants, includ- ing Otelinox, are expected to start producing such products by that time. Of the new producers, Tirgoviste I will start producing them in 1975, Otelul Rosu in 1977, and Otelinox in 1978. The following table (see also Table 3) shows trend of production, past and projected, during the current decade: Trend of Production of Alloy Rod and Bar Products (tons) l/ 1970 1977 1980 hare Resita 21,000 25,000 25,000 (20,000) 6.0 Cimpia Turzii 22,000 30,000 30,000 (26,000) 7.1 Braila 10,000 20,000 20,000 (17,000) 4.8 Tirgoviste I - 143,500 190,000(105,000) 45.2 Otelul Rosu - 30,000 35,000 (33,000) 8.3 Otelinox - - 120,000 (1O,OOO) 28.6 Total: 53,000 248,500 420,000 100.0 1/ Figures within brackets show HSLA steel variety. Annex 3-1 page 11 37. As Romania is a planned economy, there is no competition between plants. Production capacity is developed to catch up with consumption requirements as far as possible and all products are sold at State-fixed Prices. In the case of the six steel plants shown in the above table, the production programs of four with respect to special steels are modest ones. Only Tirgoviste I and Otelinox have comparatively major production programs. In 1980, Tirgoviste I would account for about 45% and Otelinox for 29A of the total production. Though Tirgoviste I and Otelinox will be producing similar products with respect to alloy rod and bar products, their product mix and product dimensions and sizes would be different. Otelinox would be producing only wire rods in thicknesses ranging from 5.2-12 mm and bars in thicknesses from 13-30 mm in the following quantities (in tons): In Coils in Out Lengths Total Wire rods 11,000 - 11,000 Bars: Rounds 44,000 24,440 68,440 Square 3,000 2,760 5,760 Hexagon 2,000 4,300 6,300 Flat 10,000 18,500 28,500 Total: 70,000 50,000 120,000 c=== === ==== ===== Product Mix 38. Otelinox Bar Mill: According to the alloy steel type classification of the American Iron and Steel Institute (AISI), Otelinox would be producing in its bar mill mainly AISI4142 (alloy steel for machine building), AISI52100B (ball-bearing steel), AS1I6150 (spring steel), T4 and M2 (high-speed steel), and stainless and heat-resistant steel of the AISI Types 410, 416, 403, 302, 303 and 305. In addition, it will also produce alloy tool steel and high-strength low- alloy steel products. The following table shows the product mix of the Otelinox bar mill: Product Mix of Otelinox Bar Mill (1980) Production % Share (tons) Alloy Steel for machine building (AISI4142) 48,340 40.3 Ball-bearing steel (AISI52100B) 26,300 22.0 Spring steel (AISI6150) 23,300 19.4 Stainless and heat-resistant steel (AISI 403, 410, 416, 302, 303, 305) 1,210 1.0 Alloy tool steel 8,300 6.9 High-speed steel (T4 and M2) 2,550 2.1 High-strength low-alloy steel (high tensile steel) 10,000 8.3 Total: 120,000 100.0 39. The above product mix selected by the Romanian authorities is based on the requirements of industries such as engineering, machine-building, motor vehicles, agricultural machinery, etc., and appears realistic. Annex 3-1 page 12 40. Otelinox Cold Mill: In Romania, as already noted (para. 18), the demand pattern for stainless steel has been such that the austenitic variety accounts for 80%, the ferritic variety for 15% and the martensitic variety for 5% of total consumption. These percentage shares are likely to remain more or less constant in the future. On this basis, the proposed Otelinox production of 30,000 tons of stainless steel sheet and strip is divided into 24,000 tons (80%), austenitic; 4,500 tons (15%),ferritic; and 1,500 tons (5%),martensitic. Under the austenitic variety, the AISI types to be produced in order of import- ance are 321, 3D)4316¶, 314 310, 302, and 309; under the ferritic variety, the most important types proposed are 430, 430Al and 416; and under the martensitic variety, the AISI types would be 410, 420 and 431. la. The following table shows the break-up of proposed Otelinox production in 1980: Break-up of Otelinox Production of Stainless Sheets and Strips (1980) AISI Type No. Production % of Total (tons) Austenitic: 321 12, 000 40.1 304 2,400 8.0 316Ti 2,400 8.0 316 1,900 6.4 310 1,800 6.o 302 1,750 5.8 309 1,750 5.8 Sub-total: 24,000 8o.O Ferritic: 430 3,150 1o.5 430Al 450 1.5 416 450 1.5 Other 450 1.5 Sub-total: 4,500 15.0 Martensitic: 410 and 420 750 2.5 431 750 2.5 Sub-total: 1,500 5.0 Grand Total: 30,0001/ 100.0 1/ of which 50% is planned to be in coils and the rest in cut lengths. 4a'. The proposed break-up of Otelinox production seems to be at variance with the usual product composition in the developed countries. For example, the most important AISI type used in general is 304 (which is very similar to AISI 302) while AISI 321, which at present costs about 35% more than AISI 304 or 302, is the most important type proposed for Otelinox. The importance given to higher-grade, higher-value types such as 316Ti, 310 and 309 is also much greater. Compared to AISI 304 or 302, AISI 316Ti costs at present nearly 70% Annex 3-1 page 13 more, AISI 310, approximately 160% more and AISI 309 nearly 90% more. In the case of other AISI types, the importance given in the Otelinox product mix appears reasonable as shown in the following comparison between the Otelinox product mix proposed for 1980 and the actual product composition in the US in 1971: Product Mix Comparison by Types (% of total production) AISI Types Otelinox US!/ 321 40.0 1.5 304 8.0 38.2 304L - 3.4 316Ti-/ 8.0 2.2 316 6.4 4.9 310 6.o 1.3) 309 5.8 ) 302 5.8 2.2 430 10.5 11.2 416 1.5 2.7 Other 8.0 32.4 Total 100.0 100.0 j/ Source: American Iron and Steel Institute For the US, comparable product is 316L V Including 302B 43. The above table shows that Otelinox proposes to produce 40% of its stainless flat products in AISI Type 321 while in the US the comparable percent- age for that product is only 1.5. The US percentage is the highest--38.2 (the percentage rises to 41.6 if AISI Type 304L is also included)--for AISI Type 304 while the corresponding figure is only 8.0 for Otelinox. Therefore, the import- ance given to 321 and 304 in the Otelinox product mix in particular needs to be reviewed, along with that of 316Ti, 310 and 309. Exports i44. According to the Romanian authorities, net surplus!/ from Otelinox would be available for export during 1979-1982 in the case of stainless sheet and strip, while in the case of bar mill products no net surplus is likely to be available. The net exports in the case of stainless sheet and strip are expected to develop as follows: Net Exports (Proj.) (tons) 1979 3,250 1980 7,000 1981 4,000 1982 1,000 1983 onwards - j After deducting the import of small quantities of certain types the manufacture of which would not be economical in Romania. Annex 3-1 page 14 14g. As shows in the above table, net exports of stainless sheet and strip are projected to rise gradually from 1979 reaching a peak of 7,000 tons in 1980 and then tapering off to nil in 1983. But it is not yet clear where Metal Import- EXport, a government agency in charge of trade in metal products, would be marketing such products especially in the face of keen competition from Japan, France, Sweden and Italy. It seems appropriate for Metal Import-Export to con- duct a study of export markets. However, it has to be pointed out that the net exports in 1980 might be considerably lower than the 7,000 tons projected by the Romanian authorities as the domestic consumption (para. 31) is likely to be higher than forecast by them. It is most unlikely that the net surplus available for exports would exceed 3,000 tons in 1980, since consumption of stainless sheet and strip is likely to reach at least 27,000 tons -- about 4.,000 tons higher than projected by the Romanian authorities. Thus, export is not a major issue in the project. During the short period of 1979-1982 when limited net surplus would be available, Metal Import-Eaport is likely to succeed in selling it especially in Algeria, Iran, the UAR, Zaire, and some other developing countries with which Romania is developing close economic links. Industrial Projects Department May 1974 Annex 3-1 Table 1 ROI4ANIA: OTELINOX STEEL PROJECT STEEL PRODUCTION AND CONSUMPTION -- PAST TRENDS AND FUTURE FORECASTS (In Crude Steel Equivalent) Per Capita Steel Apparent Steel Steel Production Consumption Consumption (I000 tons) ('000 tons) (Kg) 1950 531 n.a. n.a. 1955 766 n.a. n.a. 1960 1,810 2,425 132 1965 3,426 4,098 215 1966 3,670 3,930 206 1967 4,088 5,168 267 1968 4,751 5,781 290 1969 5,540 6,182 308 1970 6,517 7,007 349 1971 6,804 6,949 340 1972 7,401 7,564 361 1973 7,670 8,160 385 1974. 8,075 8,875 414 1975 10,100 9,325 432 1976 11,000 11,930 545 1977 12,000 12,770 577 1978 13,100 13,588 602 1979 114,300 14,369 631 1980 17,000 15,765 682 2! Projections from 19714-1980. Sources: The European Steel Market, Annual Publication of U.N. *Econoic Commission for Europe, for data prior to 1965; and the Ministry of Metallurgical Industries, Romnania, for data from 1 965-1980. Industrial Projects Department December, 1973 Annex 3-1 Table 2 ROMANIA: OTELINOX STEEL PROJECT ANNUAL GRDWTH RATES OF PRO WCTION OF MAIN ALLOY STEEL CONSUMING SUBSECTORS (in percentages) Average for 1968-1973 1970-1975 1975-1980 1970-1980 (Actual) ---- Projected- 1. Chemical, Paper, Cellulose, Refinery and Textile Equipment 22.o 23 12.5 17.5 2. Food Industry Equipment 12.0 29 24.0 22.0 3. Refrigeration Equiprent 25.0 21 13.0 17.5 4. Power Industry Equipment 28.0 27 13.0 20.0 5. Metallurgical Industry Equipment 13.0 21 14.0 17.0 6. Metal Processing Equipment 22.0 15 35.0 24.0 7. Agricultural Machinery 7.0 11 4.5 8.0 8. Construction MachinerA' 14.0 18 14.5 16.0 9. Diesel and Electric Locomotives 13.0 3 0.5 2.0 10. Trucks2/and Buses 7.5 2 11.0 6.5 11. Cars 60.0 25 22.0 23.0 1/ Including road building machinery. ~/ Including dump trucks. 3/ Starting from a low base. Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December 1973 ROMANIA: OTELINOX STEEL PROJECT 1/ PLANTWISE PRODUCTION OF ALLOY BAR MILL PRODUCTS IN ROMANIA (in tons) 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1. Resita 15,000 21,000 21,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 2. Cimpia Turzi 19,000 22,000 22,000 28,000 28,000 28,000 30,000 30,000 30,000 30,000 30,000 30,000 3. Braila- - 10,000 12,000 13,000 14,000 15,000 17,000 20,000 20,000 20,000 20,000 20,000 4. Tirgoviste I - - - - - - 30,000 136,000 143,500 127,500 160,000 190,000 5. Tirgoviste II (Otelinox) - - - - - - - - - 54,000 112,500 120,000 6. Otelul Rosu - - - - - - - - 30,000 35,000 35,000 35,000 7. TOTAL 34,000 53,000 55,000 66,000 67,000 68,000 102,000 211,000 248,500 291,500 382,500 420,000 8. Total Production of All Types of Alloy Steel (in crude steel equivalent) 193,000 414,000 470,000 529,000 525,000 674,000 950,000 1,100,000 1400,000 1,550,000 1,750,000 2200,000 -/ Including alloy bars, wire rods and light sections of the type to be produced by Otelinox. 2 Started producing alloy bar mill products in 1968 after it was modernized. Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 - Annex 3-1 Table 4 ROMANIA: OTELINOX STEEL PROJECT CRUDE STEEL PROWOCTION 1N SELECTED COUNTRIES (in million tons) Romania Poland Czechoslovakia Italy U. K. 1952 0.70 3.18 3.76 3.64 16.68 1953 0.72 3.60 4.37 3.60 17.89 1954 0.63 3.95 4.27 4.33 18.82 1955 0.77 4.43 4.47 5.55 20.11 1956 0.78 5.01 4.88 6.o8 20.99 1957 0.87 5.30 5.17 6.98 22.05 1958 0.93 5.64 5.51 6.45 19.88 1959 1.42 6.16 6.14 6.95 20.51 1960 1.81 6.68 6.77 8.46 24.70 1961 2.13 7.23 7.04 9.38 22.44 1962 2.45 7.68 7.64 9.76 20.82 1963 2.70 8.00 7.60 10.16 22.88 1964 3.04 8.57 8.38 9.79 26.65 1965 3.43 9.09 8.60 12,68 27.44 1966 3.67 9.85 9.13 13.64 24.71 1967 4.09 10.41 10.00 15.89 24.28 1968 4.32 11.00 10.56 16.96 26.28 1969 5.54 11.25 10.80 16.43 26.85 1970 6.80 12.69 12.07 17.45 24.17 1972 7.40 14.00 13.00 19.82 25.32 Source: The Steel Market, Annual Publication of the U.N. Commission for Europe. Industrial Projects Department January, 1974 ROMANIA: OTELINOX STEEL PROJECT PRODUCTION OF ROLLED PRODUCTS IN ROMANIA (in '000 tons) Wire Tube Other Bars, Heavy Railway Total Hot- Plates Sheets Others Total Total Rods Rounds Rods and Sections Track Non-Flat Rolled ( 3 mm (under Flat Rolled and Light Materials Products Strip and 3 mm ) Products Products _____ Squares Sections over ) 1965 214.0 178.2 1,000.0 347.7 66.1 1,806.0 98.4 147.4 185.2 76.0 507.0 2,313.0 1970 357.9 497.7 1,343.0 369.8 85.1 2,653.5 202.7 1,075.9 199.1 373.1 1,850.8 4,504.3 1971 371.0 484.5 1,374.1 418.4 70.0 2,718.0 196.9 1,421.6 202.8 223.9 2,045.2 4,763.2 1972 398.9 453.3 1,447.5 425.3 75.3 2,800.3 146.0 1,951X7 258.0 73.9 2,429.6 5,229.9 1973(est.)458.0 483.0 1,520.0 454.0 75.0 2,990.0 73.0 2,248.0 372.0 34.0 2,727.0 5,717.0 1974* 481.0 480.0 1,583.0 480.0 76.0 3,100.0 25.0 2,568.0 392.0 34.0 2,819.0 6,120.0 1975* 482.0 497.0 1,741.0 434.0 76.0 3,230.0 27.0 3,661.0 623.0 179.0 4,490.0 7,720.0 1980* 1,220.0 800.00 3,205.0 879.0 76.0 6,180.0 30.0 6,205.0 700.0 35.0 6,970.0 13,150.0 *Projections Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 9! ROMANIA: OTELINOX STEEL PROJECT CONSUMPTION OF STAIlLESS SHEE? AND SIRIP IN MAIN CONSUMING SUB-SECMRS (in tons and in percentages*) ___________ ___________ __________Actual Projected 1 8 1968 1969 1970 197l 1972 1973 1974 1975 1976 1977 1978 1979 1980 1. Consumer Goods 425(12.5) 556(13.9) 668(19.0) 1,020(15.6) 1,367(16.8) 1,400(16.2) 1,500(16.5) 1,500(15.8) 2,500(16.7) 2,800(14.8) 3,000(14.3) 3,400(15.4) 3,500(15.2) 2. Motor Vehicles, Tractors and Railways 61( 1.6) 58( 1.5) 45( 1.0) 37(0.6) 40(0.5) 65(0.7) 90(1.0) 100(1.1) 300(2.0) 400(2.1) 500(2.4) 500(2.3) 500(2.2) 3. Electrical EquipmentI 196( 5,1) 162( 4.1) 188( 4.0) 198(3.0) 203(2.5) 240(2.8) 300(3.3) 300(3.2) 600(4.0) 900(4.7) 1,000(4.7) 1,000(4.6) 1,000(4.4) 4. Electrotechnic and Electronic Equipment 75( 2.0) 65( 1.6) 62( 1.3) 715(11.0) 977(12.1) 1,100(12.7) 1,200(13.2) 1,200(12.6) 1,600(10.7) 1,900(10.0) 2,000(9.5) 2,300(10.4) 2,500(10.8) 5. Agricultural Implements _ and Equipment for Food Pro- cessing and Chemical Industries 323( 8.3) 381( 9.5) 476(10.0) 2,713(41.6) 3,409(42.0) 3,600(41.6) 3,800(41.8) 3,800(40.0) 4,700(31.3) 6,800(35.8) 7,500(35.7) 7,700(35.0) 8,000(34.8) 6. Construction EqNipment 1,430(36.8) 1,502(37 5) 1,858(39.3) 59(0.9) 70(0.9) 85(1.0) 100(1.0) 100(1.0) 300(2.0) 420(2.2) 500(2.4) 500(2.3) 500(2.2) 7. Other Equipment2/ 1,315(33.8) 1,288(32.1) 1,438(30.4) 1.780(27.3) 2,050(25.2) 2.162(25.0) 2.110(23.2) 2,500(26.3) 5.000(33.3) 5.780(30.4) 6,500(31.0) 6.600(30.0) 7.000(30.4) 8. TOTAL 3,885(100.0) 4,201(100.0) 4,735(100.0) 6,522(100) 8,116(100) 8,652(100) 9,100(100) 9,500(100) 15,000(100) 19,000(100) 21,000(100) 22,000(100) 23,000(100) Of which: - Austenitic 3,180(82.05 3,430(80.8) 3,713(78.5) 5,152(79.0) 6,298(77.6) 6,750(78.0) 7,180(78.9) 7,510(79.0) 11,850(79.0) 15,145(79.7) 16,905(80.5) 17,775(80.8) 18,630(81.0) - Ferritic 513(13.0) 543(13.5) 753(15.9) 1,044(16.0) 1,388(17.1) 1,470(17.0) 1,475(16.2) 1,520(16.0) 2,400(16.0) 2,945(15.5) 3,105(14.8) 3,215(14.6) 3,335(14.5) - Martenistic 192( 5.0) 228( 5-7) 269(5.6) 326(5.0) 430(5.3) 432(5.0) 445(4.9) 470(5.0) 750(5.0) 910(4.8) 990(4.7) 1,010(4.6) 1,035(4.5) 9. % Increase in Total Consumptiot - 8.0 13.0 37.7 24.5 7 5 4.5 58 27 10.5 5 4.5 Over Previous Year * Shown within brackets. 1 For generating hydro and thermal power. 2/ Excluding tractors. 3/ Including cranes, power distribution equipment, ship-building machinery, etc. Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 ROMANIA: OTELINOX STEEL PROJECT CONSUMPTION OF ALLOY BAR MILL PRODUCTS* IN SELECTED SUB-SECTORS -_- PAST TRENDS AND FUTURE FORECASTS (in tons) Actual Forecast 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1. Motor Vehicles, Tractors & Railways 29,000 31,000 34,000 37,000 49,000 60,000 70,000 78,000 92,400 110,000 122,000 2. Agricultural Implements,1I and Equipment for Food Processing and Chemical Industries 16,000 17,300 24,000 23,000 29,000 40,000 52,000 60,000 70,000 75,000 80,000 3. Electrotechnic and Electronic Equipment 6,100 8,500 10,800 11,500 16,000 20,000 26,000 32,000 34,000 35,000 37,000 4. Consumer Goods 5,600 6,500 6,900 7,600 9,500 12,000 14,000 17,000 20,000 21,000 23,000 5. Construction Equipment2 2,800 3,700 4,100 4,300 5,000 5,500 5,500 6,000 6,600 6,600 6,600 6. Electrical Equipment- 3,000 3,000 3,000 3,200 4,000 5,000 5,500 5,500 6,000 6,000 6,000 7. Other/ 24,500 25,000 34,200 35X400 35.500 59,500 90,000 101,500 115,000 136,400 145,400 8. TOTAL 87,000 95,000 117,000 122,000 148,000 202,000 263,000 300,000 344,000 390,000 420,000 % Increase over Previous Year - 9 23 4.5 21 36 30 14 15 13 8 * Including bars, wire rods and light sections of the type to be produced by Otelinox. 1/ Excluding tractors. - Power generating equipment for hydro and thermal stations. 3/ Including cranes, power distribution equipment, machinery for shipbuilding, etc. Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department C December, 1973 _ lX Annex 3-1 Table 6 Romania: Otelinox Steel Project Trend of Per Capita Steel Consumption in Selected Countries (Kg) Average Annual Growth Rate (%) 1950 1960 1970 1972 1950-1960 1966_7-7_ Austria 108 268 396 372 9.5 4.0 Luxelbourg 210 255 477 465 2.0 6.5 Bulgaria n.a. 114 273 175 n.a. 9.1 Czechoslovakia n.a. 476 611 663 n.a. 2.5 Democratic Republic of Germany n.a. 348 533 507 n.a. 4.4 France 1/ 150 300 457 456 7.2 4.3 Federal Republic of Germany 2/ 2d0 521 2/ 658 648 9.8 2.5 Hungary n.a. 208 - 298 314 n.a. 3.7 Italy 63 181 393 379 11.1 8.0 Japan 50.5 209 676 644 15.2 12.5 Poland n.a. 212 356 422 n.a. 5.3 Romania n.a. 132 318 374 n.a. 9.2 Spain n.a. 52 253 276 n.a. 17.1 Sweden 292 548 733 686 6.5 3.0 U.K. 278 420 458 406 4.2 1.0 U.S. 565 498 620 3/ 663 -1.0 2.2 USSR n.a. 296 454 - n.a. n.a. 4.5 1/ Includes the Saar up to July 1959. 2/ Includes the Saar after July 1959. 3/ Was 682 kg in 1969. Sources: Steel Production and Consumption Trends in Europe and the World (published in 1952), and The Steel Market (an annual publication) of the U.N. Economic Commission for Europe. ROMANIA: OTELINOX STEEL PROJECT ROMANIAN CONSUMPTION AND IMPORTS OF STAINLESS SHEETS AND ALLOY EDS AND BARSIh (in tons) Stainless Sheet and Strip* Alloy Rod and Bar Products Total Total Value of Total Value of Value of Consumption Imports Imports Consumption Imports Imports Imports (tons) (tons} (US$ Million) (tons) (tons) (US$ Million) (US$ Million) 1965 3,459 3,459 6.2 45,000 11,000 7.1 13.3 1966 3,507 3,507 6.4 49,000 14,000 9.5 15.9 1967 3,590 3,590 6.6 62,000 26,000 18.2 24.8 1968 3,885 3,885 7.2 75,000 30,000 21.6 28.8 1969 4,012 4,012 7.6 79,000 33,000 24.1 31.7 1970 4,735 4,735 9.2 87,000 34,000 25.6 34.8 1971 6,522 6,522 13.0 95,000 40,000 30.4 43.4 1972 8,116 8,116 16.6 117,000 51,000 39.3 55.9 1973 (fst.) 8,652 8,652 18.0 122,000 55,000 42.9 60.9 1974Z/ 9,100 9,100 20.0 148,000 80,000 63.2 83.2 1975 9,500 9,500 20.1 202,000 100,000 80.0 100.1 1976 15,000 15,000 32.1 263,000 52,000 42.1 74.2 1977 19,000 19,000 41.1 300,000 51,000 41.3 82.4 1978 21,000 14,300 31.1 344,000 52,000 42.1 73.2 1979 22,000 - - 390,000 7,500 6.1 6.1 1980 23,000 420,000 - 0 * Including strips. 1! Of the type to be produced by Otelinox. 2/ ProJections from 1974-1980. Source: Ministry of Metallurgical Industries, Romania. 0-3u Industrial Projects Department _a December, 1973 Annex 3-1 Table 10 ROMANIA: OTELINOX STEEL PROJECT RQHANTAN IMPORTS OF ROLLED STAINLESS AND OTHER ALLOY STEEL PRODUCTS (1965-1973) .i Stainless Steel Other Alloy Steel Products Quantity Average Total Quantity Average Total (in t*sx) Price Per Value (in tons) Price Per Value ______ rTon (US$) ('000U$) Us$) Ton (US$) ('000us$) 1965 5,659* 1,508 8,533 29,069 360 loA,464 1970 13,585 1,647 22,374 52,962 600 31,777 1971 15,351 1,763 27,063 89,018 757 67,386 1972 21,688 1,680 36,436 90,780 705 63,999 1973 19,350 1,847 35,740 100,743 725 73,038 1/ Flat products only. */ Plates of more than 3 mm only. Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 Annex 3-1 Table 1 1 RCKANIA: OTELINOY STEEL PROJECT CONSUM4PTION OF ALLOYS RODS AND BARS ]Y CATEGORIES IN RONANIA (in tons) Actual Projected _1268 1970 1973(est) 1975 1977 1980 1. HSLA, Steel 32,000 35,000 49,000 81,000 122,000 211,000 2. Alloy Steel For Machine Building 26,000 32,000 44,000 73,000 11000 120,000 3. Ballbearing Steel 8,200 10,000 15,000 25,000 34,000 45,000 4. Spring Steel 5,400 6,200 8,700 14,000 20,000 25,ooo 5. Carbon Tool Steel 800 900 1,300 2,200 4,300 6,680 6. Alloy Tool Steel 700 800 1,220 2,000 3,200 4,300 7. Stainless and Heat-Resisting Steel 630 700 820 1 ,400 2,500 3,360 8. High Speed Steel 1,270 1,400 1,960 3,1400 4,000 4,660 TOTAL 75,000 87,000 122,000 202,000 300,000 420,000 Of which: - net imports 30,000 34,000 55,000 100,000 51,000 - % of Imports hO0 39.0 45.0 49.0 17.0 - Source: Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 Annex 3-1 Table 12 RC(ANIA: OTEIJNOX STEEL PROJECT PROJECTED OTELINOX PRODUCTION OF ALWY RODS AND BARS BY CATEGORIES (in tons) 1978 1979 1980 1. H SLA Steel 5,659 9,479 10,000 2. Alloy Steel for Machine Building 23,i485 46.,851 48,340 3. Ballbearing Steel 11,826 24,634 26,300 4.! Spring Steel 10,476 21,826 23,300 5. Carbon Tool Steel 2,554 5,316 5,700 6. Alloy Tool Steel - 1,578 2,600 7. Stainless and Heat-Resisting Steel - 936 1 ,210 8. High Speed Steel 1,880 2,550 TOTAL 54,000 112 ,500 120,000 Of which: In Coils 31,500 65,600 70,000 Sources Ministry of Metallurgical Industries, Romania. Industrial Projects Department December, 1973 ROMANIA: OTELINOX STEEL PROJECT LOCATION OF CONSUMERS AND SUPPLIERS \._.- >, ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ S. - -. i/7 -\ 44 HOT ROLLED STAINLESS t/'~ BOTOSANI COIL-SUPPLY. SATU MARE CONSUMERS OF "OTELINOX' -' \ tEj %FINISHED PRODUCTS. . ORADEA v PIATRA NEAM / > \t 4 ~~~~~~ ~~355Km. TG.MURES // K4 CLJ 484Km. \RAE I ONESTI BIRLAD FAG2 \ TCUCI SIBIU RAOV 'V231 Km. TI MISOARA 308K .#%\59Km 1 GALATI 7 && t/S B EAU 35 > ; / ~~~~RM.VILCE A - *21 2K . ;j 275Km. 0 OPDIESTI 52Km. TR-SEVERI PITESTi TIRGOVISTE 92 A0K m UEITU T \tC3R4AIOVA A1 ' 2341(m. ~ ~ ~ ~ ~ 8Km (v _2 TR.MAGURELE ALEXANDRIA i _ > K m.233( _.212 Km (DL-i World Bank - 8259(R) LOCATION OF ROMANIAN IRON AND STEEL PLANTS IRON AND STEEL WORKS V F - .- K a O IN ROMANIA. / I.M. IASI IT. ROMAN tiS.CIMPIA TIMRZII t I.M. VLtAHITA C,S HUNEDOARA \ INTR. VICTORIA CALIN \ El / INTR. CIOANUL NADRAC CL. GALATI INTR OTELUL ROS~ ~ ~ ~ ~~~~[L RIL TIRGOVISTE (OD INTER REPUBLICA- World Bank-8258 Annex 3-2 ROMANIA: OTELINOX STEEL PROJECT SPECIAL STEEL PRICES World Situation 1. Steel prices in general show marked fluctuation from year to year depending on the world economic situation. However, the average increase in spedalsteel prices has been 4 to 5% a year during 1965-1972. The price rise in 1973 has set a new record, with the transaction prices having sharply increased by at least 25% though this might not have been reflected in the list prices of many countries. The price increase was particularly sharp in the second half of 1973. According to UK trading circles, special steel prices surged by 15% in the second half of 1973 compared with nearly 10% in the first half. The previous jump in specialsteel prices occurred in 1969 when they rose by about 10%. However, the following year, prices slipped because of the world recession, with the total world steel production touching a new low. In 1971, alloy steel prices were up again by about 7%, but in 1972, the prices declined to more or less the normal trend line of long-term increase in special steel prices. UK traders also feel that it is likely that specdl steel prices would go up by about 10% in 1974 and may decline a bit in 1975 considering the cyclical trend. The Romanian authori- ties have estimated that their import price per ton of speciB steel increased by about 50% during 1962-1972. Romania imports special steels mainly from Austria, Sweden, Germany, Italy, France and Japan. Steel Prices in Romania 2. As in the case of all products in Romania--both domestic and imported-- steel is sold at prices fixed by the State in its price catalogue. Details of steel prices for all types, grades, shapes and dimensions are given in the catalogue which also specifies extra charges for certain quantitative charac- teristics such as gauge, width, finish, temper, packing, etc. The steel prices are scheduled for major revisions within the next two years along with the general revision of all prices. 3. For Otelinox stainless sheet and strip (to be produced for the first time in Romania), the Romanian authorities seem to have determined catalogue prices on the basis of the 1973 import prices (CIF Romanian border) which present a misleading picture as 1973 prices were abnormally high. International Comparison of Prices 4. Listed basis prices (including extra charges for qualitative charac- teristics) for mid-1973 have been collected from Armco, US Steel and Allegheny Ludlum in the US, the British Steel Corporation in the UK, and August Thyssen Hutte (Thyssen) in the Federal Republic of Germany for comparison with the prices used by the Romanian authorities for Otelinox products--stainless sheet and strip , and alloy bar mill products--and the semi-products used by the project for rolling, hot-rolled bands and billets. Annex 3-2 page 2 5. List prices vary from country to country. In the UK, they have been comparatively low because of government restraint and price leadership by the government-subsidized British Steel Corporation. However, following the UK membership of EEC in 1973, the country has been switching over to the EEC system and level of pricing. A 10% increase was granted by the Government in April 1973. Another increase of 9% was granted in November 1973. 6. Under the EEC regulations, every member country is required to publish price lists for steel products. These price lists bear a great similarity to each other but one of the rules of EEC allows a company in certain circumstances to align down its delivered price to that of a competitor, but never to align its prices upwards. This alignment practice is one reason why there is often a difference between "list prices" and "going prices", but it is to be noted that going and list prices virtually coincide when demand is high. 7. As for the US, though steel pricing is often subject to government intervention, actual prices charged more or less reflect the level of demand as well as cost increases. Thus, producers charge comparatively more when market is buoyant, and slash prices in times of recession. Such fluctuations have not been a major feature in the UK. 8. Though listed prices are not identically the same as transaction prices, the former are the only ones available for international price comparisons. Appendix I contains the listed prices for specific types of Otelinox products in the US, the UK, Germa and Romania. Taking the average of the listed prices in the US, the UK and Germany for specific types and sizes and applying them to the product mix of Otelinox, the weighted average prices per ton of 'stainless sheet and strip and alloy bar mill products we obtained. As already noted, the listed prices refer to mid-1973. Therefore, the weighted average prices obtained were dgflated by 10% to get the 1972 prices. The 1972 prices were then increased by 5%iI to get the best approximation to normal international prices for Otelinox products in 1973. Based on the above approach, the international prices for Otelinox products are: Adjusted 1973 International Price./ (Base Year 1972) Romanian Price Lei/ton Lei/ton Stainless Sheet and Strip 38,050 41,790 Alloy Rod and Bar Products 9,465 8,057 9. The above table shows that compared to international prices, the prices used for projections by the Romanian authorities are 10% higher for stainless sheet and strip, while they are 17.5% lower for alloy j/ Assumed normal long-term annual price increase for steel as well as main semi-product inputs. 3/ Without allowance for cyclical fluctuations. Annex 3-2 page 3 10. The semi-product to be used by Otelinox for rolling in the cold mill is hot-rolled band and in the bar mill, billets. The average price used by the Romanian authorities for hot-rolled band is Lei 19,500 (US$975) per ton and for billets, Lei 4,535 (US$227) per ton. Hot-Rolled Band Prices 11. The hot-rolled band prices (mid-1973) for different types provided by Allegheny Ludlum (US) and Thyssen (Germany) are as follows: Price Comparison for Hot-Rolled Band (mid-1973)!! (US'/ton) AISI Typ2e us Germany 321 1,067 872 304 847 800 31 6Ti - 1,250 316 1,232 1,100 302 785 784 430 566 570 410 570 - j/ 960 mm wide and 3-5 mm thick. 12. The above table shows that the listed basis prices for hot-rolled bands are more or less comparable in the US and Germany. Using the average of the US and Germany quoted prices for particular types, and based on the proposed product mix of Otelinox with respect to stainless sheet and strip , the weighted average price for hot-rolled bands in mid-1973 was about Ub$950. however, it is commonly known that the list prices of semi-products like hot-rolled bands and billets are unreliable because producers are not willing to trade those products unless they get a considerable mark-up. Therefore, on a conservative basis, the mark-up could be assumed to be at least 10%. Therefore, slashing the above weighted average price by that percentage, the mid-1973 transaction price of hot-rolled bands could be considered to be US$854 per ton. Further, to get the 1972 trans- action price, this price was reduced by 10%--the rate of increase in world steel prices in general from the end of 1972 to mid-1973. On the above assumptions, the international price for hot-rolled bands in 1972 was about US$776.5 per ton. Increasing this by the assumed normal price increase of 5% a year, the adjusted international price for hot-rolled bands in 1973 is estimated at US$815.5 per ton (Lei 16,310)--about 19.5% lower than the price used by the Romanian authorities for projections. Billet Prices 13. The following table compares the available listed basis prices for billets of the British Steel Corporation, US Steel, and Thyssen: Annex 3-2 Page4 Comparison of Listed Basis Prices (mid-1973) for BiUet8i/ (US$/ton) AISI Type UK US Germany 615o 244 288 326 4142 219 273 288 41o 451 534 538 416 506 622 511 T4 - - 1,500 521 0OB 220 253 288 #/ 100o mm x 100 mm, 4-meter long. 14. Based on the same approach followed for calculating the international price for hot-rolled bands, adjusted international prices for biLlets in 1973 is estimated at Lei 5,560 (US$278.0) per ton. This is about 23% higher than the average price of Lei 4,535 (US$227) per ton assumed by the Romanian authori- ties in the projections. Industrial Projects Department January 1974 Annex 3-2 Appendix I ROMANIA: OTELINOX STEEL PROJECT INTERNATIONAL PRICE COMPARISON FOR FINISHED PRODUCTS (MID-1973) (US$/ton) I. Stainless Sheets and Strips (In Cut Length ) a/ b/ c/ d/ AISI Types Thickness(mm) U.S.- U.K. Germany Romania 321 -1.5 T,732 T1;V3] - I,75- 321 2.0 1,706 1,428 - 1,815 321 0.5 2,286 1,589 - 3,000 304 1.5 1,320 1,344 - 1,797 304 0.5 1,610 1,540 - 2,875 316 + Ti 1.5 1,892 - 1,750 2,344 316 + Ti 2.0 - 1,881 1,750 2,269 316 1.5 1,872 1,727 1,960 2,430 316 0.8 2,072 1,840 - 2,818 310 2.0 - 2,488 - 2,783 302 1.5 1,320 - - 1,617 302 0.3 - 1,450 - 2,588 309 1.5 2,057 - - 2,133 430 0.5 1,450 1,095 1,120 1,520 II Bar Nill Products 1/ ( In Cut Length Except Otherwise Stated) AISI Types size (mm) 4l42* R & A Rounds, 019 332 269 519 290 4142 R & A Flats, 4Ox2O 353 389 569 293 4142 R & A Hexagon, 20 353 343 534 284 52,100B* R & A Rounds, $19 387 273 403 254 52,100B R,A,P & G Rounds, $ 15 967 390 480 268 6150* R & A Rounds, $ 19 349 300 488 2/ 278 6150 R & A Flats, 4Ox2O 368 417 538 - 290 6150 R & A Hexagon 20 368 371 511 291 410 R,A & P Rounds p15 1,260 - 846 n.a. 416 R,A,& P Rounds $15 1,304 - 819 n.a. 302 R,A & P Rounds ;15 1,710 - 1,115 n.a. T4* R,& A Rounds $ 19 - - 2,865 3/ 2,149 T4 R.A,P & G Rounds, $ 15 8,712 - 3,163 2,262 * In coils 1/ R-rolled; A - Annealed; P = Peeled; and G - Ground $=diameter T/ $ = 13 m'm ,1 if - 16.5 mm a) Based on listed basis prices (mid-1973) for Armco and U.S. Steel products. b) Based on listed basis prices (mid-1973) of the British Steel Corporation. c) Based on prices (mid-1973) supplied by Thyssen. d) Prioes used for Otelinox products by the Romanian authorities. Industrial Projects Department January 1974 ANNEX 4-1 ROMANIA: OTELINOX STEEL PROJECT PROPOSED TYPES AND GRADES OF SPECIAL STEELS A. Flat Products: Cold-Rolled Sheet and Strip--30,,000 TPY 1. Austenitic Stainless Steel: (a) AISI 321 - containing chrome, nickel, manganese and titanium alloys. (b) AISI 316 Ti - containing chrome, nickel, molybdenum, titanium and manganese alloys. (c) AISI 302/304 - containing chrome, nickel and manganese alloys. (d) AISI 309, 310, 316 - other austenitic grades 2. Ferritic Stainless Steel: AISI 430, 430 Al, 416 and others - containing chromium alloys. 3. Martensitic Stainless Steel: AISI 431, 410, and 420 - containing chromium alloys. Width of the products will range from 50 mm to 1200 mm; and thickness, from 0.1 mm to 3 mm. Shipments mill be in coils and cut lengths. B. Non-Flat Products: Rods and Bars--120,000 TPY (a) AISI 4142 - alloy steel for machine building (b) AISI 52100 B- ball-bearing steel (c) AISI 5150 and 6150 - spring steel (d) AISI 4142 - tool steel (e) AISI T4 and M2 - high-speed steel (f) AISI 302, 303, 3o5, 403, 510 and 416 - stainless and heat-resistant steel (g) HSLA steel - high-strength, low-alloy steels Non-flat products would be produced mostly in the form of round rods and bars, vith some bars in the form of squares, small flats and hexagons. The diameter of round rods and bars will range from 5.2 mm to 30 mm. The flats will be in 20 mm x 70 mm sizes. Shipments of products mill be in coils and cut lengths. Industrial Projects Department January 1974 ANNEX 4-2 ROMANIA: OTELINOX STEEL PROJECT LIST OF BASIC FACILITIES The general plant layout of the bar mill, the cold mill and common facilities is given in Appendix I, and the main facilities are listed below: A. Bar Mill Facilities The bar mill will consist of a complete hot-rolling mill for rolling billets into round rods and bars, hexagons, squares and small flats. Its major equipment will be: 1. One 2-zone, 70-ton/hr billet reheat furnace; 2. One single-strand, continuous, two-high, hot-rolling mill with 28 stands (a primary trair. of six stands, intermediate trains of 12 stands and finishing trains of 4 stands, and finishing stands for rods); 3. Crop shears at each mill train; 4. Bar cooling beds--individual and pack-type systems; 5. Cold saw-shears for bars; 6. Coilers (two); 7. Coil cooling - on hooks/conveyor systems; 8. Heat treatment--continuous normalizing, annealing, sphereoidizing, quenching, and tempering facilities; 9. Finishing facilities--straightening, grinding, turning, and cutting equipment; and 10. Packaging, inspection, storage, shipping and related service facilities. B. Cold Mill Facilities These facilities will consist of a complete cold rolling and finishing mill complex which will include the following major equipment: 1. Batch annealing facility; 2. Coil preparation line; 3. Hot-strip heat-treatment, shot-blast and pickling line; 4. Hot-strip grinding line; 5. Sendshzr cold reduction mill; 6. Cold-strip heat-treatment and pickling line; 7. Bright annealing line; 8. Coil inspecticn line; 9. Two-high temper mill; 10. Slitting line; 11. Shearing line; 12. Stretcher leveller; 13. Sheet polishing line; 14. Strip polishing line; 15. Coil and sheet packaging lines; and 16. Storage, shipping and related facilities. ANNEX 4-2 Page 2 C. General Information LAND AREAs The plant will occupy an area of 33.5 hectares of land at the disposal of the Industrial Steel Central, Bucharest, which is now being utilized for agricultural purposes. It is adjacent to a major national highway and will be zerved by suitable railway connections (see Appendix I for the general plant layout). POWER: Power will be supplied from the national grid through one of the two existing transformers of 63,000 MVA-llO/lOKY capacity each, which are located close to the plant site. Total power needs of the plant are estimated at about 44,000 MW. Processed steam and hot water will be supplied from an existing, nearby thermal station at the Lathe factory, Tirgoviste. This facility will be expanded as required by industries served by it. WATER: Water to the plant will be supplied from the Puciosa Reservoir; and potable water will be supplied from "Lazuri" wells of the Tirgoviste Water Supply System. LABORATORIES: Necessary laboratories and small electrical,mechanical,chemical maintenance shops and roll shops are included in the project. A separate replacsimt parts plant in Tirgoviste is also foreseen. BUILDINGS: Buildings for the cold mill will use structural steel with insula- ted, corrugated, galvanized-steel roofing and siding. Bar mill buildings will utilize prefabricated concrete columns, metal framing, and insulated, corrugated, galvanized-steel roofing and siding. Almost all building materials will be supplied locally. Industrial Projects Department January 1974 ROMANIA: OTELINOX STEEL PROJECT GENERAL PLANT LAYOUT 'p ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ C | 4 YXPA t CONNECTION l~~~~~~~~~~~~~~~~~~IROVST 4$'~~~~~~~~ COLD MILL ~~ALLOY STEEL PLANT . . . ......= R1 INDUSTRIAL PROJECTS DEPARTMENT WrdBn46 JANUARY, 1974 ANNEX 4-3 ROMANIA: OTELINOX STEEL PROJECT DESCRIPTION OF PROCESSES AND PFROCESSING SEQUENCES I. Cold Mill A. Raw Material 3-6 mm gauge hot-rolled coils from Galati (see Appendix I) will be delivered by railo ad on flat cars; coils will be unloaded by crane (using tongs) and will be processed over a downender for subsequent handling by crane c-hooks or a ram tractor. The proposed product flow is given in Appendix II. B. Facilities for Austenitic Grades (a) Coil preparation line for: (1) Welding on leader strips; (2) welding small coils together up to a maximum weight of 20 tons; (3) visual inspection to remove very bad sections and to reweld; and (4) side trimming. (b) Hot-rolled anneal, shot blast and pickle line for: (1) Uncoiling; (2) end shearing; (3) KEG welding; (4) annealing at about 1150OC; (5) quenching (probably multi-media cooling); (6) shot blasting; and (7) Pickling: (a) with sulfuric acid, and rinsing; (b) with nitric and hydrofluoric acids, and rinsing; (c) drying; (d) shearing; and (e) recoiling (c) Inspection line for: (1) Visual inspection of both sides of coils; and (2) removal of minor defects by spot grinding. (d) Cold-rolling on Sendzimir Mill which will have: (1) 5o-6o mm work rolls; (2) facilities for tension control, automatic gauge control using both contact and X-Ray gauges and a process control computer; and (3) a recirculating oil treatment system. The mill will be capable of about 70% reduction between intermediate anneals. (e) Intermediate coil grinding line for use only when end applica- tion requires it. ANNEz 4-3 Page 2 (f) Cold-rolled anneal and pickle line (for intermediate and final annealing and also for bright annealing). It would have facilities for: uncoiling, welding, electrolytic cleaning, rinsing, annealing at about 11000C, quenching (multi-media cooling), salt descaling, rinsing, pickling, drying, shearing and recoiling. (g) Additional cold reduction and intermediate annealing will be performed when necessary. (h) Bright annealing will be done either in a separate line with a vertical furnace, or alternatively, in horizontal furnaces which are part of the cold-rolled anneal and pickle line. (i) A single stand, two-high temper mill will be used to reduce 2-4% for optimum surface and desired hardness. (j) Coil Grinding and Polishing Line: Present plans subject to modification caTI 6ior-p6hiijg 50% of the product mix, an unusually high percentage as compared to the level in Western Europe. (k) Sitting line for side trimming of coils. (1) Shearing line including facilities for levelling and side trimRing for cut length sheets. (m) Packaging lines for coils and for sheets. C. Ferritic Grades will have some additional annealing treatment (e.g. box annealTng at about 8000C). II. Bar Mill A. Raw Material The proposed product flow is given in Appendix III. Billets in sizes of 80 x 80 mm and 100 x 100 mm will be delivered by truck from Tirgoviste I across the road, after billet conditioning at Tirgoviste I Where: (1) Allqy billets will be hot scarfed on the rolling line; (2) alloy billets for critical end product applications will be Magnaglo inspected and all defects removed by spot grinding; (3) stainless and tool steel billets will be 100% ground for complete surface removal; and (4) internal quality of billets will be inspected ultrasonically. ANNE% 4-3 B. Billet Handling and Storage facilities will include: (1) Two bay billet storage yards containing apace to stock a 30-day supply of billets of about 400 grades; (2) Two 12.5-ton cranes (one in each bay) for truck unloading, billet stocking and deatocking and placement of billets on unscramblerE; (3) Two billet unscramblers (one in each bay) for unpiling billets. All billets go where they are individually weighed. Billet identification is entered into computer at this point to activate the product identifica- tion system installed throughout the mill. C. Billet Heating facilities will include: Two-zone, natural-gas-fired, walking-beam furnace with a capacity of 70 tons/hr, equipped with modem combustion controls with a maximum decarburization guarantee of 1% of finished bar diameter. The furnace builder will guarantee a maximum temperature variation of 200C from center to surface of billets and 30PC from end to end of billets. The furnace will be charged with two rows of 4-meter- long billets or one row of 9-meter-long billets. The walking-beam system can move each half of furnace separately for 4-meter-long billets or both halves together for the 9-meter-long billets. Billets will exit from the furnace by a roller table with an output range varying from 7 to 70 tons per hour. The furnace system can be preset and controlled by a process computer. D. Rolling facilities will include: (1) a mill similar to a Demag mill la aIled at the Krefeld Works of the DEW Company in Germany. This mill is producing the same product mix planned for Otelinox. It is a single-strand, two-high continuous mill, with its stands individually driven. The reduction sequence for it will be diamond-square for first 6 passes, and oval-square for the balance. The mill will have high-speed roll-changing equipment, allowing 8-10 minutes roll change time. It will have modern looping control devices to avoid inter-stand tension. Further, the rolling sequence for cut length bars (12-30 mm) will involve the use of: (1) a descaler - high pressure water (185 atm.); (2) a roughing train - 6 continuous stands alternately horizontal and vertical rolls; (3) first crop shear; (4) first intermediate train of 6 continuous stands with alternate horizontal and vertical rolls; (5) second crop shear; (6) second intermediate train of 6 con- tinuous with alternate horizontal and vertical rolls; (7) third crop ehear; (8) a bar finishing train - 4 continuous stands alternately horizontal and vertical rolls; (9) fourth crop shear; ANNEX 4-3 Page 4 (10) a Schloemann-type water-cooling system for bars; (11) a rake-type cooling bed with facilities for pack cooling of spring steel; and (12) two cold shears. The rolling sequence for coiled bars (12-30 mm) will be the same from 40) as for cut-length bars, but will also have the following: two Mueller-Neumann-type coilers to coil rounds, squares, hexagons and flats, and a rock conveyor for coil cooling. The rolling sequence for coiled rods (5.2-12 mm) will be the same(IU) as for the cut-length bars, and in addition include the use of: (1) a rod finishing train of 6 con- tinuous stands with alternate horizontal and vertical rolls; (2) fourth crop shear; (3) a water-cooling system for rods. (4) coiling facilities will include four conventional coilers for direct coiled product; or Stelmore-type cooling with laying cone, cooling conveyor and two reforming tubs; (5) a hook conveyor for coil cooling and/or conveyance of coils to the finishing department. E. Finishing facilities will include: (1) four roller hearth, atmosphere controlled furnaces (capable of heating to 9500C), for normalizing, annealing, spheroidize annealing and isothermal annealing of both bars and coils in an atmosphere mainly of nitrogen with hydrogen added depending upon the grade being treated; (2) a hood-type stress relieving furnace capable of heating to 6000C with tempered flame burners; (3) two 2-roll bar straighteners; (4) abrasive cutting machines; (5) bar turning machines; (6) centerless grinding machines; (7) spot grinding machines; (8) testing machines using Eddy-current, and Magnaglo; (9) a line for uncoiling, straightening and cutting coils to cut length bars; (10) a line for uncoiling,grinding and recoiling coiled bar products; and (11) various types of bundling and packaging equipment. Industrial Projects Department January 1974 ANNEX 4-3 APPENDIX I ROMANIA: OTELINOX STEEL PROJECT GALATI FACILITIES FOR SPECIAL STEEL PRODUCTION I. Steel-Making a. Number of furnaces - 2 b. Type of furnaces - electric arc c. Nominal capacity of each - 50,000 TPY d. Power - 25 MVA e. Estimated tap-to-tap time - 6.5 hours f. Estimated annual production - 150,000 TPY g. Total investment - Lei 345 million h. Estimated commissioning date - first furnace, 4th quarter of 1973 - second furnace, 2nd quarter of 1974 II. Rolling Facilities Type of Number of Estimated Total Expected Facility Units Investment Commissioning Date (million Lei) A. Slabbing Mill 1. Soaking pits 8 50 2nd quarter of 1974 2. Bell-type furnaces 9 20 3rd quarter of 1975 3. Scarfing machine 1 7 1st quarter of 1976 B. Hot-Strip Mill 1. Slab reheat furnace 1 41 1st quarter of 1974 118 III. General Comments 1. It should be noted that the facilities listed above are designed to meet the needs of stainless steel heavy plate production in Romania, and also to supply the hot-rolled stainless steel coils for Otelinox. The total cost of facilities listed above, including necessary support facilities, would approach approximately US$25 million. This capital investment is already firmly planned and the facility construction is now underway. Industrial Projects Department January 1974 ANNEX 4-3 Appendix II ROMANIA: OTELINOX STEEL PROJECT RAW MATERIAL AND FINISHED PRODUCT FLOW - STAINLESS FLAT PRODUCTS HOT COILS 145000 tty 9000 t/yT7 BELL-TYPE FURNACES 36000 t/y (12 STANDS) 8800 t/y I I COIL BUILD-UP LINE I1 LINE I 41574 t/y 9207 tSy ONLY FOR PICKLINE LINE HOT STRIP ANNEALING-SHOT BLASTING & PICKLINE LINE (LINE INCLUDING CONT.dvJOUS FURNACE) 4 40048 t/y HOT STRIP GRINDING LINE 11 LINE I 39348 tly SENDZIMIR MILL (OIL 654 x 1400 mm 1 39426 tlY COLD STRIP INTERMEDIATE AND FINAL ANNEALING AND PICKLING LINE (2 LINES INCLUDING CONTINUOUS FURNACE) 38816 t/y S96ftly INSPECTION LINE 11184tY (1 LINE I 29231 t/y SENDZIMIR MILL 4 29145 t/y 1176 COLD STRIP INTERMEDIATE AND FINAL ANNEALING AND PICKLING LINE l9500 t/y SENDZIMIR MILL 1 9465 t/y 486t COLD STRIP INTERMEDIATE AND FINAL ANNEALING AND PICKLINE LINE 4 935 t/y SENDZIMIR MILL 4 930 t/y COLD STRIP FINAL ANNEALING AND | PICKLING LINE r 32730 t/Y 728 t/v TWO HIGH TEMPER MILL - 33426i t/y POLISHING LINE (2 LINES) 16416 t/Y s s 16980 t/y SLITTING LINE SHEARING LINE 0(1 LiNE) (11 LINE) - 15015 t/y 15000 t/y STRETCHER LEVELLING UNIT PACKAGING AND SHIPMENT 30000 t/y BASED ON PRELIMINARY YIELD FIGURES WHICH WERE REVISED SUBSEQUENTLY INDUSTRIAL PROJECTS DEPARTMENT World Bank-8261 JANUARY. 1974 ANNEX 4-3 Appendix III ROMANIA: OTELINOX STEEL PROJECT RAW MATERIAL FLOW AND THE FLOW OF PRODUCTS FROM THE BAR MILL BILETSS 146,500t WALKING BEAM FURNACE BAR ROLLING MILL 135,000t COIL STORAGE BARSTORAGE ANNEALING FURNACES HEAT TREATMENT FURNACES WEIGHING, FORMING, STRAIGHTENING & BAR STRAIGHTENING STRAPPING & PRO- CUT-TO-LENGTH (DEBURRING & PAINT TECTION LINEFROM COILS INTO MARKING) INSTALLATION INSTALLATION |SCALPING (CLEANING) |SAPN | AND CROPPING SCALPIN WEIGHING, STRAPPING WEIGHING, STRAPPING & PROTECTION LINE & PROTECTION LINE SHIPPING SHIPPING 70000t 50000t INDUSTRIAL PROJECTS DEPARTMENT JANUARY, 1974 World Bank-8257 ROMANIA: OTELINOX STEEL PROJECT PROCESS FLOW CHART FOR COLD MILL HOT-ROLLED COILS COIL BUILD-UP LINE HOT-STRIP ANNEALING-SHOT BLASTING-PICKLING LINE JR1Je1 BATCH ANNEALING FURNACES COLD STRIP INTERMEDIATE SENDZIMIR MILL HOT-STRIP GRINDING LINE AND FINAL ANNEALING AND PICKLING LINE SHEET POLISHING MACHINE TWO-HIGH TEMPER MILL SHEARING LINE STRETCHING LINE SHEETS X @) SHEETS SLITTING LINE STRIP POLISHING LINE COILS INDUSTRIAL PROJECTS DEPARTMENT World Bank-8263 JANUARY, 1974 ROMANIA: OTELINOX STEEL PROJECT PROCESS FLOW CHART FOR BAR MILL (BI LLETS) SEMI-PRODUCT REHEATING ROLLING PROCESS BAR CUT-TO-LENGTH AND COOLING BAR SURFACE CONDITIONING MARKING DEBURRING STRAIGHTENING BAR HEAT TREATMENT 9~~~UNN BAR WEIGHING, BUNDLING AND PROTECTION tX X~~~~~BAR SHIPMENT AR SHIPMENT COIL FORMING, WEIGHING, STRAPPING STRAIGHTENING AND COIL HEAT TREATMENT CUT-TO-LENGTH FROM COL-ETTETMN ,Q ~COILS INTO BARS l Z COIL SHIPMENT _ INDUSTRIAL PROJECTS DEPARTMENT JANUARY, 1974 World Bank - 8262(R) ANNEX 4-5 ROMANIA: OTELINOX STEEL PROJECT EMPLOYMENT AND TRAINING Manpower Needs 1. The Romanian authorities have forecast that the Otelinox Steel Project would require 1,612 employees (on a three-shift basis), of whom 625 would be for the cold rolling mill, 673 for the bar mill, and 314 for services common to both plants (i.e. for administration, maintenance, trans- portation, etc.) as shown below: Manpower Needs (Numbers) Cold Mill Bar Mill Common Total 1. Direct Production Workere 351 359 - 710 2. Auxiliary Production Workers 135 159 194 488 3. Maintenance Personnel 112 124 53 289 4. Management 27 31 67 125 F2T 673 fD314 1,6E12 2. Faployees in Romania work for about 2,240 hours a year. On this basis, the total manhours worked by production workers in the cold mill per year would be 1.4 million to produce 30,000 tons of stainless sheet and strip, and in the bar mill, 1.53 million manhours to produce 120,000 tons of rod and bar products a year. In other words, manhours per ton of stainless flats and bar mill products would be 47 and 13 respectively. These figures appear high by about 20% compared to the norms for similar plant operations in the West, therefore, the labor force requirements are overestimated by WeGtern ztandards but seem Justifiable because of the lot.^ hourly employment costs and the strategy of the Romanian authorities to augment trained and experienced manpower for stepping up steel production in the country as a whole. 3. According to the practice in Romania, part of the trained manpower in the existing plants is relocated at new enterprises by the State. Under this system, about 320 well-experienced personnel for top and middle level positions at Otelinox are expected to come from the existing steel plants and 342 skilled craftsmen (welders, electricians, etc.) would come from various industries. In addition, 150 persons (with 12-year schooling) would be recuited from the special secondary schools for technical trainingfor middle level positions and 600 persons (with 10-year schooling) would be selected from technical schools in Tirgoviste, which has good educational institutions geared to industrial training. These new recruits to the labor force would work as apprentices for 3 years before they are assigned to permanent positions. Further 200 persons from various places would be trained at a school to be run by the project for training people in operating cranes, machines, commercial vehicles, etc. 4. No problem is foreseen in getting adequate manpower for the project. Personnel seLection has begun. The General Manager has already been appointedl by the Minister of Metallurgical Industries. He has about L5 years of experience in responsible positions in steel plants. Other personnel are expected to be appointed gradually. ANNEX 4-5 page 2 5. Foreign training is an important part of the project. About 103 key engineering and 15 management personnel are expected to be trained abroad at the plants of equipment suppliers as well as in steelmills similar to Otelinox. Further, the suppliers of equipment and technical assistance will provide experts to train technicians of Otelinox in specialized opera- ting and maintenance techniques. Interchange of information as well as provision of manuals of training and standard practices will also be part of the technical assistance program. 6. The following table shows the gradual build-up of manpower at Otelinox: Number 1974 1975 60 1976 740 1977 1,030 1978 1,030 1979 1,320 1980 onwards 1,612 Housing and Other Facilities 7. Apartments for employees of both Tirgoviste I and Otelinox are under construction. Additional schools, hospitals, sports and other facilities have bean dcs7loped at Tirgoviste town to meet the needs of the TirgoviFte Alloy qteel Complex in general. Wage System in Romania 8. Under the Romanian System, the basic wage rate (excluding bonuses and other payments) varies with the training required for, the branch of activ- ity, and the complexity of the job. The average monthly wage rose at an annual rate of about 7% during 1951-1972, reaching Lei 1,498 in 1972. The general policy of the Government is to increase wages systematically on the basis of increasing labor productivity. Wages are also increased as a consequence of promotion. 9. The wage differentials between employees of different skill levels are limited. For example, in 1970, only 14% of the employees in Ronania had basic monthly wages exceeding Lei 2,000; 79% were earning between Lei 900 to 2,000; and 7% had basic monthly wages of Lei 800-900. The basic minimum monthly wage was raised from Lei 800 to 1,000 on September 1, 1972. 10. Incentives are buiilt into the wage system. Wages are related to the fulfillment of targets for different enterprises. For example, all employees initially receive only 80% of their basic wages and salaries and the remainder is paid only if they meet their production targets. Moreover, if workers ful- fill the annual targets in a steel plant with respect to production and benefits (profits), they receive 2% of their basic wages by way of bonus. Nonfulfillment of the targets leads to a reduction in basic wages proportionate to the responsi- bility and position of the individual employee. Additional payments are also made for individuals or collective work units for important achievements in production, and for savings in the use of raw materials, fuel and labor. Supple- mentary incentives are also given for exceeding the export target. In 1972, incentive payments accounted for about 18% of the total earnings of employees, with the basic wage accounting for the rest. ANNEX 4-5 Page 3 11. The wage system is also intended to establish continuity in employ- ment within the same enterprise. An employee leaving an enterprise for reasons other than an approved transfer loses his seniority. Industrial Projects Department January 1974 Annex 4-6 ROMANIA: OTELINOX STEEL PROJECT ECOLDGY Ecological Hazards 1. Since Otelinox is basically a rolling operation and not an integrated steel plant, it presents fewer obvious ecological hazards than a steel plant with basic iron and steel-making equipment, such as coke plant, sinter plant, blast furnace, BOF shop, etc. (The latter are frequently considered to be problem areas for steel plants, particularly those located close to centers of population). However, the Otelinox plant does have pickling operations which result in noise, and effluents emanating from the use of sulfuric,-nitric and hydrofluoric acids. It also has a cold-rolling operation which results in oily vapor/liquid effluents, and hot-rolling operations which result in effluents with mill scale, suspended solids, oil and grease; these operations also result in some toxic products. All things considered, the most hazardous products that would be released by Otelinox are from acid pickling. These acids will not be regenerated as in some larger operations, but will be neutralized in a special facility built for that purpose. Liquid effluents will also be treated for removal of oil, grease, suspended solids, and scales prior to release into the Ialomita River (Appendix 1). Facilities and Costs 2. A description of these facilities and their estimated costs are contained in Appendix 2. Standards 3. Appendix ,3 gives some general information on pertinent ecology legislation now existing in Romania, clarifying standards in force with respect to air, water and noise pollution. Status 4. In summary, the plan to neutralize and treat pickling line and other effluents, seems adequate to solve the problems of acidity, solids, oil, grease, etc. However, the release of neutralized acid with fluorine compounds may pose some health hazards, including toxic effects. Therefore, additional review will be made of the overall ecological aspects following the final selection of processes for the project. Industrial Projects Department January 1974 Annex 4-6 Appendix 1 ROMANIA: OTELINOX STEEL PROJECT WATER FLOW VOLUME AND EFFLUENTS Plant Sections Cold Mill Bar Mill Industrial Water 2740 M3 per hour total flow 2250 M3 per hour (of which 2240 M3per hour (of which 2350 M3 recirculated and 500 M3 per recirculated and hour make-up) 200 M3 make-up; effluent, 200 M3 per hour. Effluent = 500 M3/hr. Effluent = 200 M3/hr. Drinking Water 645 M3 per day (once through 555 M3 per day (once system--all effluent) through system--all effluent) Effluents will flow into the Ialomita River, adjacent to the plant. Industrial Projects Department January 1974 Annex 4-6 Appendix 2 ROMANIA: OTEIINOX STEEL PROJECT ECOLOGY - BASIC FACILITIES AND APPROXIMATE INVESTKMNT COSTaS (in 000 Lei) A. Acid Treatment Neutralizing plant for waste water from pickling and cleaning: 20,000 of which: - chemical work 13,500 - construction work 5,220 - electric supply and electric drives 650 - ventilation 350 - cranes 280 B. Settling and Skimming Fluipment Mill scales and solids, sedimen- tation, and oil separation 1,000 C. Piping and General Conduits, pipes, etc. 4,000 Total: 25,000 or approximately US$1.25 million Note: The above represents an initial estimate of basic equipment related to ecology. Additional equipment may have to be added in the future, with marginally higher costs following the final selection of processes for the project. As proposed by IPROLAM Industrial Projects Department January 1974 Annex 4-6 Appendix 3 ROMANIA: OTELINOX STEEL PROJECT LAW (NO. 9/1973) REGARDING PROTECTION OF ENVIRONMENT Chapter I - Explanation of the general purposes of environmental protection. Chapter II - Protection of the various components of the environment. Section 1: Protection of the Air 1. with the purpose of protecting the air, it is forbidden to emit poisonous substances into the air in the form of gases, vapors, solid particles, etc. in excess of the limit presently established by the law. It is also pro- hibited to construct new facilities that are not adequately equipped to retain or neutralize polluting substances. Section 2: Protection of the Waters 2. It is forbidden to permit the evacuation, disposal, or the injection into surface and sub-surface waters, as well as salt water, waste, residues, solid substances, liquids or gases, bacteria or microbes in quantities and con- centrations that can change the character of the waters, to the extent that they are poisonous to the people, the flora or fauna, or prohibit a rational use of these waters.... 3. It is also forbidden to construct new facilities that are not adequately equipped to retain or neutralize polluting substances. All State and public organizations are obliged to assure the protection of waters by: A. coordination of their development; B. rational use; C. installation according to schedule of pollution control devices; D. proper maintenance of reservoirs, river beds, irrigation networks, etc. Section 3: 4. To maintain and improve the quality of the resources of the soil and its productive potential, custodians of land are obliged to combat erosion, landslides, floods, etc. The depositing of waste or solid)liquid or gaseous residues, as well as radioactive substances that can pollute the soil, is possible only in specially designated areas. Chapter III 5. Ministries and other central organizations are responsible for establishing and applying measures that respect the anti-pollution norms set by law. New units must be designed with these norms in mind. Annex 4-6 Appendix 3 page 2 Maximum Permissible Concentrations of Polluting Substances in the Atmosphere of the Protected Zones Item Number Substance Concentration in mg/m3 temporary average/24 hours 1. Hydrochloric acid 0.3 0.1 2. Sulphuric acid 0.3 0.1 3. Nitrogen dioxide 0.3 0.1 4. Sulphur dioxide 0.75 0.25 5. Chlorine 0.3 0.1 6. Fluorine and its compounds 0.02 0.005 7. Soot 0.15 0.05 8. Hydrogen sulphide 0.03 0.01 9. Carbon monoxide 6.0 2.0 10. Carbon tetrachloride 3.0 1.0 11. Suspended powders (non-toxic) 0.5 0.15 12. Settling-down powders (non-toxic) 200 t/Km2/year 13. Lasting smells - perceptible Annex 4-6 Appendix 3 page 3 Day Water Quality Conditions Item No. Substance Concentration Category 2 Category 3 1. Oxygen dissolved in water mg/d3 min. 5 4 2. Biochemical oxygen consumption mg. 14 mv dm3 min. 4 10 3. Chemical oxygen consumption by the method of potassium dichro- mate mg/dm3 max. 20 30 4. Chlorides (Cl) mgJdm3 max. 400 400 5. Calcium (Ca) mg/dn3 max. 200 300 6. Sulphates (S04) mgJdm3 max. 400 400 7. Magnesium (Mg) mg/dm3 max. 100 200 8. Constant residue mg/dm3 max. 100O 1200 9. Suspended matters in waste water before discharging it into the river, depending on the degree of mg/din3 dilution : degree of dilution: 150-200 mg/dm3 450-1500 750-2500 10. Temperature rise from the maximum natural average temperature OC 5 5 11. The colour of the waste water diluted with day water in a Should not be noticeable proportion corresponding to the in a water column of the dilution obtained at the minimum following height: flow rate of the river 10 cm 5 cm 12. The smell of the waste water diluted with day water in a proportion corresponding to the odourless odourless dilution obtained at the minimum flow rate of the rIver 13. pH 6.5-8.5 6.5-9 Annex 4-6 Appendix 3 page 4 Concentration Item No. Substance Category 2 Category 3 14. Sexavalent chromium (Cr) mg/dm3 max. 0.1 3 i5. Trivalent chromium (Cr) mg/dm3 max. 0.5 0.5 16. Anionic detergents mg/dm3 max. 2 3 17. Totally ionic iron (Fe) mg/dm3 max. 1 1 18. Fluorine mg/dm3 max. 1 1 19. Nickel (Ni) mg/dm3 max. 0.1 0.1 20. Nitrates (N03) mg/dm3 max. 30 - 21. Carbon tetrachlordie mg/dm3 max. 5 5 22. Crude oil and petroleum products mg/dm3 max. 0.1 0.1 Maximum permissable noise level 6. Manufacturing and maintenance facilities that make noise greater than 80 decibels will be located in separate buildings or structures as far as possible. The walls of the buildings will be acoustically isolated. Industrial Projects Department January 1974 ANNEX 4-7 ROMANIA: OTELINOX STEEL PROJECT LONG-RANGE PLANNING AND FUTURE EXPANSION 1. Plant and equipment layouts, processes, and all facility planning at Otelinox are designed to facilitate future expansion. Such expansion will probably be required in the early 1980's. A review of the present stage of project engineering indicates that project sponsors have carefully considered the relationship between the present project and subsequent expansion stages, thus providing for economical expansion in the future. Basic Plan 2. The basic plan is to double the capacity of the bar mill and to increace the cold mill capscity by about 30% in the second stage of plant development. Bar Mill Expansion 3. The present layout (Stage I) provides for rolling of rod and bar products in one continuous mill with wire products being processed, finished, and shipped from the adjacent (south) bay. This layout will permit future expansion into two continuous mills -- one for rods and the other for bars -- by adding fan-rolling trains and a furnace to the first mill with heat-treat- ment facilities remaining common to both mills. Capacity for the production of bar products at Otelinox could be effectively doubled in this way when the market justifies expansion. Flat Products Plant Expansion 4. The situation at the cold mill is somewhat different. Initial (Stage I) capacity will be limited to 30,000 tons per year at full utilization of the one modern, efficient Sendzimir mill for cold reduction. It is planned to achieve the 30% expansion of the plant capacity in Stage II with the addi- tion of one single-stand reversing cold mill and necessary support facilities. In this way, the use of two mills will provide increased capacity, while helping to maintain the high level of quality control (shape and close dimen- sional tolerances) normally associated with the Sendzimir mill processing. Industrial Projects Department January 1974 ROMANIA: OTELINOX STEEL PROJECT CAPITAL COST nTinmkZ (in MillionT Cold Hlll Bar____ _ Total Otelinox ki ei in Lei) (in Lei) (in US$) Local ci T e T Ial Forei Total Lal For Tat 1. Equikprt (CIF plant site) 162.4 484.0 646.4 210.2 671.5 881.7 372.6 1,155.5 1,528.1 18.6 57.8 76.4 2. Spares 3.0 40.0 43.0 6.o 52.0 58.0 9.0 92.0 201.0 0.5 4.6 5.1 3. Engineering, Ynow-how and Technical Assistance 79.3 77.8 157.1 42.9 25.0 67.9 122.2 102.8 225.0 6.1 5.1 11.2 4. Construction & Installation 448.3 - 448.3 457.4 - 457.4 9°5.7 - 905.7 45.3 - 45.3 5, Supevision and Start-up 25.9 - 25.9 7.6 _ 7.6 33.5 - 33.5 1.7 - 1.7 6. Pre-operating Expenses 11.1 4,o 15.1 - 300 14.1 4.o 18.1 0.7 0.2 0.9 Sub-total 730.0 . ,3 727.1 7C83 1, 4 K 1471 1,3314j 2,=.4 ~47" E7- 7. Contingencies Pbysical 70.1 68.0 138.1 68.3 81.0 149.3 138.4 149.0 287.4 6.9 7.4 14.3 Price (10%) - 122.0 122.0 1032 103.2 - 22225.2 - 11.3 13 Total Fixed Capital 87 7P " 795. 932.7 1,7Ef 19 1, g2O.. 3, 70 8. WorkLng Capital Requirements 103M7 2.2 52.6 1.5 .1 356.3 3.7 160.0 7.8 0.2 8.0 Total Project Cost MM 79t5.0317 .28 i7T:i 17372 3;4W.o B77 ME o 17; 9. Interest and Financial Charges During Construction 38.5 183.4 221.9 1.9 9.2 11.1 Total Firncing Required 1,790.3 1,915.6 3,705.9 89.5 95.8 185.3 1/ This project is exempted from all duties and taxes on imported items. Industrial Projects Department May 1974 ANNEX 5-1 Page 2 ROMANIA: OTELINOX STEEL PROJECT DETAILS OF EQUIPMENT COST (US$ 000) Equipment and Associated Items Foreign Local Total I. COLD MILL A. EOT Cranes and Material Handling 260 300 560 B. Batch Annealing 420 - 420 C. Coil Preparation Line 900 300 1,200 D. Hot Roll, Anneal and Pickle Line 1,715 575 2,290 E. Hot Strip Grinding Line 1,530 490 2,020 F. Sendzimir Mill 4,850 500 5,350 G. Cold Roll, Anneal and Pickle Line 2,100 715 2,815 H. Bright Anneal Line 2,070 690 2,760 I. Coil Inspection Line 680 105 785 J. Two High Temper Mill 1,400 160 1,560 K. Slitting Line 520 70 590 L. Shearing Line 845 155 1,000 M. Sheet Stretcher Leveller 310 - 310 N. Sheet Polishing Line 135 - 135 0. Strip Polishing Lines (2) 1,850 185 2,035 P. Coil Packaging Line 50 150 200 Q. Miscellaneous Equipment and Items 900 525 1,425 R. Auxiliary Equipment 2,915 3,200 6,115 S. Freight and Insurance 750 - 750 Sub-Total 24,200 8,120 32,320 II. BAR MILL A. EOT Cranes and Material Handling 250 300 550 B. Billet Reheat Furnace 500 310 810 C. Rolling Mill 22,500 3,600 26,100 D. Heat Treating Facilities 1,200 1,380 2,580 E. Finishing Facilities 3,975 1,295 5,270 F. Miscellaneous Equipment and Items 1,000 425 1,425 G. Auxiliary Equipment 3,150 3,200 6,350 H. Freight and Insurance 1,000 - 1,000 Sib-Total 33,575 10,510 44,o85 TOTAL (I and II) 57,775 18,630 76,405 Industrial Projects Department January 1974 ANNEX 5-2 ROMANIA: OTELINOX STEEL PROJECT WORMING CAPITAL RQUIREMTNTS (000 Lei) 1978 1979 1980 1. Cash 500 500 500 2. Inventory A. Cold Mill - Production Capacity (%) 22 90 100 Raw Materials (15 days of operation) 8,40o 33,800 37,600 Wbrk in Process (15 days of operation) 7,950 32,000 35,631 Finished Products (7 days of production) 6,500 26,300 29,224 Spare Parts 2,220 2,220 2,220 Auxiliary Materials 1,020 1,020 1,020 B. Ear Mill - Production Capacity (%) 45 94 100 Raw Materials (8 days of operation) 7,600 17,200 16,930 Work in Process (8 days of operation) 8,ooo 16,700 17,900 Finished Products ( days of production) 7,1400 15,1400 16,485 Spare Parts 1,480 1,480 1,480 Auxiliary Materials 1,010 1,010 1,010 Total Working Capital 50,810 147,630 1602000 Incremental Working Capital 50,810 96,820 12,370 Note: In the Romanian context, payments on all industrial trade transactions are made by the National Bank, which provides credits to enterprises in an amount equal to the total production cost of the sales transaction involved on receipt of invoices from them. When the customer informs the National Bank to make the payment on the customer's behalf, the National Bank makes the entire payment while cancelling the credit already provided. Therefore, account receivables as well as account payables are not a part of working capital requirement calculations, as is common in the market economy. Industrial Projects Department January 1974 ANNEX 5-3 Page 1 ROMANIA: OTELINOX STEEL PROJECT INVESTMENT IN NEW PROJECTS A. Types of Investments 1. There are two main categories under which investments are generally undertaken in Romania. First and most important, covering over 95X of total investments in recent years, are Centralized Investments, the investments from the state funds which are authorized in the Plan and which include all major investments. Second and relatively minor in total value are Non-Cen- tralized Investments, the small investments made by enterprises from their own funds without specific plan approval; such investments are primarily made by the enterprises from their planned profit allocated for this purpose which are held in Central's account in the Investment Bank and are disbursed to an enterprise in accordance with demonstrated need. Productive investments of urgency and investments of social benefit (such as urgent maintenance/modernization jobs, technical improvements in plant, social and cultural investments like schools, housing, etc.) are some examples of non-centralized investments. While the individual investments are decided by the Enterprise itself and need not be specifically approved in the annual plan, the gross allocation of funds for such decentralized investments must be approved by higher authorities as a part of the annual financial plan and within the framework of the state annual plan. A graphic description of these two categories of investments and their major sources of finance is given in Table 1. As practically all important investments fall under the centralized investment category, this note will concentrate on the approval and financing of centralized investments. Table 2 gives a graphic view of the decision-making and funds flow for centralized investments. B. Approval of Investments 2. Investments in all sectors of the economy are designed to meet the production targets set forth in the National Production Plan, both Five-Year and Annual, approved by the Grand National Assembly. The Annual State Budget (Annual Financial Plan), also approved by the Grand National Assembly, details the investments required by different sectors of the economy, including a breakdown up to the enterprise level, to achieve the production targets established for them. Once these Investment and Financial Plans are approved, they acquire the status of a State Law and must be strictly adhered to by all the concerned parties. The procedure outlined in the following paragraph describes the steps followed to include an investment in these plans. 3. Investment projects are prepared by the enterprise or by the ministry concerned (in the case of large projects of national importance, it is prepared by the ministry itself or by the enterprise concerned only with the assistance of the ministry concerned) to achieve the production targets ANNEX 5-3 Page 2 approved in the Five-Year and Annual Plans. Prior to its inclusion in the Plan, an investment must be approved by the authorized organization unit. The authority for approval depends on the total cost of the proposed investment; a higher than required organization may, however, approve investments of special significance. Generally, investment of: (a) Lei 10,000,000 or less can be approved by the Enterprise; 1/ (b) Lei 10,000,000 to 30,000,000 are approved by the Central; 1/ (c) Lei 30,000,000 to 70,000,000 are approved by the Ministry; 1/ and (d) Over Lei 70,000,000 are approved by the Council of Ministers. In this case, the Minister concerned presents the proposal but the Council of Ministers receives comments from the Ministry of Finance, State Planning Committee, Ministry of Supply and Investment Control, and Investment Bank. 4. The investment decisions are made on the basis of the "Techno- Economic Studies". These studies not only contain the economic justifica- tion of the project but also include the project schedule, detailed cost estimates of the project based on complete design and engineering, and fully identify sources of equipment, raw materials, labor and financing. For example, the approval for an investment is not given till sources of financing are firmly identified. Consequently, immediately after the ap- proval of a project, its financing is incorporated in the national plan in order that the physical execution of the project can start soon thereafter. C. Financing of Investments 5. There are three major sources of financing available to industrial enterprises: (i) Their "Own Funds": depreciation, share of own benefits (profits) and to a much smaller extent receipts from sale of obsolete equipment. (ii) Allocations from the State/Local Budget. (iii) Credits from the banks: this source is expected to become more important in future. Investments made through credit sources are called the Credit Investments and all other investments are called the Financed Investments (Table 1). 1/ In the case of these investments, a notification of the Investment Bank's consent is necessary for final approval. The Investment Bank particularly reviews the efficiency of investing the requested level of funds to meet the production goals; it may recommend a reduction in or even a postponement of the proposed investment. ANNEX 5-3 Page 3 6. Non-Centralized Investments. As already mentioned earlier, invest- ments in non-centralized investments are made from the Non-Centralized Fund. An allocation to this fund is made if the enterprise meets its planned- benefit target for the year. Amount of allocation varies between 1% to 4% of the planned profits depending upon the "rentability" (roughly profits on sales revenues) of the enterprise as explained in para 3 (v) of the note on "Distribution of Benefits". 7. Centralized Investments. The broad Financial Plan for the whole project is prepared by the enterprise in consultation with the Investment Bank during the preparation of the Techno-Economic Study. However, detailed sources of funds for work to be completed in a budget year are identified in the annual financial plan of the enterprise/central. This annual financial plan (sources and usage of funds statement) considers the planned benefits for the enterprise and the funds likely to be surplus after making other mandatory allocations, the depreciation funds and other "own funds", surplus depreciation funds from other enterprises in the central and the credit in- vestments suggested by the Investment Bank. If these sources are not suffi- cient, the financing gap is met through a non-reimbursable, non-interest- bearing grant from the budget. Republic Enterprises request allocation from the Republican (National) Budget while the Local Enterprises get allocations from the Local (District, Municipal) Budget. Allocations for such investments are made through the Republican/Local Economic and Social Development Fund part of the Budget. 8. In this process of seeking budget funds, the enterprise, first, makes a detailed statement of its sources (planned benefits minus mandatory allocations) and needs for funds to achieve the production targets set for it for the forthcoming year. It forwards this statement to the Central without balancing the sources and usage of funds. The Central collates the statements from all the enterprises associated with it and tries to meet ex- cess needs of one enterprise with the surplus funds, if any, from other en- terprises. For example, if during a year an enterprise has authorized cen- tralized investment needs below its "own funds" (depreciation and its share of benefits), then these excess funds are used for centralized investments in other enterprises. The Central, then, finalizes its financial plan; if the total investment needs of the enterprises are in excess of their com- bined "own funds", the Central requests budget allocations. On the other hand, If the enterprises, as a group, have surplus funds during a year, they are returned to the State Budget. Each Ministry receives annual plans from all its Centrals, consolidates them and forwards them to the Ministry of Finance. The latter collates the financial plans of all the Ministries and formulates the National Financial Plan which is approved by the Grand National Assembly and the Council of State. 9. This approval authorizes the enterprises to proceed further with their planned activities. The Investment Bank, National Bank and other banks receive copies of the approved financial plan for each enterprise and are ANNEX 5-3 Page 4 responsible for making payments from the budget categories/sources specified, according to the approved schedule. The banks keep a separate account for each category in the financial plan for every enterprise. The banks deal directly with the enterprises and the intermediate organization units, Min- istry and the Central, do not get involved in the financial transactions once the Annual Plan is finalized and sources of funds identified. The deprecia- tion fund is handled in the Investment Bank; it receives bi-monthly payments from the enterprise. The allocations from the Economic and Social Develop- ment Fund are channeled through the National Bank; it makes bi-monthly trans- fers to the enterprise account at the Investment Bank, according to the sched- ule approved in the Plan. The latter makes all payments after ensuring that they are in full conformity with the approved Plan. D. Cost of Financing 10. The Investment Bank decides, in consultation with the borrower, if any part of an investment should be designated Credit Investment and financed by credits. The balance is, then, designated Financed Investments for finan- cing through "own funds" and budget allocations. The main criteria for ap- proving credit investments are: (i) The investment should be able to pay for itself in maximum 10 years. (ii) It should have sources of equipment firmly identified. (iii) It should have firm sales contracts for the proposed pro- duction. (iv) Until the new law of 1973, such investments were limited for projects under Lei 70 million. The cost of these two and other types of financing is discussed below. 11. Financed Investments. At present the Financed Investments (see para 5) have no specific fixed financial obligations though any surplus gen- erated during the year is transferred to the budget on a preallocated basis. However, a new law now under consideration is expected to impose a tax on in- vested funds. This tax could be considered like a fixed dividend rate on equity and is aimed to encourage an efficient use of State funds invested as budget allocation. The tax rate, subject to a maximum of 6%, is expected to be different for different sectors of the economy. This differential rate will be used to encourage investments in specific sectors like agriculture. 124 To provide an incentive to make investments productive as soon as possible, the financing under the financed investments is not effective till the investments start production. During the construction period, the Invest- ment Bank pays for the investments from a special account for all expenditures, ANNEX 5-3 Page 5 except for buildings and construction which are directly paid from the financed investment funds. The financing for investments, plant, equipment, spares etc. is provided at a 2% interest rate until the date of commissioning. However, as soon as the plant is declared commissioned after the "technical tests", these special account credits are replaced by funds from the financed-invest- ments fund. If actual commissioning is delayed, then this interest rate is increased from 2% to 6% for the delayed period. 13. Credit Investments: are expected to become more important in fu- ture. These are medium7long-term loans, presently at 2%-4X interest rate, extended by the Investment Bank from its own sources for the centralized investments. Under a new law in force since January 1973, the Investment Bank has been authorized to extend large credits for projects of national interest, which was not possible earlier. At present the maximum term for loans is 10 years. The lower interest rates are charged for short maturity credits and the higher interest rates, i.e. 4%, are charged for longer ma- turities. 14. Working Capital A. Temporary: For the commissioning period, the Investment Bank provides the enterprise with credit for its working capital needs (spares, inventory, materials for commissioning period) at 2% interest rate. This credit must be paid back, within 90 days of the scheduled commis- sioning date, from the sales of production during this period. If the com- missioning is delayed, the interest rate is increased to 6% for the delayed period. 15. Working Capital B. Permanent: Once an investment is declared ef- fective (commissioned), the expected working capital needs for the forthcoming year are met by the State Budget channelled through the National Bank. The enterprise must negotiate, each year, its working capital needs for the coming year with the bank. The working capital amount is composed of two parts. First, the "normative" amount calculated on the basis of the planned produc- tion and the previously approved "norms" like the turnover rate. Second, any "additional" needs which must be specifically approved either by the National Bank or the Ministry on grounds like special supply conditions which justify higher than economical level of inventories, etc. Increases in the "normative" amount of permanent working capital requirements are mostly met, through self generated funds by retaining benefits though additional grants from the State Budget are possible, if necessary. The "additional" working capital needs are met through specially approved loans at 3%-5% interest rate; late payments are charged 12% interest. Industrial Projects Department May 21, 1974 ANNEX 5-3 Chart 1 ROMANIA INDUSTRIAL SECTOR MAJOR TYPES OF INVESTMENTS AND SOUkfiES Ot FUNDS Investments Type According to Approval Needed Investments from Investments from funds State Funds 1/ from economic uni 2 Type According to Financing Financed Credit Investments Investments | Sources of Finance Fixed Assets Own Funds State Budget Fixed Assets Allocations Investment Own Funds (non-reimbursable) Bank (mainly Non-centralized Working Capital Credits Investment Funds) National Bank Credit 1/ Centralized Investments 2/ Non-centralized Investments World Bank - 8403(RI ROMANIA: INDUSTRIAL st IOR SOURCES OF CAPITAL FUNDS FOR CENTRALIZED INVESTMENTS The Grand Natona ANNEX 5-3 Assembly Chart 2 , 1Appoval Financial Plan for Approval * - -. - _ . _. .-._ . _ ._. S I Budgot rquest Mini Finn Ii 1Speciel Units I I Profits I Local I Repulic I Budgets Budtet -I FOwn ' lRepublic1 | ffi Economic LocalEconomic rom c | & Social a ~~~~~~& Social & S odl Z Dev Funds ' DeweFunds Dev Fund .~ ~ I . \DvFn j I Dept. I Profits .I I .... . ; * = j%i *.. I * ,NX ationl k _,__,... Bank -i - - - - - ---- - - - - * I W*,;;, *~~~~~~~i Minister . (e.g.Chsemicals) - - - - - -. - - - --. (tCOsnixlsl _._._._._._. 5 \ @ I j ~~~~~~~~~~~~~~~~~~Suppliers| . . '. ~ ~ ~~~~~~~~~~~~I S1 Investmentf Plan & Sources / | /s Cenral . -. -. . . - Entere ' ' | /VContractor Financial Plan I : -, Cash Flow Budget Balanced Enterpri Etc. _ . _-. _-. Financial Plan Approval for Expenses . . .. Alloeation from Profits - - - - Budpt Allocation Allocation from Depr ecition Funds - . Allocation of Enterprise Profits and Depreciation World Bank 8402(R) ANNEX 6-1 Page 1 ROMANIA: OTELINOX STEEL PROJECT EQUIPMENT AND SERVICES IO BE FINANCED BY THE BANK Category Estimated % to be Amount to be Total Foreign Financed Financed by Exchange Cost / by the Bank the Bank (USffiOOO ) (X) (US$000) A. Cold Mill 1. WOT Cranes and Material Handling 260 100 260 2. Batch Annealing 420 100 420 3. Coil Preparation Line 900 100 900 4. Hot Roll, Anneal and Pickleline 1,715 100 1,715 5. Hot-Strip Grinding Line 1,530 100 1,530 6. Sendzimer Mill 4,850 100 4,850 7. Cold Roll, Anneal and Pickleline 2,100 100 2,100 8. Bright Anneal Line 2,070 100 2,070 9. Coil Inspection Line 680 100 680 10. Two-High Temper Line 1,400 100 1,400 11. Slitting Line 520 100 520 12. Shear Line 845 100 845 13. Sheet Stretcher Leveller 310 100 310 14. Sheet Polishing Line 135 100 135 15. Strip Polishing Lines (2) 1,850 100 1,850 16. Auxiliary and Miscellaneous Equip.2/ 6,615 100 6,615 17. Engineering and Know-how and Technical Assistance 3/ 4,090 100 4,090 Sub-total 30,290 30,290 1/ The Bank loan is expected to finance the entire cost of the Cold Mill bid package which is to be procured under International Competitive Bidding (ICB), including equipment, spare parts, engineering, know how, training, technical assistance and other services. Romanian firms are not expected to participate in the consortium supplying the Cold Mill. With respect to the Bar Mill the Bank loan is expected to finance a part (about 65%) of the bid package to be procured under ICB including similar items as described above for the Cold Mill. In the case of the Bar Mill, it is expected that Romanian firms may participate as members of the supplying consortium. The remainder of the foreign exchange (and local) financing required for the project is expected to be supplied by the State. 2/ This includes the cost of spares as well as foreign freight and insurance. 3/ Includes the cost of technical assistance, which may be required during the procurement stage, estimated at US$0.2 million. ANNEX 6-1 Page 2 Category Estimated % to be Amount to be Tbtal Fbreign Financed Financed by Exchange Cost by the Bank the Bank (US$000O) (% (U$000) 1/ B. Bar Mill- 1. Rolling Mill 22,500 100% of ) 2. Heat Treatment Facilities 1,200 individual ) 3. Finishing Facilities 3,975 expenditures ) 4. Billet Reheat Furnace 500 up to loan ) 5. Material Handling 250 amount ): 24,310 6. Auxiliary and Misc. Equipment 7,750 (expected to ) 7. Engineering, know how and technical cover 65% of ) assistance 1 250 actual expendi-) 37,425 2/ tures) ) C. Unallocated 15,4oo Total 70,000 1/ It is expected that all of the Bank Loan will be utilized for financing of goods and services required for the project. However, if any funds from the loan amount remain after all reasonable commitments for goods and services for the project have been made, such amount may be reallocated by the Bank for interest during construction. 2/ Based on recent information received in May 1974 some significant Bar Mill components--listed in this annex as "Foreigni"--may be shifted to Romanian supply but included as part of the foreign bid package if accepted voluntarily by the lead firm of the supply consortium. Thus, figures shown above may include Romanian components supplied through the foreign consortium. Industrial Projects Department May 1974 ANNEx 6-2 RCKANIA: OTELINOZ STEEL PROJECT - ESTIMATED DISBURSFE~NT SCHEDULE (000 US) a, Amount Undistributed Year Disbursement Outstanding Amount 1974: III Qtr 0 0 70,000 IV Qtr 0 0 70,000 1975: I Qtr 2,180 2/ 2,180 67,820 II Qtr 3,490o 5,670 64,330 III Qtr 3,490 9,160 60,840 IV Qtr 3,490 12,650 57,350 1976: I Qtr 3,490 16,140 53,860 II Qtr 3,490 19,630 50,370 III Qtr 3,490 23,120 46,880 IV Qtr 5,470 28,590 41,410 1977: I Qtr 6,980 35,570 34,430 II Qtr 12,915 48,485 21,515 III Qtr 7,560 56,045 13,955 IV Qtr 0 56,045 13,955 1978: I Qtr 3,960 60,005 9,995 II Qtr 6,975 66,980 3,020 III Qtr 3,020 70,000 0 1/ This is based on the following assumptions: 5%, down payment; 50%,progress payment; 25%, on delivery; 10%, on oommissioning; and 10% after the completion of performance guarantee. 2/ Includes the cost of the technical assistance for procurement, if necessary. Industrial Projects Department May 1974 ROMANIA: OTELINOX STEEL PROJECT IMPLEMENTATION SCHEDULE 7 1974 1 176 1976 _5F I PUBLISHING OF INTERNATIONAL ADVERTISEMENTS M A I 1UjI 7 I IA: DI|MIQ .t + j ' J 2RAECEIVING OF RESPONSES TO AGE ,1 3 PREOUALIFICATION I DRAWING UP AND SENDING OF INOUIRIES I ; TO THE PREQUALFIED FIRMS - --________tl 5 PRE RID DISCUSSION I | ___| __ 6DATE OP RECEIPT GF PRELIMINARY OFFERS - tt -' - 7 TGCHNICAL DISCUSSIGNO AITH THE BIOI'ERS 82 RECEIPT BASIC TECHNICAL E RICED BI .t O9TEECTRICAL ERECTSIONS M ECEAIPTAL FIRNALGECHIA AND PRICED12,2BIDS2 25NOLETOAD O TEST S TEAUEDB-ECSO RTO AWART CONT RACT A 0 RA TEST 127 ACCETAINCEO TEROSTS REMN A REVISEDSIESTIMATESND17GMAY 1024 AGREEMENT L _188 R 17AIGMN OF PAREVSDETM AE 17 MA 1974 Wom Bak807{ ANNEX 7-1 ROMANIA: OTELINOX STEEL PROJECT RAW MATERIALS Otelinox Needs 1. Main semi-finished steel products required by the Otelinox Plant for its rolling operation are hot-rolled bands and billets. When fully operational in 1980, the plant would require annually 40,500 tons of hot- rolled bands (3-5mm) to produce stainless sheet and strip , and 146,500 tons of billets (in 80mm x 80mm and 100mm x 100mm sizes) to produce alloy bars and bar-like products. Hot-rolled band will be supplied by rail from the new integrated steel plant at Galati, 270 km from Otelinox, and billets will be delivered by truck from the Tirgoviste Steel Plant (Stage I), adjacent to Otelinox. 2. In addition to the above main inputs, the Otelinox plant would require the following inputs among otheir which would be used in small quan- tities: Otelinox Requirements Aiuxiliary Materials Sulphuric Acid (tons) 3,000 1ydrofluoric Acid (tons) 500 Trichloroethylene (tons) 2,290 Nitrogen ('000 m3) 2,,240 Refractories (tons) 90 Rolls (tons) 375 Utilities Natural Gas ('000 Nm3) 39,060 Power ('000 Kwh) 63,000 Water ('000 m3) 24,250 3. The above inputs are available locally and no problem is foreseen in their supply. Raw Material Needs of Galati and Tirgoviste I to Produce Semi-Products for Otelinox 4. As already noted, Otelinox will require hot-rolled bands from Galati and billets from Tirgoviste I. To produce these semi-products for Oteli.nox, Galati and Tirgoviste I will require the following main inputs: ANNEX 7-1 Page 2 Main Input Requirements (in tons except where mentioned) Mater ials Galati Tirgoviste I Total Scrap 1/ 46,ooo 204,000 250,000 Ferrosilicon (75% Si) 815 2,115 2,930 Refined Ferromanganese (85%Mn) 1,675 70 1,745 Ferromanganese 1,500 1,500 Refined Ferrochromium (65% Cr) 17,010 875 17,885 Ferrochromnium (35% Cr) 6,595 2,445 9,040 Ferromolybdenum 375 240 615 Ferrotitanium 2,625 65 2,690 Nickel 6,840 490 7,330 Graphite Electrodes 600 1,400 2,000 Castings 2,720 6,800 9,520 Refractories 5,290 10,410 15,700 Limestone 465 12,600 13,065 Ferrovanadium _ 310 310 Wolfram (Tungsten) - 520 520 Cobalt 1 40 40 Cast Iron _ 6,125 6,125 Magnesite Granules - 2,100 2,100 Rolls - 300 300 Utilities Natural Gas ('000 Nm3) 80,025 20,450 100,475 Power ('000 Kwh) 16,890 195,380 212,270 Water ('000 m3) 13,035 18,785 31,820 1/ Excluding recoveries. 5. As shown in the above table, the production of semi-products for Otelinox would require a total of about 250,000 tons of scrap, 26,925 tons of ferrochromium and 9,790 tons of other ferroalloys, 7,330 tons of nickel, 40 tons of cobalt, 520 tons of tungsten, 15,700 tons of refractories, 13,065 tons of limestone, and some other iems in minor quantities. Scrap Sapply 6. Romania is able to meet its scrap requirements from internal sources. In 1972, a total of 4 million tons were supplied to steel mills. Their requirements are expected to rise to 6.5 million tons in 1980, and the entire needs are expected to be met from domestic sources. 7. Romania has a well-organized scrap collection, processing, storage and distribution system. A Central established in 1952 looks after these aspects. It has at present about 160 warehouses in different parts of the country. In addition, three scrap preparation centers have been already established, and five more are being developed. These processing centers process ferrous as well as non-ferrous scrap. ANNEX 7-1 Page 3 Ferroalloys, Nickel and Tungsten 8. Ronania relies on imports to meet most of its requirements of ferroalloys. This situation is expected to continue in the future except for lower grade (35% Mg) ferromanganese for -which a plant is being built at TMcea port, on the Danube River. However, higher-grade ferromanganese (65%Mg) 'will continue to be imported from the Soviet Union, India, Brazil, Gabon and Morocco. In the case of ferrochrome, nickel and tungsten, three other important alloying materials uFed in special steels, the imports are expected to rise as follows: 1972 1980 Main Sources of Import Ferrochromium 1 i0 2B700 Europe Nickel 3,000 8,000 U.K., Holland, Canada, USSR and Cuba Tungsten 400 1,200 China Cobalt Cobalt is imported from Belgium. Imports are expected to rise from 75 tons to 120 tons during 1972-1980. Refractories 9. Refractory materials made of chromemagnesite, silicoalumina and silica would be used by Otelinox. In the case of silicoalumina and silica bricks, the country is self-sufficient. However, chromemagnesite refractories are currently imported from Czechoslovakia, the USSR, Yugoslavia and Austria, but there are plans to produce them locally. Graphite Electrodes 10. These are produced in adequate quaatity in Slatina and Tirgoviste. Limestone 11. Limestone is locally available in abundant quantity. Other Materials 12. Other raw materials required for alloy steel production are minor in importance. Most of them are available locally. Utilities 13. Romania has one of the largest gas and oil resources in Eastern Europe. Power generation is increasing fast at the rate of about 12% a year, and power is supplied through a national grid. As a result, the supply of natural gas and power to the project seems assured. Power transmission and water supply facilities as well as transportation links to the project site have already been developed as part of the development of Tirgoviste I. Industrial Projects Department January 1974 ANNEX 7-2 ROMANIA OT!LINOX STEEL PROJECT Cold Mill at Full Capacity Production (30,000 tons) Reuirei ents Price Total Production Cost No. Item U/M Per Ton of Annual Lei/i Lei'O00 % Product 1. Raw Materials: -- RDt-roleld coil tons 1.350 40,500 19,500 789,750 2. Recoveries 0.320 9,600 3,314 31,814 Sub-total 757,936 74.3 3. Auxiliary materialst --Sulrurle aeld t 0.100 3,000 850 2,550 -- tdroflouric acid t 0.016 500 45,200 22,600 --Tricholorethylene t o.o86 2,590 7,076 18,328 --Rolls t 0.0017 51 138,800 7,080 --Others 17,871 Sub-total 68,429 6.7 4. Utilities 3 --natural gas 10 Nm3 793 23,791 205 4,875 --electricity 103 Kwh 1,000 30,000 400 12,000 --industrial water 103m3 500 15,000 250 3,750 --steam, compressed air, etc. 2,340 Sub-total 22,965 2.3 5. Wages & Salaries 21,700 2.1 of which: --Social Tax (2,500) 6. aiop Overhead 136,600 13.4 of which: --Depreciation (84,700) 7. General Factory Overhead 12,439 1.2 Total Cost of Production 1,020,069 100.0 ANNEX 7-2 Page 2 ROMANIA - OTELINOZ STEXL PROJECT PR-ODUCTION COST ESTIYA!TS U1W0 Bar Mill at Full Production Capeoity (120,00C TPy) Requiremsnts Price Total Production Cost No. Item Per Ton of Ainual Lei/UM Lei '000 _ U/M Pr-oduct- 1. Raw Materials - billets tons l,220 146,400 4s535 663,924 2. Recoveries 0.210 25,200 853 21,496 Sub-total 642,428 75.5 3. Auxiliary Materials: --Rolls tons 0.0027 324 30,000 9,720 --Nitrogen 103M3 o.o0866 2,240 2,785 6,238 --Refractories tons 0.00075 91 1,800 164 --Others 744 Sub-total 16,866 2.0 4. Utilities -rDatural Gas 103Nm3 127 15,280 205 3,132 --Electricity lo3Kwh 275 33,000 400 13,200 --Industrial Water 103M3 77 9,250 250 2,313 --Others 1,851 Sub-total 20,496 2.4 ri. nrect Salaries 23,800 2.8 .. P which social tax: (2,800) 6. Shop Overhead 136,900 16.0 --of which Depreciation (91,300) 7. Genral Factory Overhead 10,692 1.3 Total Cost of Production 851,182 100.0 Industrial Projects ]epartment January 1974 ANNEX 7-3 Page 1 ROMANIA: OTELINOX STEEL PROJECT ROMANIAN PRICING SYSTEM 1. Within the industrial sector, the primary function of prices is to facilitate planning and control of expenditures. They are kept more or less constant over long periods of time. The existing prices are the published catalogue prices of 1963 with minor modifications over time. 2. The product price within the industrial sector is set in the State catalogue to cover production costs in an average facility and also to yield an acceptable profit, subject to certain modifications due to relative domestic and/or foreign scarcities or priorities. A turnover tax is added to the product price to arrive at the delivery price. This delivery price is charged only when products are sold to final consumers. The turnover tax is not applicable to sales of primary and intermediate products (e.g., for iron ore, steel, etc.) The export price is identical to the product price, since an enterprise receives the same payment from the foreign trade enterprise that markets the goods abroad as it would from a domestic customer. Supplementary expenditures required to prepare a product for export are reimbursed separately. The lei prices of imported items are determined in one of three different ways: (i) in correlation with the production price of similar items produced domes- tically; (ii) by conversion of unit foreign exchange expenditures into domestic currency at specially determined exchange rates (usually done for equipment); and (iii) by conversion of the cost of the components imported at a specially determined exchange rate and then pricing of the subsequently assembled pro- ducts in correlation with the imported price of the components. 3. According to the Romanian authorities, 1963 catalogue prices were set more or less in line with 1963 world prices. Since then the world demand and technology situation has changed, necessitating a number of price modifica- tions. Usually, the more capital intensive an industry, the higher its approved profit mark-up so that capital repairs and expansion do not have to be financed by budgetary grants. However, in industries where technical progress has pro- duced unnecessarily high profit rates, regularization taxes have been applied since 1970 to absorb these excess profits. Certain prices have been changed to prevent misuse of resources such as the use of natural gas as a fuel instead of as a chemical feedstock. Oil products have been slightly modified and sold at higher prices. 4. In order to eliminate the existing price distortions and align prices with the social costs of production, a major price revision based on Law Number 19/1971 is scheduled for adoption in 1974/75. Accordingly, new prices will be introduced gradually, not all at once as in 1963. The role of Centrals and enterprises in setting prices is expected to increase and price adjustments would be done more frequently. Some catalogue prices would no longer be invariable, but would indicate merely the upper limit. ANNEX 7-3 Page 2 5. As already mentioned, product prices will be set to equal average production costs plus the approved profit mark-up which would be a function of total assets. In addition to the usual cost elements, such as materials, utilities, wages including social taxes, depreciation, research and develop- ment, etc. two new cost elements - a tax on total assets and a land tax - will be introduced. These taxes, whose rates for each industry are yet to be determined, 1/ are designed to encourage more efficient use of capital and land. The product price based on costs can be altered to encourage: (i) introduction of new products of higher quality or with lower production costs; (ii) profitable use of natural resources determined by reference to world prices and long-range requirements; (iii) domestic production of pro- ducers' goods; (iv) rational use of materials by reference to world prices; (v) vertical integration of production; and (vi) increased production of spare parts. 6. The Bank has been given no indication of the new prices that will result from the revision. The prices of natural gas, coal, iron ore and other raw materials are expected to rise to the level of world prices. Prices may be lower than previously fixed levels, for products in industries such as chemicals, machine building and electrical equipment where technical progress has been substantial. On the average, prices are expected to increase only moderately. Although there would be some adjustments, the pricing system is such that it would not affect the financial viability of the Enterprise. The revenue forecasts which are based on the present catalogue prices are given in Annex 7-4. Industrial Projects Department May, 1974 1/ A total asset tax of 6% is now being used experimentally in the food industry. ANNEX 7-4 ROMANIAL OTELINOX STEEL PROJECT IIV NUr; funbA.AbrC - Total Revenue Avg. Price (Lei Million) Products Per Ton 1978 1979 1980 1981 1982 1983 1984 A. Cold Mill Products Domestic Austenitic 45,197 242.3 829.4 768.6 904.1 1,039.5 1,084.7 1,084.7 Ferritic 29,083 29.2 117.8 130.9 130.9 130.9 130.9 130.8 Martensitic 25,394 8.5 _4-3 38.1 38.1 38.1 38.1 38.1 Sub-total 280.0 981.5 937.6 1,073.1 1,208.5 1,253.7 1,253.7 Exports Eutxpo itic 45,197 - 146.8 316.1 180.6 45.2 Total Cold Mill Products 280.0 1,128.3 1,253.7 1,253.7 1,253.7 1,253.7 1,253.7 B. Bar Mill Products Domestic In Coils 6,923 192.1 455.1 484.7 484.7 484.7 484.7 484.7 In Bars 9,645 158.9 446.9 482.3 482.3 482.3 482.3 482.3 Total Bar Mill Products 351.0 902.0 967.0 967.0 967.0 967.0 967.0 Total Otelinox 631.0 2,030.3 2,220.7 2,220.7 2,220.7 2,220.7 2,220.7 Industrial Projects Department January 1974 ANNEX 8-1 Page 1 ROMANIA: OTELINOX STEEL PROJECT CASH FLOW AND ALLOCATION OF PROFITS A. Introduction 1. Every enterprise must draw up a financial plan in support of its annual material plan. This plan, which specifies sources and uses of funds, is not initially required to balance at the level of the enterprise. The Central, which has the primary role in financial planning, then allocates surpluses and deficits among enterprises in an attempt to balance their financial plans. If the total sources and needs of all enterprises under the Central do not match, the Central identifies the difference to indicate its needs/contributions to the State Budget; in case of a surplus, the fi- nancial plan included a matching entry for allocation to the State Budget; in case of an overall deficit, an equivalent amount is requested from the State Budget. The same process is followed at the Ministry level and the State Budget level. Since the overall investments authorized for the whole economy for a fiscal period are always supposed to equal the expected overall financial resources, the financial plan must balance at the State Budget level. Because of this balancing, debt default at any of the organization structure is not possible in theory. 2. Financial flows provide a major means of controlling an enterprise's activities. All funds flow in and out of a number of special accounts held for the enterprise by the National Bank (for the operational activities) and the Investment Bank (for the construction activities). Sales receipts are all credited to a National Bank account labeled "Account B", but the amounts needed to meet payments for wages, materials, utilities and short-term loans are immediately transferred from this account to "Account A". The funds remaining in "Account B" are used for bi-monthly depreciation, profit, and tax remittances and can cover temporary shortages in "Account A". A part of these extra funds go into special enterprise funds (e.g. for prizes) and modernization funds also held by the National Bank and are used only for designated purposes. The enterprise holds only a small amount of petty cash for entertainment, office expenses, etc. B. Distribution of depreciation charges and scrap value of obsolete equipment 3. Internally-generated depreciation funds and revenue from the sale of obsolete equipment are used as needed to finance State-approved expansion (called centralized investment) within the enterprise or to repay loans for previous expansion. Excess funds are transferred to the Central and then to the Ministry, if necessary, to be used for centralized investment in other enterprises. If neither the Central nor the Ministry requires such funds, they are remitted to the State Budget. Depreciation is charged on all installed assets even though they may be fully depreciated. The enterprise ANNEX 8-1 Page 2 is permitted to request that up to 25% of the depreciation on assets which have outlived their expected lives be allowed to be retained to finance unplanned improvements or capital repairs. In addition, an amount upto 15% of the depreciation of these assets can be allocated to the non-centralized investment fund held by the Central. This fund finances major capital repairs, modernization, social investments (e.g., in housing). C. Distribution of excess working capital 4. If the National Bank decides that an enterprise has more working capital than necessary to produce a given output, this excess working capital must be redistributed. The first claim on this surplus is to meet planned working capital growth needed to cover increased output targets of the enter- prise itself. Any remainder will be allocated among other enterprises within the Central and lastly, among other enterprises within the Ministry concerned. If not needed by them, it is remitted to the Budget. However, such redistri- bution is possible only for usages already authorized by the National Bank. D. Distribution of Benefits (Profits) 5. Prior to 1969, enterprises had little control over the utilization of benefits earned by them; over 50% of profits were allocated by law to the state budget and very little funds could be spent at the discretion of the enterprises. However, various reforms since then have reduced the mandatory allocation to the state budget; the enterprises now have the first right over utilization of their depreciation funds; discretionary funds like the re- serve fund and the fund for non-centralized investments, described later, have been created; and the centrals can allocate unused funds from one enterprise to another before returning the surplus funds to the state. 6. Major allocations of the profits are based on the planned benefits. The planned benefit is the profit an enterprise includes in its annual in- vestment and financial plan which is approved finally by the Council of Ministers; such an approval gives these plans the status of a law. The planned profit is based on the approved production plan (a part of the annual plan of the ministry and the country) and the agreed prices and costs. 7. The annual financial plan also indicates the planned distribution of the benefits. The distribution is made in the following order of priority: (i) At least 10% 1/ of the benefits must be allocated to the National Budget or the Local Budget depending on the designation of the enterprise - Republic enterprises pay this allocation to the National Budget and local enter- prises to the local budget. This allocation could be re- garded as a corporate profit tax. 1/ 10% is the mandatory minimum and is deducted first. Any surplus benefits after other allocations also go to the budget. ANNEX 8-1 Page 3 (ii) Workers' first allocation or the prize fund has the next priority. This allocation is at most 2% of the total wages of all enterprise enployees called the "salary fund". The salary fund includes only direct wages and does not incor- porate indirect labor costs like the social security, etc. This allocation is used to pay bonuses to the employees. (iii) Bank Credits (loans) due during the year have the next prior- ity. They include both the long/medium-term credits from the Investment Bank and the short-term credits extended by the National Bank for approved working capital needs. (iv) Allocation for the centralized investments approved by the Council of Ministers in the investment plan of the enterprise. Any surplus, if any, after this allocation would be further distributed. (v) Repayment of any funds borrowed from the National Bank over the working capital norms. Such credits are approved in special cases, e.g. when an enterprise exceeds its produc- tion target, needs additional inventory due to special supply conditions, etc. All National Bank credits must be repaid every year and new credits negotiated for the next year. (vi) Allocation to the Non-Centralized Investments Fund, which is used for productive investments in the social field. This allocation is based on the rentability 1/ (profitability) of the enterprise: Maximum Allocation of Rentability Profits to Uncentralized Fund Less than 2% 4% 2.01 - 5% 3% 5.01 - 10% 2.5% 10.01 - 15% 1.5% Over 15% 1% (vii) Allocation to the Reserve Fund up to a maximum of 0.1% of enterprise's working capital. This fund is used for miscel- laneous expenses, e.g. protocol, representation, and to repay the excess working capital borrowings, National Bank and other credits if benefits in a particular year are not adequate to do so. 1/ YRentability o Total Benefits Value of Production Sold at Production Cost ANNEX 8-1 Page 4 (viii) Best Workers Fund deduction. It cannot exceed 0.05% of the salary fund and is used to give special bonuses to outstand- ing workers/teams. (ix) If any funds are left after the above allocations, they can be used by the Central to make centralized investments in other enterprises under it. (x) Any funds left over even after they are remitted to the state budget cannot be claimed back the next year. 8. Even if the actual benefits made by an enterprise are less than the planned benefits, the budgeted allocation to the budget (minimum 10% plus any planned surplus allocations) must be made first. After meeting this obligation, the workers bonus allocation must be made even if credit repayment cannot be made. The bank credits are repaid next; if the benefits after the budget allocations are inadequate, the reserve fund of the enter- prise is used for repayment. Benefits and/or reserve funds from other allo- cations are used for such repayments before other allocations are made. How- ever, no allocations to the Uncentralized Investments Fund, Best Workers Fund and Reserve Fund are made if planned benefit is not achieved. 1/ 9. If the actual benefits are more than the planned benefits, the employees bonus allocation is increased proportionately, e.g. an extra 10% benefits would also increase the workers allocation 10% above the planned. The additional benefits are next used to repay any credits obtained for modernization but the repayment is again proportional to the additional benefits; for 10% extra benefits, 10% of such credits would be repaid from these extra "unplanned" funds. The balance is distributed between the Re- publican and the Local Budgets. The ratio of this distribution depends on the development stage of and the investment possibilities in the district in which the enterprise is located and is specified by law and can be varied from year to year by the Ministry of Finance. For example, for enterprise located in a poor district, 80% of surplus additional benefits may be allo- cated to the Local Budget and only 20% to the Republican Budget. E. Creation of Special Funds 10. Output prices are set high enough above basic unit input costs so that a number of special funds can be created. Most of these funds, such as the fund for invention, innovation and improvement and the fund for worker's protection, are remitted to the Central and then redistributed in accordance with demonstrated needs. Funds for research and development can often be kept by the enterprise. 1/ However, it appears that in practice small allocations are made for these categories even if planned profits are not achieved. ANNEX 8-1 Page 5 F. Sales Taxes 11. Turnover and regularization taxes are invoiced by the enterprise when certain consumer goods are sold. These taxes are remitted directly from the enterprise's account in the National Bank to the Budget. G. Budget Allocations 12. Budget allocations channelled through the National Bank are used to finance annual loans for increased working capital when other sources are not available. In the case of new enterprises, the initial working capital en- dowment comes from the Budget through the National Bank in the form of a non- reimbursable advance. In the case of large centrally-planned investment proj- ects, most, if not all, of the financing comes from the Budget through the Investment Bank. This is particularly true for new enterprises. The Budget also finances losses which cannot be covered by other sources. Industrial Projects Department May, 1974 ROMIA IA: OTELIOX STEEL PR)JE tin Lei MilI'on) 128 1y7 1980 1984 19821f1 1985 1 9 -8 18- Production CO3hill - in % of capacity 22% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% - in TPY 6,700 27,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Bar Mill - in % of capacity 45% 914% 100% 100% 100% 100% 100% 100% 100% 100% 100% - in TPY 5oa i000 112,500 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 Net Sales9361205 DomestiC:Cold Mill Products 280.0 981.5 93716 i,073.1 12085 1,253.7 1,253.7 1,253.7 1,253.7 1,253.7 1,253.7 Bar Mill Products 351.0 902.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.o Exports:. Cold Mill Prodwts - 1.46. 8 316.1 1L80.6 45.2- - Total 631.0 27M. 2 07 2,820.7 2,220.7 2, 7 0 2,220.7 2,220.7 2,220.7 2,220.7 Cost of Goods Sold: Direct Raw Materals 410.2 1,319.7 1,400.3 1,400.3 1,400.3 1,400.3 1,400.3 1,400.3 1,400.3 1,400.3 1,400.3 Auxivlary Materials 25.2 81.2 85.3 85.3 85.3 85.3 85.3 85.3 85.3 85.3 85.3 Utilities 12.6 40.6 43.4 43.4 43.4 43.4 43.4 43-4 43.4 43.4 43.4 Labor 29.0 37.2 45.5 45.5 45.5 45.5 45.5 45.5 4--5.5 45.5 45.5 Oross Profit 25.0 M 7 6 2 -V 646.2 646.2 Oerating Exqsenses General Factory Overhead 15.6 22.2 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.1 23.1 Maintenanee and Repair 61.0 96.5 97.5 97.5 97.5 97.5 97.5 97.5 97.5 97.5 97.5 Depreciatio 176.0 176.0 176.0 176.0 176.0 176.o 176.0 176.0 176.0 176.0 176.0 Benefits -98.6 256.9 349.6 349.6 349.6 349.6 349.6 349.6 349.6 349.6 349.6 Tnterest on IBRD Loan 63.0 121.7 112.2 104.5 96.4 87.6 78.2 68.1 57.2 45.5 33.0 Benefits After Interest Charges -161.6 135.2 237.4 245.1 253.2 262,0 271.4 281.5 292.4 304.3 316.6 =~~ = - Note: Details of Revenue Calculations are given in Annex 7-4 and of Production Cost are given in Annex 7-2. 3 Industrial Projects Department May, 1974 ROMANIA: OTELINOX STEEL PROJECT SOURCES AND APPLICATION OP FUNDS PROJECTIONS (1974-1984) (in Lei Million) 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 SOURCES I. From Operations: -- Benefits - - - - -98.6 256.9 349.6 349.6 349.6 349.6 349.6 -- Depreciation _ - - - 176.0 176.0 176.0 176.0 176.0 176.0 176.0 Cash Generation - - - - 77.4 432.9 525.6 525.6 525.6 525.6 525.6 II. IBRD Loan 4.0 249.0 318.8 549.1 279.1 - - - - - _ III. State Advances for: -- Fixed Assets (a) Foreign - 49.3 65.7 147.8 65.7 - - _ _ _ _ (b) Local 122.2 328.6 764.1 370.7 9.9 - - - - - - -- lforking Capital - - - - 50.9 96.8 12.3 - - - - -- Financial Charges (a) Foreign 3.6 20.1 38.9 74.2 46.5 - - - - _ _ (b) Local 0.0 2.6 7.7 17.2 11.1 - - - - - -- To Cover Losses and Obligations - - - - 99.5 - _ - - _ _ TOTAL 129.8 649.6 1,195.2 1,159.0 640.1 529.7 537.9 525.6 525.6 525.6 525.6 APPLICATIONS I. Fixed Investment -- Foreign Currency 4.0 298.3 384.5 696.9 344.8 - - - - - - -- Local Currency 122.2 328.6 764.1 370.7 9.9 - - - - - -- Financial Charges 3.6 22.7 46.6 91.4 57.6 - - - - - - II. Surplus Before Compulsory Allocations - - - - 77.4 432.9 525.6 525.6 525.6 525.6 525.6 of which: (a) Interest on IBRD Loan - - - - 63.0 121.7 112.2 104.5 96.4 87.6 78.2 (b) Repayment of IBRD Loan - - - 48.9 103.1 110.8 118.9 127.7 137.1 -- Depreciation Allocation 1/ - - - - 176.0 176.0 176.0 176.0 176.0 176.0 176.0 -- Benefit Allocation 1/ (a) State Budget 2/ - - - - - 25.7 35.0 35.0 35.0 35.0 35.0 (b) Workers Bonus 3/ - - - - 0.6 0.7 0.9 0.9 0.9 0.9 0.9 (c) Non-Centralized Investment Funds 4/ - - - - - 3.9 5.2 5.2 5.2 5.2 5.2 (d) Reserve Fund 5/ - - - - 0.3 0.7 0.8 0.8 0.8 0.8 0.8 (e) Other Allocations 6/ - - 225.9 307.7 307.7 307.7 307.7 307.7 III. Working Capital Increase - - 50.9 96.8 12.3 - - - - TOTAL 129.8 649.6 1,195.2 640.1 529.7 537.9 525.6 525.6 525.6 525.6 a == =- - - - - - 1/ Detailed explanation of allocation of depreciation as well as benefits is contained in Annex 8-1. 2/ 107. of planned benefits. 3/ 2Z of wage and salary bill. 4/ 1.5% of benefits for repairs and replacement. 5/ Maximum allocation possible, 0.57. of working capital, is assumed. 6/ Includes certain other allocations, such as centralized investment funds, with the residual going to the Stage Budget as explained in Annex 8-1. Industrial Projects Department May, 1974 ROMANIA: OTELINOX STEEL PROJECT BALANCE SHEET PROJECTIONS (in Lei Million) 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 ASSETS I. Current Assets Cash - - - - 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Reserve Funds - - - - 0.3 1.0 1.8 2.6 3.4 4.2 5.0 Inventory - - _ _ 50.4 147.2 159.5 159.5 159.5 159.5 159.5 - - - - 51.2 148.7 161.8 162.6 163.4 164.2 165.0 II. Fixed Assets Gross Fixed Assets 129.8 779.4 1,974.6 3,133.6 3,545.9 3,549.8 3,555.0 3,560.2 3,565.4 3,570.6 3,575.8 Less: Accumulated Depreciation - - - - 176.0 352.0 528.0 704.0 880.0 1,056.0 1,232.0 Net Fixed Assets 129.8 779.4 1,974.6 3,133.6 3,369.9 3,197.8 3,027.0 2,856.2 2,685.4 2,514.6 2,343.8 TOTAL ASSETS 129.8 779.4 1 974.6 3X133.6 3,421 1 3,346.5 3,188.8 3018.8 2,848.8 2,678.8 2,508.8 LIABILITIES I. Current Liabilities Current Portion of Long-Term Debt _ - _ - 48.9 103.1 110.8 118.9 127.7 137.1 147.2 - - - - 48.9 103.1 110.8 118.9 127.7 137.1 147.2 II. Long-Term Debt (IBRD) 4.0 253.0 571.8 1,120.9 1,351.1 1,248.0 1,137.2 1,018.3 890.6 753.5 606.3 III. Equity State Funds for 1/ (a) Fixed Assets 125.8 526.4 1,402.8 2,012.7 1,969.9 1,842.8 1,769.9 1,704.7 1,647.6 1,599.3 1,560.4 (b) Working Capital - - - - 50.9 147.7 160.0 160.0 160.0 160.0 160.0 Non-Centralized Investment Funds 2/ - - - - - 3.9 9.1 14.3 19.5 24.7 29.9 Reserve Funds 2/ - - - - 0.3 1.0 1.8 2.6 3.4 4.2 5.0 125.8 526.4 1,402.8 2,012.7 2,021.1 1,995.4 1,940.8 1,881.6 1,830.5 1,788.2 1,755.3 TOTAL LIABILITIES 129.8 779.4 1,974.6 3,133.6 3,421.1 3,346.5 3,188.8 3,018.8 2,848.8 2,678.8 2,508.8 RATIOS: Long-Term Debt/Equity Ratio 3:97 32:68 29:71 36:64 40:60 38:62 37:63 35:65 33:67 30:70 26:74 Current Ratio - - - - 1.1 1.4 1.5 1.4 1.3 1.2 1.1 Debt Service Coverage (times) - - - - - 3.2 3.0 2.9 2.9 2.8 2.8 1/ All State funds (interest free) to the enterprise are considered as equity. Drop in equity is because all the initial advances for the project are recouped by the State through depreciation amounts (see Annex 8-3). 2/ Both the Non-Centralized Investment Funds and the Reserve Funds are held by the Central (see Annex 8-1) and may be redistributed to any of the enterprise within the Central. Here the assumption is that Otelinox allocates the maximum allowable to these funds and receives back from the Central the entire amount allocated, in the same year the allocation is made. Industrial Projects Department May, 1974 ANNEX 8-5 Page 1 ROMANIA: OTELINOX STEEL PROJECT MAJOR ACCOUNTING PRACTICES 1, *There are some differences between the financial statements pre- pared by industrial enterprises in Romania and the ones prepared under the generally accepted accounting practices followed by most Bank borrowers; the type of statements as well as their frequency and format are slightly different. While the statements prepared by the Romanian enterprises may not be considered adequate by financial analysts in a conventional financial system, they seem well suited to the Romanian industrial and financial system. 2. Basic Oblectives of Statements: The main differences arise from the difference in the usage of financial statements in the two systems, due to various sources of financing available to commercial organizations. In economies with a predominant private sector, the main source for financing new investments is the capital market. In such a system, the investment and financing decisions, though interconnected, are taken separately and by a different group of people. The management of a corporation decides on new investments; the bankers and the leaders of the financial markets evaluate the overall financing needs and the creditworthiness of the corpora- tion before agreeing to provide additional financing. Generally, the fi- nancing is flexible and is not tied to individual investments. Consequently, the financial statements are designed to provide the lenders sufficient in- formation to enable them to judge the creditworthiness of the company rela- tive to other borrowers. The accounting and audit practices are designed to ensure consistency and accuracy of the statements, to meet this basic objec- tive. In Romania, the State is the only source of financing. It also takes all investment decisions. As a result, both investment and financing deci- sions are taken by the same supreme body. The responsibility for financing is assumed by the State at the same time as it approves the investment. The financial statements in Romania do not perform the primary information func- tion as in market economies. They are instead designed to ensure that com- merical entities dovetail their activities to the National Plan; they are primarily a planning and control tool. Romanian accounting and audit systems are tailored to meet this objective. For example, instead of identifying the investment funds by their sources, the balance sheet identifies them by investment categories as the financing is approved for specific investments and not for aggregate requirements of the enterprise. Some of the major differences between the financial statements prepared under the two systems are described below. 1/ 3. Financial Statements: Types and Timing of Preparation: In Romania, each Central and enterprise prepares four major sets of financial statements 1/ Details of the funds flow and financial audit methods are described in Annexes 8-1 and 8-6 respectively. ANNEX 8-5 Page 2 annually, two for the planning of next year's operations -- the Investment Plan and the Financial Plan, which detail sources and uses of funds; and two to show past year's performance -- the Balance Sheet and an annex to the Balance Sheet which closely resembles a normal income statement. There are a large number of other annexes to the Balance Sheet. In addition, a variety of statistical reports are prepared. A hypothetical balance sheet prepared by the Steel Central in 1973 is attached as an example. It is understood that even though individual enterprises have long-term production plans, they do not prepare balance sheets for any future years. 4. A new enterprise does not start making its balance sheet until the plant is officially commissioned, i.e., it is certified that the "technical tests" have been successfully completed; until then, only the Investment Statement and the Financial Plan are prepared. 5. Difference in Format: The Balance Sheet is prepared in a different format reflecting Romanian practices on financing of new investments 1/. The major different feature of the Romanian Balance Sheet is in the presentation of the liabilities; they are listed primarily according to the type of invest- ments they have financed rather than the source of funds. There are three major sources of funds for investments available to an enterprise: its "own funds" in form of depreciation and a share of benefits, allocations from State Budget, and credits from banks. However, as shown in the attached Balance Sheet a breakdown of liabilities according to these sources is not given. Instead, the liabilities are shown according to the use of funds for different types of assets, a practice which makes the liability side of the balance sheet look very similar to the asset side. This is perhaps due to the three factors mentioned earlier: (i) the State is the only source of financing; (ii) funds are provided for specific investments and not for the overall needs of the enterprise; and (iii) until recently, credits -- long- and short-term -- were a negligible source of financing. 6. As a result, some of the comparable information readily available from the Balance Sheets normally submitted to the Bank Group by other borrowers, would not be presented in the usual Romanian Balance Sheets. This includes: (i) breakdown of liabilities by major sources of funds: own funds, State allocations and bank credits; (ii) debt/equity ratio; (iii) breakdown of debt by current and long-term liabilities; and (lv) breakdown of own funds between equity capital and retained earnings. However, such information which would be considered vital for an enterprise seeking funds from a conventional system is perhaps neither needed nor rele- vant in the present Romanian financial system. Investments are decided dur- ing the national planning exercises; once the investment is approved, funds 1/ See the hypothetical balance sheet given in Appendix I. ANNEX 8-5 Page 3 are automatically authorized, and the performance of an enterprise is pri- marily judged by its physical achievements rather than its profitability. In addition, until January 1973, a very minute part of investment funds came in the form of long-term loans. With much larger long-term credit in- vestments now permitted and especially in the case of enterprises receiving IBRD loans, this situation would change and the Bank Group will insist that debt liabilities be shown separately in the Balance Sheets. 7. Payments/Receipts Mechanism: The enterprise itself does not make any major payments to other organizations. For example, even though when the annual investment plan is approved and funds are earmarked for the enterprise, the actual payments are made semi-monthly by the National Bank to the Invest- ment Bank and not to the enterprise. This seems to serve two objectives: (i) it ensures that the surplus cash (cash lying idle) is reduced to the minimum in the economy as a whole; (ii) it acts as a part of the overall control system (see Annex 8-6). Perhaps for similar reasons, payments against all major allocations to the State are made twice a week by large enterprises; all small units do so once a month. These payments include (i) Regularization Tax, (ii) Tax on Circulation of Goods or Turnover Tax, (iii) Taxes on Salaries, and (iv) Allocation of Benefits. 8. Balance Sheet: Paragraphs 9 and 10 give definitions of major ac- counting terms used in Romanian financial statements. While reviewing the Balance Sheets, it should be noted that the current assets are kept at a minimum possible level as a part of the national policy. Within the indus- trial sector, it is against the law to sell or buy goods on credit; there are no credit arrangements between enterprises and their customers. 9. "Fixed Assets" show the book value of all fixed assets in enter- prises that have already been commissioned and always equal "Own Funds and Allocations for Fixed Assets." The productive life of each major category of assets is specified by law (e.g. 20 years for a rolling mill) and assets are depreciated under the straightline method. However, even after this legal life is over, the assets are depreciated at full rate until they are scrapped and sold to a special State enterprise formed for this specific purpose. Depreciation on assets that have exceeded their expected lives is not included in accumulated depreciation. "Investment in Progress" in- dicates the total cost of projects that have not yet been completed and is equivalent to "Financing of Investment in Progress." Once the investment is certified "commissioned", it is taken out of the "Investment in Progress" category and entered into the "Fixed Assets" category. No depreciation is charged on any asset until it is "commissioned" and production starts. 10. Within the "Working Capital" section, semifinished and finished products inventories include not only the goods ready to be shipped between sections or out of the factory, but also products already shipped for which payments have not yet been received. The latter are equivalent to 3-5 days' sales, the time taken by the National Bank to receive authorization for pay- ments from the buyers; in the meantime, the National Bank provides credits ANNEX 8-5 Page 4 equal to the production cost of such materials. Packaging materials re- present the stock of reusable containers. Pecuniary assets refer to the amounts held in bank accounts plus a small amount of petty cash. Accounts receivable from transactions that involve less than 500 lei and consequently do not go through the National Bank are treated separately in accounts re- ceivable involving small amounts. Accounts receivable from related organiza- tions indicates transfers to be made. "Goods-in-Process" include only pro- ducts that have not been completed within a shop. Section B on the liability side of the Balance Sheet covers current liabilities and all the self-financing of inventory from own funds. Special funds include funds for prizes, non- centralized investment, etc. and are allocated from profits. 11. Payments to the State consist of remittances still to be credited to the State Budget. It is interesting to note that while most of the pay- ments are made in advance and the adjustments are supposedly made at the end of the year, these allocations appear both as assets (paid in advance) and liabilities (owed to the State) instead of the two entries cancelling each other when the books are closed at the end of the year. This is because these accounts are settled about two weeks after the books are closed for the year. This and some other minor entries which are double counted tend to slightly inflate both the current assets and current liabilities. According to the Romanian system, sections B plus D on the asset side must equal the two similar sections on the liability side of the Balance Sheet. 12. Income Statement: The following entries in the Romanian income statements are worth nothing: (i) Revenues are calculated on the basis of the product price which is less than the price paid by buyers by the amount of the Regularization Tax and the Tax on Product Circulation (Turnover Tax) determined separately for each product and paid directly to the State budget. However, these taxes are not applicable in the case of steel products. (ii) A product is considered sold only when payment is received for the shipment and not when the invoice is raised or the product physically shipped. Thus even though a product is shipped and an invoice raised, it will not be considered sold but will be carried in selling enterprise's books until the payment is received; to this extent, the sales are on a "cash basis" and not on an "accrual basis". (iii) Interest charges, being very small, are not shown separately in the income statement; it is normally included along with other overhead costs which also contain administrative and overhead costs. However, it should be noted that the interest charges on the IBRD loan would not be included here but treated as a separate expense item, below the benefit (profit) entry. This would/prevent reduction of profits of an enterprise obtain- ing IBRD loans relative to other enterprises in the same sector. ANNEX 8-5 Page 5 (iv) Benefit is equivalent ot profit before tax even though it is the bottom line of the income statement. All allocations, like the State Budget allocations, the Workers Bonus, etc. whether mandatory or optional, are made in accordance with the approved Financial Plan and are not shown in the income statement. In this context, it may be noted that the product price of a pro- duct, which determines the revenue, is fixed at a level where the profitability 1/ of the industry would be acceptable. The product price may be altered to bring the profitability and hence benefits to acceptably levels. 13. All financial statements prepared by the Bank are in accordance with the conventional system taking into account the peculiarities of the Romanian system. 1/ Romanians use the word rentability which is equal to Benefits t Production costs, including depreciation and overhead costs. ROMANIA: OTELINOX STEEL PROJECT HYPOTHETICAL BALANCE SHEET IN LEI MILLION Beginning End of Beginning End of of Year Reporting Period of Year Reporting Period A. FIXED ASSETS 17,719 18,944 A. OWN FUNDS AND ALLOCATIONS FOR 17,719 18,944 FIXED ASSETS -- Book Value (gross) 25,331 27,350 -- of which: bank loans 63 44 -- Accumulated Depreciation 7,612 8,406 B. WORKING CAPITAL 3,251 3,641 B. OWN FUNDS, 1DAlN AND 3,191 3,551 PAYMENTS FOR WORKING CAPITAL 1. Material inventories 1,633 1,714 1. Own funds 1,854 1,974 2. Semi-finished and finished 1,271 1,494 products anventorie) 2. Working!eapital loans 859 1,024 3. Packaging materials 2 4 3. Accounts payable involving 352 396 small amounts 4. Pecuniary assets 58 146 4. Accounts payable to related 67 3 5. Accounts receivable involving 17 29 organizations small amounts 5. Future income and penalties 1 1 6. Accounts receivable from 8 13 payable related organizations 6. Unpaid expenses 4 12 7. Prepaid Expenses 30 38 I 7. Special funds 54 142 8. Goods-in-process. 219 203 C. INVESTMENT IN PROGRESS 4,277 5,199 I C. FINANCING OF INVESTMENT IN PROGRESS 4,277 5,199 D. RENITTANCES TO THE STATE 2,363 2,532 D. OWIED T'O THE STATE 2,424 2,622 TOTAL 27,610 30,316 TOTAL 27,610 INDuSTRIAL PROJECTS DEPARTM1ENT January 17, 1974 ANNEX 8-6 Page 1 ROMANIA: OTELINOX STEEL PROJECT CONTROL AND AUDIT SYSTEM 1. To support its highly centralized decision-making process, Romania has, at least in its industrial sector, an elaborate control and audit system designed to keep the managers at all levels of the economy advised of the progress of, and deviations from, the planned activities. This control system is backed by a fairly strong incentives system. The system, de- scribed below, includes not only the audit system generally used by the industry in other economic systems familiar to the Bank Group, but also the work generally performed by Corporate Controllers, National Controller Generals and Audit Groups (like the GAO in the USA), as well as some of the duties entrusted to the National Courts dealing with judicial cases concern- ing commercial activities. It has three major objectives: (i) to audit the financial accounts to ensure that they accurately reflect the actual finan- cial status of the unit; (ii) to report to higher authorities that the eco- nomic assets are being used efficiently and effectively in accordance with the national plan; and (iii) to recommend changes desirable to improve the economic use of the assets in future. 2. The control and audit system is organized like a pyramid as shown in Table 1: at the top is the Court of Superior Control reporting directly to the President of the country, while at the bottom are the accountants checking and approving routine day-to-day financial transactions at the enterprise level. The numerous organizations involved perform either the "Internal Control" or the "External Control" duties. The Internal Control, conducted by the accountants and internal controllers working either for the Enterprise or its Ministry, can be divided in two broad categories: first, the preliminary control which involves a day-to-day check of all financial transactions; second, the posterior control which resembles annual audits. The External Control, simultaneously carried out by three main organizations, the Banks, Ministry of Finance and the Court of Superior Control, which are independent of the Ministry concerned, also has the preliminary and posterior control functions. As described below, all the bodies involved perform their functions independently of each other and report to different authorities. Thus an enterprise, during a period of one year, is controlled by (i) its chief accountant who reports to the manager and also to the General Manager of the Central; (ii) the internal controller, who submits reports both to the General Manager of the Central and the Minister concerned; (iii) the inspectors from the Investment Bank and/or National Bank, whose reports are also available to the Ministry of Finance, (iv) the controllers from the Ministry of Finance; and (v) the inspectors from the court of Superior Control, whose reports can reach the Council of Ministers and the President himself, if necessary. ANNEX 8-6 Page 2 A. Internal Control System 3. Preliminary Control: The chief accountant at each commercial unit, e.g. Enterprise, Central, performs the "preliminary control" functions which combine activities of both the accountants and controllers as familiar to us. He is responsible for checking and approving all financial transactions, e.g. payments, orders, etc. to ensure that the business is conducted in the most economic way and according to the approved plans. He reports directly to the General Manager of the unit and is supposed to report any disagree- ments to the manager of the supervising unit. For example, if the chief ac- countant of an Enterprise does not agree with a payment authorized by the manager, he is expected to report it to the General Manager of the Central. To ensure the objectivity and independence of the chief accountant, he is nominated by the supervising unit or the Ministry and cannot be changed by the management of the unit he audits. This system may be further modified under a new law on "Internal Control" which is now being drafted as a follow- up of the recent policy decision to create the Court of Superior Control (see para 13); under this new law the chief accountants may be subordinated to the Ministry of Finance instead of the Ministry of the Central concerned as at present. 4. Posterior Control performed by the special "Internal Control Units", is somewhat similar to the work performed by the certified accountants and/or national audit organizations. These control units spotcheck financial trans- actions conducted during the year and evaluate the financial state of the company, including the actual value of its stated assets. The audit must be conducted at least once a year for all enterprises, unless specially exempted by the Ministry of Finance; such exemptions are given to very small units like shops, schools, hospitals, etc., which are generally audited once every 2-3 years. The audit involves a check of 14 items listed in law No. 5 of 1970; some of the items are: - Inventory: quantity, quality and value - Payments, receipts, etc: their accuracy and validity - Documents, e.g. orders, checks - Entries in accounting books: their conformity to the rules of the Ministry of Finance - Status of assets and liabilities: actual vs book entries - Techno-economic indicators, e.g. productivity, input/output ratios, etc.: their accuracy. Thus, an internal audit not only certifies the correctness of the financial books but also presents an opinion about the efficiency of operations. ANNEX 8-6 Page 3 5. The accounts of a unit are examined by the Internal Controller lo- cated in its supervising unit; accounts of a department are checked by the control unit in the Enterprise, while the accounts of the Enterprise are checked by the control unit in the Central. This internal audit is the basis of all other higher audit/control activities designed to monitor the efficiency of the economy. The Internal Controller is expected not only to give an opinion on the financial status of the unit, as done by the certified accountants in the USA, but also to check other items like the techno-economic indicators and to make recommendations on the improvements desired in the organization. The internal audit also establishes the differences, with their reasons, between the actual status and recorded entries. The chief accountant of the organiza- tion takes into account these comments before issuing the final financial state- ments. It is understood, however, that the Internal Controllers do not certify the accuracy of the final statements, which is the responsibility of the chief accountant. 6. The Internal Controllers are nominated by the Ministry concerned and approved by the Ministry of Finance. However, an Internal Controller can neither be transferred nor removed without prior approval from the Min- istry of Finance. Under the new draft law on Internal Control procedures mentioned earlier, the power to approve the appointments and transfers of the Internal Controllers may be shifted from the Ministry of Finance to the Court of Superior Control. This measure, designed to make the controllers even more independent from the operational managers, may be promulgated by December 1973. B. External Control System 7. This audit/control function is performed by organizations outside the operational units. The Banks perform the day-to-day "preliminary con- trol" of purely financial matters, and seem to have the primary responsibil- ity for conventional audit functions, the Ministry of Finance and the Superior Control Court audit the techno-economic performance on "posterior" basis and seem to concentrate on the financial control aspects. 8. Preliminary External Control by Banks: Four banks (the National Bank, Investment Bank, Food and Agriculture Bank, and Foreign Trade Bank) are involved in this work. The law requires the Romanian banks to monitor, and ensure the "economic" use of, their investments in the industrial units, much more than, for example, a bank in the US would. The Banks not only com- ment extensively on the desirability of an investment before it is approved by the State, but also supervise and certify the appropriateness of invest- ment work before releasing payments against supplies. In addition, the Na- tional Bank not only approves the working capital included in the annual financial plan, but also monitors actual requirements during the year. No transactions can be paid for without an approval from the bank concerned. ANNEX 8-6 Page 4 9. Each bank must monitor its own investments. Investment Bank, which provides financing for all new projects in every sector except agriculture and food, supervises projects under construction while the National Bank, which finances the working capital needs of on-going projects, supervises the units in production. Thus, an enterprise may be "controlled" by more than one bank at the same time. For example, the Craiova Central, which is executing ex- pansion projects and also has production units already operational, has its accounts concerning the production audited by the National Bank and accounts concerning the expansion projects checked by the Investment Bank. 10. The checks are fairly elaborate. For example, in the case of a large investment, the Investment Bank will: - comment on the techno-economic study with particular reference to the investment plan and forward its comments to the Council of Ministers before it approves an investment; - receive a copy of the techno-economic study, which gives all financial and technical data on the project, as approved by the Council of Ministers. The Investment Bank is obliged to ensure that the project is executed according to this plan; - approve all payments after checking that the supplies conform to the purchase orders; - approve any variations from the approved contracts. It may impose penalties on the defaulting parties; - check that the project is proceeding according to the sched- ule approved in the plan; - make all payments and is the conduit for all investment funds, irrespective of source, allocated to the project. 11. Similarly, the National Bank must approve the working capital needs of the enterprise/central; it determines, in consultation with other parties concerned, the norms to be applied in calculating the working capital needs of an enterprise. At the beginning of the budget year, it approves the budget allocation based on these norms; any additional needs must be justified by the Enterprise to the National Bank. During the year, it periodically monitors the actual needs; if the Enterprise needs funds above the budget allocation, it must seek specific approval for them from the Bank. 12. Ministry of Finance: oversees the work of all the ministries. Through its own controllers and by reviewing the reports of the Internal Controllers (at the Ministries, Centrals and Enterprises), it ensures that the actual performance is in conformity to the annual plan approved for each Ministry, and that the accounts of the Ministry and the Centrals/ Enterprises under it are maintained properly. The Finance Ministry reports ANNEX 8-6 Page 5 its findings to the Council of Ministers. Any expenditures exceeding the allocation in the annual plans approved for a Ministry/Central must be evaluated by the Finance Ministry and approved by the Council of Ministers. 13. Court of Superior Control: is a successor to the Account Court established in 1864 and abolished in 1948; the Superior Court was created under a new law promulgated on March 28, 1973. Most of the functions now performed by this court were handled by the Ministry of Finance between 1948 and 1973. The court reports directly to the President of Romania; its prim- ary function is to control the main state bodies in Romania, e.g. the Min- istry of Finance, other Ministries and the Banks. It performs both the "preliminary" and the "posterior" controls. 14. The preliminary control is performed by the controllers (inspectors) in each Ministry to ensure that the work is performed efficiently and the funds are employed effectively. If the controller disagrees with any specific trans- action, he discusses his findings with the Minister concerned. In case they are unable to resolve the issue at this level, the controller presents his report to the Superior Court. If the Court concurs with the objections of the controller, the matter is taken to the Council of Ministers for a deci- sion, where both the Minister and the Court present their arguments. If the Council overrules the objection raised by the Court, the President of the country receives a report from the Court for his information. 15. Similar procedure applies in case of the posterior control in which inspectors from the Court audit the accounts of the State Bodies mentioned earlier. The inspectors may also audit accounts of the Centrals, though at present it is not done on an annual basis. The main objective of this con- trol is to ensure that the main objectives of the National Plan are being achieved, "economic efficiency" is being attained as planned, and the Cen- tral Fund for Economic and Social Development, the main source of investments in Romania, is being economically used. 16. The Court, to perform its function, receives the following reports regularly: - Quarterly reports from the banks on their financial status; - Finance Ministry's control reports; - Annual internal control reports from each Ministry, including recommendations made by the Internal Controllers. The Court prepares its annual report which is submitted to the President and the State Council. In this report, the Court also makes recommendations on the possibilities of improving the economic use of national resources. The Court evaluates the reasons for the shortfalls in meeting the plan targets and fixes the responsibility for them. ANNEX 8-6 Page 6 17. The Court has three other major responsibilities: (i) It acts as the coordinating body for the overall control system in the country; it ensures that there are no duplica- tions and suggests means for improving the system. (ii) It acts as the counsellor of the State Council. For example, the President of the State Council may ask it to express its opinion on state laws. (iii) It is a judicial court: it analyses the 'damages' to the na- tional economy due to economic mismanagement, fixes respon- sibilities for such damages and determines what, if any, penalties/punishment should be imposed on the individual(s) concerned. However, only cases involving the senior officials like the Ministers, Director Generals in the Ministries and the General Managers of the Centrals are considered by the Court of Superior Control. Industrial Projects Department May, 1974 ANHJLE B-6 Appendix 1 ROMANIA INDUSTRIAL SECTOR CONTROL & AUDIT SYSTEM Council. Einemtry of s_ ______ __Co_t_o__er L1 h Mnostry of 14*t , Fins E- | bl4"n E"""""""""s|||Z||| ~~~~~~~~~~~~~~~~~~~~~. E|§||.............. ..;..... E.- ......... , - ......... ....|||" , ................... ........... ....*. L Interna[x Organiation Unit flnlmii Cotal Fntrciail- E t:::- ; s 3 3 E~~~~~~~~~~le:: C ~ Z] Internal Control -Preliminary [Z] internal Control -Posterior - E.teral Control Banks - F-i is 3 E External Control -Ministry of Financ Court of Superior Control ,0r uerantIjI I , ' e*ne* Reports to Normal Audit Channel * Audit Chaneil in specia cases World Bunk.8401 ROMHNIA: OTELUIOX STEEL PROJECT FINANCIAL RATE OF RERUIW in Lei Million 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 COLD MILL Revenues - - - - 280.0 1128.3 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 1253.7 Costs Capital Costs 69.3 330.2 566.9 461.9 192.7 70.5 10.3 - - - - - - - - - - - - - - Raw Materials - - - - 166.7 682.1 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 757.9 Operating Expenses - - - - 68.4 166.3 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 177.4 Net Benefits (69.3) (330.2) (566.9) (461.9) (147.8) (209.4) 308.1 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 318.4 Financial Rate of Return: 13. BAR MILL Revermes - - - - 315.0 902.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 967.0 Costs Capital Costs 56.9 296.7 581.7 605.7 212.9 26.3 2.0 - - - - - - - - - - - - - - - Raw Materials - - - - 289.1 603.9 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 642.4 Operating Expenses - - - - 75.0 111.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 117.4 Net Benefits (56.9) (296.7) (581.7) (605.7) (262.0) 160.4 205.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 207.2 Financial Rate of Return: 6.80% OTELINOX (Cold Mill and Bar MlIll combined) Revenues - - - - 631.0 2030.3 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 2220.7 Costs Capital Costs 126.2 626.9 1148.6 1067.6 405.6 96.8 12.3 - - - - - - - - - - - - - - Raw Materials - - - - 455.8 1286.0 1400.3 1400.3 1400.3 1400.3 1400.3 1400.3 1400.3 1400.3 1400.3.3 143 1400.3 1400.3 1400.3 1400.3 1400.3 1400.3 Operating Expenses - - - - 143.4 277.7 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 294.8 Net Benefits (126.2) (626.9)(1148.6)(1067.6) (373.8) 369.8 513.3 525.6 525.6 525.6 525.6 525.6 525.6 525.6 525.6 525.6 525.6 525.6 52506 525.6 525.6 525.6 Financial Rate of Return: 12.8' ldiBtrial Projects Departnent May 1974 ANNEX 8-& ROMANIA: OTELINOX STEEL PROJECT BREAK-EVEN POINT The profit break-even points of the Otelinox plant and of the cold mill and bar mill separately in 1980 are calculated based on the following data. The year 1980 is selected because that is the year in which first full capacity production is expected. In Lei Million Cold Mill Bar Mill ToTal Otelinox Variable Fixed Variable FixedViiab2e Fixed Cost Cost Cost Cost Cost Cost Raw Material 757.9 - 642.4 - 1,400.3 - Auxiliary Materials 54.7 13.7 13.5 3.4 68.2 17.1 Utilities 20.7 2.3 18.4 2.0 39.1 4.3 Wages - 21.7 - 23.8 - 45.5 maintenance 41.5 10.4 36.5 9.1 78.0 19.5 Depreciation - 84.7 - 91.3 - 176.0 Overhead 6.2 6.2 5.4 5.3 11.6 11.5 Financial Charges - 64. - - 112.2 881.0 203.2 716.2 182.91,597.2 386.1 Revenue 1,253.0 967.0 2,220.7 Break-even Point (capacity %) 54.6% 72.9% 61.9% ANUEX 8- 8 Pageo 2 BREAK- EVEN POINT 22 20 18 16 SEA".V POWN 1 .& / - .---- 12 I 00 6 / I 2 0 L i ,.9 20 140 60 ao 100 Industrial ProjectE Department PERCENTAGE Of OPERATION Januar-y 197h ANNEX 9-1 ROMANIA: OTELINOX STEEL PROJECT ECONOMIC RATE OF RETUR AND SENSITIRITY TESTS Assumptions 1. International prices for special steels and semi-products for 1973 are estimated in Annex 3-2, using 1972 as the normal year for steel prices. on that basis, the price for stainless sheet and strip per ton in 1973 is estimated (Annex 3-2) at US$1 902.5 (Lei 38,050) and for alloy steel rods and bars, US$473.0 (Lei 9,i465S. To those prices, transportation cost/ton of US$28 (Lei 560) has been added -- the average transportation cost (c.i.f) to Romanian border from France, Italy, Germany, Sweden and Japan, the countries from which Romania would be importing the type of products proposed for Otelinox if the project were not built. On this basis, the accounting prices per ton of Otelinox finished products are: stainless sheet and strip, US$1,930.5 (Lei 38,610) and for alloy bar products, US$501 (Lei 10,025). 2. As for the semi-products proposed for rolling at Otelinox -- hot- rolled bands and billets -- the 1973 international prices are estimated (Annex 3-2) at US$815.5 (Lei 16,310) for hot-rolled bands and US$278 (Lei 5,560) for billets. In the case of hot-rolled bands, Romania already produces them at its integrated steel plant at Galati, close to the Russian border. If the project were not developed, probably Romania would be selling 40,500 tons most probably to Eastern European countries. The transportation cost to the Russian border by train would be about Lei 10 per ton. Deducting it from the estimated international price, the economic accounting price for hot-rolled band is assumed to be US$815 (Lei 16,300). In the case of billets, Which are proposed for manufacture at Tirgoviste I, it is assumed that if the project were not developed, the former mould be shippingby rail about 146,500 tons of billets to the border with Italy for sale to Western European countries. The transportation cost from Tirgoviste to the Italian border is Lei 110. Deduc- ting it from the international price of Lei 5,560 per ton, the economic accoun- ting price is assumed at US$272.5 (Lei 5,450) for billets. 3. The following table shows the accounting prices (c.i.f. border) used for Otelinc output and inputs: Finished Products (Lei/ton) Stainless steel sheet and strip 38,610 Alloy rod and bar products 10,025 Main Inputs Hot-rolled coil 16,300 Billets 5,450 Auxiliary Tnputs Sulphluric Ac-i.d 700 Hydrofluoric Acid 45,040 Trichloroethylene 51940 Nitric Acid 1,770 Refractories 2,200 Back-up Rolls 33,000 Recoveries Scrap froim Cold Mill 2, 400 Scrap from Bar Mill 1,600 ANNEX 9-1 Page 2 Utilities (Lei/ton) Natural Gas Lei 250/1,000 Nm3 Power Lei 450/1,000 Kwh 4. Construction Period 4 years 5. Operation Period 18 years 6. Project Cost Lei 3,484 million (US$174.2 million) 7. Scrap Value 0 ROANI&: OTELINOX STEEL PROJECT ECONOMIC RATE OF RETURN CALCULATIONS Using'US$9l - Li 20 in Lei Million 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 COLD MILL Revenues - - - - 254.8 1042.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 1158.5 Costs Capital Costs 69.3 330.2 566.9 461.9 192.7 70.5 10.3 - - - - - - - - - - - - - - - Raw Materials - - - - 139.9 572.2 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 635.8 Operating Expenses - - - - 65.3 158.3 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 169.2 Net Benefits (69.3) (330.2) (566.9) (461.9) (143.1) 233.5 335.0 345.3 345.3 345.3 345.3 345.3 345.3 345.3 345.3 345.3 345.3 345.3 345,3 345.3 345.3 345.3 Economic Rate of Retu'rn: AA BAR MILL Revenmes - - - - 541.0 1130.8 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 1203.0 Costs Capitai Costs 56.9 296.7 581.7 605.7 212.9 26.3 2.0 - - - - - - - - - - - - - - - Raw Materials - - - - 340.0 710.1 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 755.5 Operating Expenses - - - - 71.2 104.4 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 110.3 Net Benefits (56.9) (296.7) (581.7) (605,7) (83.1) 283.0 328.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 330.1 Economic Rate of Returns OTELINOX (Cold Nill and Bar Mill Combined) Revenues - - - - 795.8 2173.3 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 2361.5 CGots Capital Costs 126.2 626.9 1148.6 1067.6 405.6 96.8 12.3 - - - - - - - - - - - - - - - Raw Materials - - - - 479.9 1282.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 1391.3 Operating Expenses - - - - 136.5 262.7 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 279.5 Net Benefits (126.2) (626.9)(1148.6)(1067.6) (226.2) 516.5 663.1 675.4 675.4 675.4 675.4 675.4 675.h 675.4 675.4 675.4 675.4 675.4 675.4 675.4 675.4 675.4 Economic Rate of Returnt 1 Industrial Projects Department May 1974 ROMANIA: OTELINOX STEEL PROJECT SENSITIVITY TESTS ON ECONOMIC RATE OF RETURN * Exchange Rate US$1 = 20 Lei ** Exchange Rate US$1 = 25 Lei Rate of' Return (%) ,r ~~~~~~~~40 o20 Revenue +2.% +20%.+10% -20% ...... 225% 1~ ,' Capta _os _ _ l._1 do, .0 0~~ 0 -20% -15% -10% -5% Base :Case +5% +10% +15 +0% t . I . -- . i I 1 . .5 2.p Revenue +25% +20% +10% j -10% -20% _25% Capita+124@st +20% I1%{-C 2% _5 Operating Cost Industrial Projects Department May 1974 ROMANIA: OTELINOX STEEL PROJECT FOREIGN EXCHANaE SAVINGS in Lei million 1978 1979 1980 1981 1982 1983 1984 GROSS SAVINGS/ 796.8 2173.3 2361.5 2361.5 2361.5 2361.5 2361.5 Less: Raw Materialsz/ 278.3 895-5 950.0 950.0 950.0 950.0 950.0 Spare Parts2/ 14.3 22.5 22.7 22.7 22.7 22.7 22.7 Amortization 0.0 48.9 103.1 110.8 11869 127.7 137.1 InterestW 63.o 121.7 112.2 1o4.5 96.4 87.6 78.2 NET SAVINGS (Lei) 441.2 1084.7 1173.5 1173.5 1173.5 1173.5 1173.5 (US$) 22.1 54.2 58.7 58.7 58.7 58.7 58.7 1/ Price assumptions are same as those used for economic rate of return calculations. 2/ Including basic foreign raw materials required to produce hot rolled sheets and billets used by Otelinox 3/ Mstly rolls. 4/ On IBRD loan. Note: Calculations are based on US$11 Lei 20 1! 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