FILE Copy DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 288a-YU APPRAISAL OF IMT TRACTOR FACTORY EXPANSION PROJECT YUGOSLAVIA January 28, 1974 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Yugoslav Dinars (Din). US$1 = Din 15.5 Din 1 = us$o.o645 Din 1,000 = US$64,516 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 (i3) = 35.32 cubic feet (cu ft) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED FMK-Knjazevac = Motorcultivator and Agricultural Implements Factory Knjazevac FOB = Fabrika Odlivaka Beograd IMR = Industrija Motora Rakovica IMT, the Company = Industrija Masina i Traktora SAS = Social Accounting Service UMI = Udruzena Metalska Industrija CKD = completely knocked down ha = hectare hp = horse power PKD = partly knocked down Fiscal Year January 1 - December 31 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS ............................. i - iii I. INTRODUCTION ........ ........................ 1 A. General ........................................ I B. The Role of the Bank ..... .............2 II. THIE COMPANY ..................... 2 A. Background ..................................... 2 B. Relationship with UMII ........................... 2 C. Organization and Management .................... 3 D. Plant Facilities at New Belgrade .... ........... 4 E. Past Growth and Financial Results .... .......... 4 F. Recent Financial Position ...................... 6 III. THE MARKET .......................................... 7 A. Supply and Demand for Tractors ................. 7 1. Recent Trends ............................. 7 2. IMT's Competitive Position .... ............ 7 3. Market Forecast ........................... 9 4. Availability of Credit .................... 12 B. Supply and Demand for Agricultural Implements ................... .................. 13 C. IMT's Marketing Organization ........ .. ......... 14 IV. THE PROJECT ..................... .................... 15 A. Technical Description .......................... 15 B. Manpower and Training .......................... 16 C. Ecology ........................................ 17 D. Project Execution .............................. 17 E. Project Timing ................................. 18 V. CAPITAL COST, FINANCING PLAN AND PROCUREMENT .... .... 18 A. Project Cost ................................... 18 B. Working Capital ................................ 19 C. Financing Plan ................................. 19 -2- TABLE OF CONTENTS (Cont.) Page No. VI. REVENUE, SUPPLIES AND OPERATING COST .... ............ 21 A. Escalation in the Financial Projections ........ 21 B. Sales Revenues ................................. 22 C. Raw Material, Parts and Supplies ............ ... 23 D. Operating Costs ................................ 23 VII. FINANCIAL ANALYSIS ...... ............................ 24 A. Future Profitability ............ .. .............. 24 B. Financial Position ............. .. ............... 25 C. Financial Rate of Return and Major Risks ... ..... 26 D. Debt Service Coverage ........... .. ............. 27 E. Break-even Point Analysis ......... .. ........... 27 F. Audit Requirements ............... .. ............ 28 VIII. ECONOMIC JUSTIFICATION .............................. 28 A. Economic Rate of Return .......... .. ............ 28 B. Farm Mechanization and Agricultural Developments ............... .. ................ 29 C. Employment Effect ....... ....................... 29 D. Foreign Exchange Effect ....................... 30 IX. AGREEMENTS REACHED DURING NEGOTIATIONS .... .......... 30 -3- Annexes 1 Description of Technical Terms 2-1 Description of Existing Facilities 2-2 Organizational and Managerial Structure 2-3 Organization Chart 2-4 IMT Production and Product Line 2-5 Historical Income Statements (1968-1972) 2-6 Historical Balance Sheets (1968-1972) 2-7 Definition of Terms Used in Financial Statements 3 Market Analysis 4-1 Detailed Project Description 4-2 Plant Layout 4-3 Manpower Projections and Training 4-4 Project Implementation Schedule 5-1 Detailed Project Cost 5-2 Estimated Working Capital Requirement 5-3 Bank Financed Items 5-4 Estimated Schedule of Disbursements 6-1 Production, Price and Revenue Build-up 6-2 Raw Materials, Parts and Supplies 6-3 Operating Cost Projections 7-1 Projected Income Statement (with and without expansion) 7-2 Projected Source and Application of Funds (with expansion) 7-3 Balance Sheet Projections (with and without expansion) 7-4 Financial Profitability 7-5 Sources and Uses of Foreign Exchange 7-6 Break-even Point Analysis 8-1 Economic Rate of Return and Sensitivity Analysis 8-2 Foreign Exchange Earnings MAP IBRD 10716 Location of Plants and Sales & Services Centers This report was prepared by M4iss Haug and Mr. Jaffe of the Industrial Projects Department with contributions from Messrs. Rao, Kitching, and Wilcox (consultants). YUGOSLAVIA IMT TRACTOR FACTORY EXPANSION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the expansion of Industrija Masina i Traktora's (IMT) plant in New Belgrade. IMT is the largest producer of wheeled tractors, tractor accessories and farm implements in Yugoslavia, and operates a tractor factory in New Belgrade, a motorcultivator plant in Knjazevac and a service and repair center in Dobanovci. This expansion is designed to increase the production capacity of IMT's New Belgrade plant from about 15,000 to 35,000 tractors per annum by 1976, including two new tractor types (20-25 hp and over 100 hp units), and almost triple the output of tractor accessories and agricultural implements to about 67,000 units per year. In the first stage of the project, to which the Bank loan would apply, the necessary production facilities will be installed, whereas the second stage, tentatively scheduled for 1978-79, comprises the further expansion of administrative and storage buildings. Civil and structural work was started in August 1973 and the scheduled completion date for the project (Stage I) is the second half of 1975. ii. Total financing required for the project is estimated at US$87.6 million equivalent, comprising US$55.1 million for fixed assets, US$24.6 million for working capital and US$7.9 million for interest during construc- tion. The foreign exchange component would be equivalent to US$24.6 million. iii. The proposed Bank loan of US$18.5 million would finance the full cost of approximately 75% of the equipment and would cover the cif cost of imported items and the ex-factory cost of locally manufactured equipment and spares. The loan would be for 14 years, including 3 years of grace. The effective interest rate to IMT would be 9% per annum, including a guarantee fee of 1-3/4% to the Republic of Serbia where the project is located. The remainder of the financing required for the project will be covered by loans from the Belgrade Bank (US$46.1 million), local suppliers' credits (US$1.1 million), bilateral credits from clearing countries (US$1.0 million) and internal cash generation (US$20.9 million). iv. Equipment and spare parts to be financed by the proposed loan would be divided into 76 packages and would be procured through international competitive bidding in accordance with Bank guidelines. For the purpose of bid comparison, Yugoslav bids would be given the standard preference of 15 percent or actual customs duty whichever is less. V. The project has high priority for the Yugoslav Government, since the Agreement for the Development of Agriculture ("Green Plan") envisages a 3%-5% per annum productivity increase in agriculture during the seventies and this target requires rapid growth of farm mechanization in the social and private sectors. To meet the growing domestic demand for agricultural machinery, the Yugoslav Government encourages the expansion of competitive domestic industries such as IMT. Although exports are not expected to account for more than 9% of IMT's total revenue and average US$9 million a year over the 1973-1983 period, average net foreign exchange savings to the economy - ii - resulting from the project are expected to be US$22 million per year, offset- t:ing in about one year the entire foreign exchange cost of the project. Faced with mounting debt service obligations on short and medium term suppliers' credits, and an increasing gap in the balance of trade, Yugoslavia needs to save foreign exchange through the expansion of competitive industries. vi. TMT has achieved a dominant market position among Yugoslav tractor manufacturers because of its comprehensive product range and widespread dealer organization. IMT's selling prices are on average about 20-30% below the border prices of comparable imported tractors from convertible currency countries. The standard tractor types are well designed, reliable and tech- nically competitive on the world market. The Company's nationwide sales and services network is well established and assures the supply of spare parts and matching farm implements. The project is designed to expand IMT's capa- city in line with domestic demand thus enabling the Company to maintain its market share. In view of the good quality of the IMT tractors, the Company's general services and the federal price control of tractors in Yugoslavia, IMT's expansion of domestic capacity can be considered an acceptable means of meeting Yugoslav tractor demand at the least cost to the Yugoslav economy. vii. The project is primarily oriented towards meeting domestic demand for tractors in agriculture, about 34,000 units per year during the coming decade. Exports and domestic tractor sales for nonagricultural use will respectively account for 4,000 and 3,500 units per year. The market pro- jections assume that the Yugoslav economy will aim at a level of farm mechanization of 1 hp/ha by 1980 in order to reach the agricultural growth target established by the Green Plan. Although financing of tractor sales is not a problem at present, the availability of credit for the projected level of sales, primarily for private farmers, will be crucial for maintain- ing growth in farm mechanization and assuring IMT's domestic market. viii. IMT's management is young and dynamic and has implemented three major expansions of its factories since 1966. The Company is headed by an experienced General Manager who was elected for a 4-year term in 1971 and who is supported by capable team of executives. In practice, the management takes all major decisions and has the full support of the Workers' Council. ix. The Company's projected long-term financial position is strong, and could allow the financing of the Stage II expansion (US$12.9 million) in 1978/79 by internal cash generation. Of total debt and equity employed, debt reaches a peak of 56% in 1975 but decreases to 30% by 1979, while debt service coverage remains adequate throughout the forecast period. x. The project has high financial and economic rates of return of 21% and 16% respectively. These rates are very sensitive to changes in operating costs and revenues; however, under foreseeable adverse conditions, the economic rate of return is unlikely to drop below 8%, or the financial rate of return belowT 10%. The project is expected to provide additional permanent employment for about 1,440 people and have a major employment generating effect on the supplier industries, since IMT predominantly machines and assembles local components and parts and the direct import content of IMT's products will be less than 10%. - iii - xi. Appraisal of the project was completed before the onset of the energy crisis. The likely impact on the project was reviewed with IMT manage- ment in early January, 1974 and is thought 'to be slight. The capital cost of the project is not expected to increase by so much as would necessitate a change in the provision for price escalation and, in any event, any additional need for funds, whether caused by an increase in project cost and/or shortfall in internally generated funds during project implementation, would be covered by the Belgrade Bank. Furthermore, energy represents only 3% of I'T's direct operating costs and it can be assumed that any fuel-related increase in the Company's manufacturing costs, whether resulting from higher component prices or higher direct costs, could be passed on in the form of higher selling prices. Finally, since Yugoslavia enjoys a favorable position in respect of energy supply vis-a-vis other industrialized countries in Europe, it is unlikely that the manufacturing costs of those foreign tractors against which IMT's products would compete will be affected to a lesser extent than INT's own costs. xii. Based on agreements reached during negotiations on necessary assurances, as summarized at the end of this report, the project is suitable for a Bank loan equivalent to US$18.5 million. I. INTRODUCTION A. General 1.01 This report appraises the proposed expansion project of Industrija Masina i Traktora (IMT), the largest. producer of wheeled tractors, tractor accessories and agricultural implements 1/ in Yugoslavia. This expansion is designed to increase the production capacity of IMT's New Belgrade plant from about 15,000 to 35,000 tractors per annum by 1976, including two new tractor types (20-25 hp and over 100 hp units), and almost to triple the output of tractor accessories and agricultural implements to about 67,000 units per year. Total financing required for the project, including interest during construction and incremental working capital, is Din 1,356.9 million (US$87.6 million equivalent) of which Din 381.2 million (USq24.6 million) would be in foreign exchange. The proposed Bank loan of US$18.5 million would cover 75% of the foreign exchange cost. 1.02 Following an industrial identification mission to Yugoslavia in 1971, eight industrial projects were submitted in May 1971 to the Bank for financing. IMT was one of the five projects selected. The project has high priority for Yugoslavia, especially in the context of the Government's "Green Plan", which emphasizes farm mechanization and productivity increases in agriculture. In addition, the IMT expansion will stimulate the country's engineering industry through purchases of engines, castings, forgings, tires and electrical equipment. Some of the enterprises in these sub-sectors have already started their expansions in anticipation of IMT's increased demand for raw materials and component parts. One notable example is the expansion 3rogram of Fabrika Odlivaka Beograd (FOB), located adjacent to IMT, which will increase its annual foundry capacity from 33,000 to 90,000 tons per year. 1.03 This loan to IMT would be the third direct loan to industry in Yugoslavia. The first loan to the iron foundry Livnica Zelleza i Tempera- Kikinda (Report No. 218a-YU, dated October 19, 1973) was approved by the Bank's Executive Directors on November 20, 1973. The second loan concerning the FOB iron foundry (Report No. 256a-YTJ, dated January 28, 1974) will be presented together with this IMT proposal. 1.04 The appraisal of the IMT project included a market mission in June/ July, 1973 consisting of Messrs. Glenday and Wilcox (consultant) followed by the main appraisal mission which visited Yugoslavia in August 1973, and which consisted of Mr. Jaffe (Chief) and Miss Haug of the Industrial Projects De- partment and Mr. Swamy Rao (consultant - UNIDO/IBRD Cooperative Program). A description of technical terms is given in Annex 1. 1/ Trailers, rotovators, plows, seed drills, cultivators and disc harrows. -2- B. The Role of the Bank 1.05 The Bank's involvement in industry in Yugoslavia has been described in the Kikinda Iron Foundry and FOB Iron Foundry Appraisal Reports. II. THE COMPANY A. Background 2.01 IMT, the 50th largest enterprise in Yugoslavia, operates three separate plants - a factory in New Belgrade consisting of tractor and imple- ments assembly facilities and a machine shop, a motor cultivator factory (FMK) in Knjazevac which was acquired in 1970 and a service and repair center in Dobanovci which merged with IMT in 1956 (Map IBRD 10716). 1/ The Company's existing facilities are described in Annex 2-1. IMT Belgrade which will be expanded under the project was founded in 1947, to produce pipes, tubes and bolts. In 1955, the Company started to manufacture tractors after acquiring a Massey-Ferguson (UK) license. Since then, IMT has undertaken a number of expansion programs increasing its annual tractor production to 4,000 units in 1961, 12,000 units in 1968 and 15,000 units in 1972. As the Company's engineering and design capability increased, the manufacture of 35 hp tractors under Massey-Ferguson license was discontinued, and IMT introduced in 1968 its own tractor line (35, 55, 72 and 80 hp units) with corresponding tractor attachments and agricultural implements. 2.02 The Company had operated since 1953 a foundry and pattern shop located adlacent to IMT's production facilities in Belgrade. In 1971, this foundry and pattern shop were established as a separate company (FOB), but the close technical and supply relationships between IMT and FOB have been maintained. Both companies are members of Udruzena Metalska IndustriJa (UMI), an association of seven metal working companies in the Belgrade area. UMI was founded in 1969 and is the 15th largest industrial group in Yugoslavia. B. Relationship with UMI 2.03 Details on the composition and organization of UMI are given in the FOB Iron Foundry Appraisal Report. 2.04 Although UMI enterprises have a common development and marketing strategy which sets out broad objectives, each member company is a separate legal entity and is autonomous in the implementation of its production program and the marketing of its goods. All members have to contribute 1/ FMK Knjazevac and the Service and Repair Center Dobanovci accounted for 5.1% and 3.6% respectively of IMT's sales volume in 1972. annually a percentage 1/ of their net income to a Joint Reserve Fund and a Joint Development Fund established by UMI. The former is available for interest-free loans to cover possible losses of member companies, whereas the Joint Development F ind finances research and development programs benefiting the entire group, and advances interest-free loans for invest- ments by member enterprises. Moreover, UMI's approval is necessary for annual investments exceeding Din I million by any member company (Annex 2-2). During negotiations confirmation was obtained that UMI has approved the IMT project and will, until the completion of the project, limit its requests for contr:Lbutions from IMT. C. Organization and Management 2.05 IMT consists of four subsidiary entities, i.e. IMT Belgrade, FMK- Knjazevac, the Service and Repair Center Dobanovci and the Workers Restaurant, Belgrade. 2/ Each entity has a manager and labor unit council which manage independently within the framework of the production program and policy guide- lines laid down by the General Manager and the Workers' Council. After proj- ect completion, a new and fifth entity will be created by dividing IMT Belgrade into two entities - IMT Tractor Production and INT Implements Production. 2.06 IMT - as is normal in Yugoslavia - is managed by its workers. The self-management system is explained in Annex 2-2. Annex 2-3 gives an organi- zation chart. The supreme managing body of the Company is the Workers' Council consisting of 45 members elected by the workers for a period of two years. This body formulates the enterprise's general policy, and approves major investment plans, annual budgets and distribution of income as well as production programs within the overall plans developed by UMI for the group as a whole. It also elects the General Manaver and his deputy. 2.07 IMT's General Manager, Mr. Radovic, who is simultaneously plant manager of IMT Belgrade, has had 22 years experience with the Company in various managerial and technical positions including manager of tractors and implements production. Mr. Radovic was elected as General Manager in June 1971 for a 4-year term and can be re-elected for another term. As General Manager he is in charge of day-to-day operations of the enterprise and is responsible only to the Workers' Council. In practice, the management makes all major decisions and has the full cooperation of the Workers' Council. The General Manager is assisted by a collegium of the Company's top executives, by two advisers and an ad-hoc expert council which is formed from time to time if major policy issues arise. 1/ This percentage is determined by UMI's Workers' Council. It has been varying between 1.0% and 1.5% p.a. during the past years. 2/ The cafeteria of the IMT factory in Belgrade has been set up as a separate legal entity to facilitate day-to-day operations of this unit. -4- 2.08 Most of the sales and export-import responsibilities have been delegated to the Deputy Manager, Mr. Anastasijevic, while the General Manager concentrates on the operations and future development of the Company. IMT has a young, well trained and dynamic management team which is supported by an adequate number of qualified staff. D. Plant Facilities at New Belgrade 2.09 The existing facilities of IMT Belgrade consist of a complex for the production of tractor components, tractor assembly lines, an implements assembly bay, a scaffolding shop and miscellaneous facilities for storage, maintenance and supporting services. They are described in detail in Annex 2-1. The plant is presently used at capacity. The major problems facing the New Belgrade factory are lack of space for storage, inadequate materials flow and internal transport, some obsolete machinery and poor working conditions. The latter concern the antiquated heating, lighting and ventilation systems, insufficient social facilities (restrooms, cafeteria), and conditions in the paint shop which do not meet minimum health standards. The proposed expansion project is designed to overcome these bottlenecks and shortcomings. 2.10 Due to the overcrowded working conditions, proper safety measures have not been observed and thus the incidence of work-related accidents has been high. As greater attention needs to be paid in this area, the Bank obtained assurances from the Company during negotiations that it will institute and maintain appropriate industrial safety practices. E. Past Growth and Financial Results 2.11 Details of tMT's past production and product lines by plant are given in Annex 2-4 and historical income statements for the past five years (1968-1972) in Annex 2-5. The following table shows the trend of sales and net income of tNT since 1969: -5- Trend of Sales and Net Income /1 1969 1970 1971 1972 Sales Volume (units) Tractors /2 7,032 9,328 12,386 14,202 CKD & PKD Tractor Sets- 2,160 1,400 365 200 Implements 1,715 1,814 2,867 6,117 Accessories 5,618 6,527 6,980 10,612 Sales and Earnings (Din million) Net Sales 416.5 497.1 746.7 1,030.9 Net Income 7.5 24.1 57.8 73.1 Net Income as % of Sales 1.8 4.8 7.7 7.1 /1 Figures do not include results from FOB operations. /2 CKD - completely knocked down units. PKD - partly knocked down units. 2.12 The Company's sales history is characterized by a steady increase of sales of all IMT tractor models (35, 55, 72 and 80 hp) and the introduction of new implements (plows, seed drills, cultivators and disc harrows) in 1971/72. This is the result of substantial investments in 1967/68 and 1971/72. The 35 hp tractor is IMT's most important product, accounting for about 51% of the Company's net sales revenues in 1972. Over 90% of IMT's sales originates from its Belgrade plant. 2.13 IMT's net income more than doubled in 1971 reaching Din 57.8 million, following a 50% increase in revenues. Yet, while sales in 1972 increased by another 40%, net income as a percentage of net sales decreased to 7.1% from 7.7% in 1971. This is. due to the high cost of operating on three shifts and the charging of start-up expenses and interest during construction of the 1971/1972 expansion (Annex 2-4) to the income statement. 2.14 IMT's exports over the past five years have been constant in absolute terms, but declining in relative terms and amounted to Din 53.8 million or 5.2% of net sales in 1972. This trend, however, does not reflect IMT's competitiveness; on the contrary, its tractors are highly competitive both technically and cost-wise as will be discussed in more detail in Chapter VI and Annex 3. However, because of the continuing shortage of tractors and agricultural implements in Yugoslavia, the Company has chosen to export only such quantities as were required to earn its needed foreign exchange through the retention quota system. 1/ Although IMT plans to step up its exports (Annex 6-1), export strategy will be largely determined by the future 1/ Yugoslav enterprises can use 20% of the foreign exchange from their annual export earnings, i.e., their retention quota, without restriction. -6- domestic demand for the Company's products. The record of production, sales and earnings indicates that IMT is a technically competent and profitable company. F. Recent Financial Position 2.15 Historical balance sheets for the past five years (1968-72) are given in Annex 2-6 and recent results summarized below: IMT - Summary of Balance Sheet (Din million) 1969 1970 1971 1972 ASSETS Current Assets 236.5 236.3 263.9 401.7 Net Fixed Assets 86.0 71.5 67.9 146.9 Financial Assets 3.2 37.0 36.0 31.0 Other Assets 33.3 39.5 62.1 94.9 Total 359.0 384.3 429.9 674.5 LIABILITIES Current Lia;ilities 174.8 190.5 151.3 167.5 Long-Term Debt 67.6 57.9 60.5 81.3 Equity 1/ 116.6 135.9 218.1 425.7 Total 359.0 384.3 429.9 674.5 Current Ratio 1.t 1.2 1.7 2.4 Debt/Equity Ratio 37:63 30:70 22:78 16:84 /1 "Equity" includes Business Funds, Collective Consumption Funds, Reserve Funds and compulsory loans; these terms are explained in Annex 2-7. Nearly 30. of the equity increases in 1971 and 1972 are due to re- valuations of fixed assets which seem justified in view of the 20-25% p.a. inflation rates Yugoslavia experienced during the late sixties. For projection purposes it has been assumed that measures now being taken to curb inflation will be successful and that no revaluation of fixed assets will become necessary in the foreseeable future. 2.16 The Company has a sound financial structure. The debt/equity ratio of 16:84 at the end of 1972 is satisfactory. The current ratio has since 1971 been at a satisfactory level, because the Company has been taking conscious steps to reduce its receivables and accounts payables while main- taining a minimum level of cash. -7- III. THE MARKET 3.01 A detailed analysis of the market for tractors and farm implements is attached as Annex 3. A. Supply and Demand for Tractors 1. Recent Trends 3.02 The Yugoslav tractor fleet has increased three-fold from 42,730 units in 1962 to about 120,500 units in 1972, thereby reaching a level of farm mechanization of 0.45 hp/ha of arable land. However, farm mechanization varies greatly between regions and types of farms: (i) in Croatia and Slo- venia a level of farm mechanization of more than 0.6 hp/ha has been reached compared with less than 0.2 hp/ha in Kosovo, Macedonia, Montenegro and Bosnia, and (ii) social sector farms average 0.86 hp/ha with tractors in the 50 hp range, whereas private farms have reached 0.36 hp/ha with an average 32 hp tractor. 3.03 As shown in the following table, during the 1968-72 period domestic sales increased by 53% and domestic production by 41%. Imports are determined annually by the Yugoslav trade commission in the light of the domestic supply and demand gap. Supply and Demand Comparison of Tractors /A in Yugoslavia (Units) 1968 1969 1970 1971 1972 Production 10,927 10,810 12,048 16,046 18,423 Imports 3,969 2,727 5,460 9,281 12,760 Supply 14,896 13,537 17,508 25,327 31,183 Domestic Sales 14,259 13,117 16,996 24,012 30,001 Export 637 420 512 1,315 1,182 /1 Includes other agricultural machinery such as motorcultivators, but excludes CKD/PKD tractor sets and components. 2. IMT's Competitive Position 3.04 IMT is the largest Yugoslav manufacturer of tractors accounting for 85% of the domestic capacity. The Company produces tractors of its own de- sign which was developed on the basis of a Massey-Ferguson license. -8- It relies on Yugoslav suppliers for more than 90% of its raw materials and components. In contrast, the five other tractor producers 1/ merely assemble imported components. In view of the existing supply and demand gap and the growing trend towards farm mechanization in Yugoslavia, several companies besides DIT plan to expand their manufacturing plants, thereby increasing domestic tractor production capacity more than two and a half times to about 47,500 units by 1977. 3.05 IMT's dominant market position is the result of a competitive product line: (i) IMT tractors are well designed, reliable and easy to maintain. The Company has updated its product line progressively, so that the standard 30-65 hp models are technically competitive on the world market. In regard to the IMT 75 and 85 hp tractors, com- parable European models have superior convenience features and a better hydraulic system. IMT plans to improve the charac- teristics of its large hp models, in order to present in this range as well an internationally competitive product. (ii) Matching implements are readily available for IMT tractors, in contrast to imported models, where lack of spare parts and implements has led to diseconomies and underutilization. (iii) The nationwide sales and services network is well estab- lished and has been strengthened concurrently with IMT's production expansion. The Company's reliable maintenance and repair facilities constitute a definite competitive advantage over its competitors. I/ T. Vinkovic; Ruen Kocani; Gorenje Velenji; Torpedo and IMR Rakovic (Annex 3, para 10). -9- 3.06 A price comparison of IMT tractors with imported units is detailed in Annex 3, para 22 and summarized below: Tractor Price Comparison - August 1973 (Dinar) Base A Base /1 Model Price - Model Price - IMT-533 (35 hp) 40,723 IMT-575 (72 hp) 89,972 Steyr (32 hp), Austria 63,278 John Deere (72 hp), U.S. 115,380 Deutz (35 hp), Germany 56,885 IMT-558 (55 hp) 58,673 IMT-585 (85 hp) 101,582 Steyr (52 hp), Austria 80,556 Deutz (85 hp), Germany 129,300 John Deere (52 hp), U.S. 80,230 /1 Ex duties and taxes: cif border prices for imported tractors and IMT ex-factory price. The above table shows that IMT's ex-factory selling prices are still 20-30% below the border prices of comparable imported tractors from convertible currency countries; 1/ i.e., the Company does not need the protection of the present 29% tariff on imported tractors. 3.07 Clearly, IMT has achieved a dominant position in the Yugoslav mar- ket, by offering good, reliable and price competitive tractors and implements. The project is designed to expand ITIT's capacity in line with domestic demand, thus maintaining its domestic market share. In view of the fact that (i) tractor prices in Yugoslavia are determined annually by a Federal Commission, i.e., IMT will not be able to exploit its market position by increasing prices arbitrarily; (ii) the quality of the IMT tractors is good; and (iii) the Company's service and repair network is reliable, it is unlikely that the Yugoslav economy would benefit from increased competition and thus further proliferation among domestic and foreign tractor manufacturers at this time. 3. Market Forecast 3.08 The "Green Plan" projects an annual growth of aggregate agricul- tural production of 3.2% until 1975 and 5% in the 1976-1983 period. To reach this target Yugoslavia will have to increase significantly the level of farm mechanization of private and social farms. How farm mechanization in Yugo- slavia compares with that in other countries is shown below: 1/ Border prices of Eastern European tractors have been 5-20% below IMT's selling prices; however, they have been arrived at in barter agreements. - 10 - Level of Farm Mechanization - Selected Data tractor fleet ha per tractor hp per ha Canada 800,000 54.3 0.91 France 1,250,000 15.5 3.2 Italy 480,000 31.1 1.6 South Africa 220,000 54.8 0.91 USA 4,600,000 38.3 1.3 UK 350,000 20.6 2.4 Yugoslavia 120,500 84.3 0.45 Social 25,100 59.4 0.86 Private 95,400 90.8 0.36 Source: FAO, 1972 The above table indicates that developed countries with large farms and esten- sive farming have reached a mechanization level of at least 1.0 hp/ha, and the mechanization levels of countries with more intensive farming such as France, Italy and the UK range between 1.6 - 3.2 hp/ha. Therefore, in the market projections it has been assumed that Yugoslavia will have achieved full mecha- nization in agriculture at a level of about 1.0 hp/ha on the large farms in the social sector and approximately 2 hp/ha on the small private farms (Annex 3, para 27). 3.09 In addition to the level of farm mechanization outlined above, the projections for the Yugoslav tractor demand in agriculture assume that: (i) following a worldwide trend average hp size of tractors will increase from 51 hp to 60 hp on social farms and 32 hp to 38 hp on private farms by 1983; (ii) the replacement market will be 8% of the tractor fleet (12.5 years) until 1980 and 6% (16 years) thereafter, since with improved mechanical skills and repair services in Yugoslavia the useful life of tractors will be expanded and the large number of imported tractors will be phased out (Annex 3, para 30); and (iii) about 10% of the power requirements of private farms and the mechanization of vineyards and orchards will be met by motorcultivators (5-12 hp). - 1 1 - On the basis of these assumptions the projected tractor parc and replacement needs for the private and social sectors are presented in Annex 3, Table 5. The forecast indicates a domestic market for tractors in agriculture of 34,000 units per year over the next 10 years of which about 2,000 units would be in the social sector. 3.10 A domestic demand of 3,500 tractors per year for non-agricultural use has been projected. This level is in line with experience in Western European countries and takes into account the widespread use of tractors for haulage, construction and forestry work in Yugoslavia. 3.11 The following table summarizes the projected supply and demand situation in Yugoslavia in a typical year between 1977 and 1983: Projected Average Annual Supply/Demand Comparison for Tractors 91 hp 18-30 hp 31-50 hp 51-60 hp 61-90 hp and over Total Production / 4,600 27,900 3,650 3,300 550 40,000 of which IMT 3,000 25,000 3,300 3,300 400 35,000 Imports - 1,800 800 100 50 2,750 Total Supply 4,600 29,700 4,450 3,400 600 42,750 Domestic Demand 4,100 26,800 3,850 2,350 400 37,500 Exports 300 2,900 600 200 - 4,000 Surplus (Deficit) 200 /2 - - 850 200 1,250 /1 For capacity expansions see Annex 3, page 6. /2 Not including 7,500 units of riding motorcultivators which also compete with the 18-30 hp tractors. 3.12 The export figure of 4,000 units/year is a realistic target and reflects the minimum number of tractors the Yugoslav manufacturers will have to export to earn their retention quota. IMT can be expected to account for most of these exports without having to resort to marginal pricing since (i) DIT products are not only competitive technically and price wise on the world market, but (ii) the Company has experience in exporting assembled tractors or tractor sets to developing countries, and (iii) the association with Mlassey-Ferguson facilitates the supply of spare parts and components to that firm. Sufficient export credits on suitable terms are available and are therefore not considered a constraint on exports. In the Yugoslav context - 12 - of import regulation, imports of tractors are meant to supplement domestic supply. It can be expected that Yugoslavia will continue importing at least 2,000 tractors per year in order to satisfy barter arrangements and needs for special tractors which are not produced locally. 3.13 The above supply/demand comparison indicates possible oversupply for two market segments: (i) in the 18-30 hp category, total tractor demand of 4,100 units per year compares with an annual domestic capacity of 4,600 small tractors of 20-25 hp and 7,500 units of the Pasquali riding motorcultivators (18.5 hp). While part of the supply can be expected to be absorbed by the specific market for motorcultivators, the new IMT tractor will face considerable competition in this product category. (ii) in the above 60 hp category, there is likely to be an over- supoly, if IMT produces 3,700 units per year and Torpedo 150 tractors per year. Only in the short term may the social farms absorb the excess supply when switching to higher horsepower units. 3.14 LMT is aware of domestic competition, particularly for the small tractor market, and possible market constraints in the above 60 hp categories. As explained in para 4.06, IMT's production facilities will allow flexibility to shift emphasis among different models and spare parts production. There- fore, the Company will monitor closely the production cost and market success of its various products in order to adjust the production volume and model choice accordingly. 4. Availability of Credit 3.15 Availabilitv of credit has not been a constraint to tractor sales in the past, since social farms have had ready access to credit institutions and the private farmers who purchased tractors disposed of sufficient income from workers remittances, sales of work animals, and on and off farm work to pay cash. However, to reach the projected level of farm mechanization, credit will have to be channeled to private farmers, who may require up to Din 400 million per year in credit (Annex 3, paras 33-35) after 1976. To this end IMT plans to make available about Din 75 million per year for the 1976-78 period from its annual cash surplus and intends to channel to its dealers an additional Din 100-120 million per year through on-lending of credits from the Belgrade Bank. As to Government funds, the "Green Plan" as known to date indicates that, while some funds will be made available in the form of agricultural credit for farm mechanization, no specific amount is earmarked for private farmers. 3.16 Since private farmers account for nearly 80% of the projected tractor demand and the farm income of the average private holding may not allow cash purchases of tractors, the domestic demand for tractors can be expected to become very sensitive to the availability of credit to private - 13 - farmers, as soon as the present excess demand is satisfied. Therefore, during negotiations, it was agreed that DCN would submit to the Bank by mid-1975 a 5-year program for financing sales of IMT tractors and agricultural implements, which would support IMT's production program in the long-run, and provide information on ways and means of channeling the required funds to private farmers as well as the social sector. The Government also stated during negotiations that adequate credit to private farmers would be available as part of the objectives of the Green Plan. B. Supply and Demand for Agricultural Implements 3.17 An acceptable level of tractor utilization can only be reached if implements are available in numbers, types and sizes required to match the sale of tractors. Contrary to tractor production and the manufacture of rather sophisticated implements such as disc harrows and seed drills which require design expertise and high toolage costs, manufacture of standard implements (trailers, plows) can easily be taken up. As a result, there are besides the tractor companies about 20 small producers of farm implements in Yugoslavia. 3.18 IMT's implement line is of good design and quality (Annex 2-4) and offers a wide range of product types according to tractor size and fa-rm imple- ments. The Company has subcontracted the manufacture of the majority of tillers, mowers and plows and is steadily expanding its implements line. However, agricultural implements for imported large tractors have been in short supply resulting in an under-utilization of tractors on social farms. 3.19 The market projection for major farm implements are summarized below: Average Annual Requirements and TMT Production of Major Farm Implements in Yugoslavia (1977-1983) ----------Market-------- IMT IMT Social Private Production Market Sector Sector Total Program (1977) Share /1 ----------Units…----------- Trailers 660 15,600 16,260 7,800 48 Plows 1,125 18,000 19,125 12,000 63 Cultivators 300 9,000 9,300 1,200 13 Seed Drills 300 3,000 3,300 2,000 61 Disc Harrows 600 6,000 6,600 4,000 61 /1 Including sales by sub-contractors. - 14 - Until the early eighties the demand for the 3 major implement types (trailers, plows and disc harrows) will amount to 50-75% of the number of tractors sold to new customers, whereas more specialized equipment such as planters, seed drills and cultivators will account for not more than 20%. In contrast to tractors, implements have a useI'ul life of about 15 years and obsolescence is of lesser importance. The above projections take into account that, based on a percentage of tractor sales, the market for implements relative to tractors will be higher in the social sector than in the private sector, since the social sector will switch to larger tractors (60 hp and above) which require new large size semi-mounted or pull type implements. 3.20 IMT's proposed production program and subcontracting arrangements for implements are adequate and should maintain the utilization of IMT trac- tors at an appropriate level. C. IMT's Marketing Organization 3.21 IMT's marketing operations are directed by the Sales and Service Department in Belgrade, which has established a nation-wide sales and services network in Yugoslavia (Map IBRD 10716) and a training center in Belgrade. The present sales organization consists of 26 dealers and 100 sub-agents, which are not yet exclusive distributors of IMT tractors, implements and parts. Export sales are handled by the export division in Belgrade which uses estab- lished dealer networks of other manufacturers for the distribution and servi- cing of IMT tractors in foreign countries. The maintenance and repair service relies primarily on 146 existing service workshops, which have direct contracts with rIT. The Service and Repair Center in Dobanovci specializes in tractor overhaul, while serving also as maintenance and repair workshop in its dis- trict. 3.22 Due to the past and present demand-supply gap for tractors in Yugoslavia, IMT's dealer network undertakes promotional functions only to a minor extent. The Company is aware of the need for more intensive market- ing activities after project completion. To this end, IMT plans to (i) ini- tiate a training and information program for dealers and customers, and (ii) establish exclusive dealerships. In parallel, the maintenance and repair system will be strengthened by (i) establishing regional training centers for servicing personnel, and (ii) subcontracting new workshops. 3.23 The continued strengthening of the sales and service organization is essential in order to maintain IMT's dominant market position and good quality repair service. Accordingly, during negotiations, the Company agreed to submit to the Bank by mid-1975 a 5-year program for the expansion of its local and export marketing and servicing organization. - 15 - IV. THE PROJECT A. Technical Description 4.01 A detailed technical description of IMT's expansion program is given in Annex 4-1. Preparation of the project and detailed engineering was undertaken by the Company with the assistance of experienced local engineering firms. 1/ The proposed project relates only to the Belgrade plant, and is designed to increase the Company's annual production capacity to 35,000 tractors, 27,000 units of agricultural implements, and a proportionate number of accessories and spare parts. 2/ The new production program will include the design and manufacture of two new tractor models - one of 20-25 hp and one above 100 hp. 4.02 The expansion will be carried out in two phases. Phase I, or "the project," includes all production facilities necessary to reach the proposed output target by 1976/77. Phase II will provide a tools and maintenance shop, additional storage, offices and general service buildings. The Company plans to implement the second phase (estimated cost Din 200 million or US$12.9 mill- ion equivalent), no earlier than 1978-1979, i.e. about two years after comple- tion of the project when internal cash generation and foreign exchange surpluses are expected to allow such an investment. 4.03 More specifically, the project (Phase I) of the expansion program consists of the construction of (i) a new tractor parts machine plant; (ii) a new tractor assembly plant; (iii) rehabilitation and reorganization of the existing plant in order to improve work conditions and health standards and to accommodate the implement assembly lines and the maintenance and tool shop, including the dismantling of the present implements production bay; (iv) con- struction of an office building with space for the Production Department, a cafeteria, locker-rooms, etc.; and (v) construction of storage facilities for raw materials, parts and supplies. The plant layouts (Annex 4-2) illustrate the physical facilities to be constructed under the project. The plant design, materials flow and the equipment selected for the project are considered satisfactory. 4.04 A maJor objective of the project will be to improve the materials flow by creating sufficient storage areas and rationalizing the internal transport systems. To this end, the Company intends primarily to use conve- yors and forklift trucks. 1/ MASINOPROJEKT and SRBIJA PROJEKT, Belgrade. 2/ Assuming one shift working in the assemily plants and two shifts in the tractor parts production shop. - 16 - 4.05 The Company intends to produce about 400 tractors above 90 hp by 1976 and 3,000 tractors of 20-25 hp by 1977. The new 100 hp models will include a maximum number of components and design characteristics of the exis- ting models, but for economical reasons incorporate imported gearlinks (Annex 2-4, para. 11). Prototype production was scheduled to start in January 1974, by which time IMT also intended taking a final decision on the type, possible licensing arrangements and development strategy for its new 20-25 hp tractor. The Company's Research and Development Department is well equipped and has sufficient and experienced staff to justify the projected time schedule for bringing the new models into production. During negotiations, an assurance was obtained that the Company will keep the Bank informed of the status of product development for its new tractors. 4.06 Because of the interchangeability of parts, the production of tractors inherently has a high degree of flexibility in respect of product mix. For example, by appropriate production scheduling the Company can adjust the output of different tractor types or components. As regards volume, IMT could, by working three shifts, increase its tractor output to an annual rate of approximately 50,000 units per year. In contrast, by changing the product mix, and manufacturing more implements, accessories and spare parts than presently planned, the Company could economically reduce tractor production to 25-30,000 units per year. 4.07 Satisfactory plans for infrastructure - power, gas, roads, compressed air, water and heating - have been developed in cooperation with FOB. A major investment is required for a new transformer station and transmission lines, since IMT's electricity consumption will nearly triple after project completion. During negotiations, the Company provided documentary evidence that it has obtained commitments from the respective authorities for the timely development of infrastructure facilities. B. tanpower and Training 4.08 In April 1973, IMT employed 3,524 people, 2,905 of whom worked at the Belgrade factory. Additional employees needed after the expansion are estimated at 1,445 including 532 in the services departments. Details are given in Annex 4-3. As mentioned earlier, IMT is today operating on a three shift basis. After expansion, i.e. in 1976, the tractor assembly plant is expected to operate one shift, the implement assembly and tractor parts ma- chine shop two shifts and heat treatment facilities three shifts. Plant lay- out and equipment selection indicate that the project relies primarily on semi-automatic and standard machines rather than on fully-automatic transfer lines and assembly operations. This labor-intensive approach results in considerable direct employment generation and is economically justified (Annex 6-3) in view of Yugoslavia's relatively low wage rates. 4.09 The Company has elaborated a program of manpower needs and a re- cruitment schedule (Annex 4-3) which foresees direct recruitment of workers and staff as well as training of the present labor force in IMT's school, at Belgrade University or in Yugoslav technical institutions. IMT does not anticipate any difficulties in recruiting the necessary personnel for various - 17 - skill levels. The Company is well known in Yugoslavia for its technical excellence and employee benefits and has always been able to attract good applicants. C. Ecology 4.10 A new Federal law for environmental and pollution control stipu- lates that all enterprises must conform to certain minimum pollution stand- ards by the end of 1973 and meet all set standards by 1977. In general, IMT's production is a clean operation with no adverse effects on the environ- ment, and thus special measures to achieve compliance with Yugoslav laws or other reasonable pollution standards are not required. One exception is the effluent water from the surface protection, paint and hardening facilities. To overcome potential problems, the Company neutralizes all water used on the plant site before discharging it into the treatment facilities of the Belgrade Water Supply Company. D. Pro_ject Execution 4.11 IMT will have the major responsibility for project execution. During the past five years, the Company has implemented three sizeable ex- pansion projects (Annex 2-4) and is well experienced to carry out the project. The main burden will rest with IMT's Expansion Department, a unit which was created in April 1973 to assure adequate preparation and supervision of the project. Mr. Predragovic, 63, an experienced engineer, is in charge of the Expansion Department and is assisted by a qualified staff of about 25, in- cluding engineers familiar with network analysis and other planning tools and economists experienced in cost control. 4.12 Since the Company has no previous experience of international competitive bidding procedures, especially in the preparation of bid documents in English, IMT has contracted a local firm "RAPID" which has dealt with procurement of foreign equipment to assist it in this task. Documents submitted to the Bank to date indicate that this arrangement is satisfactory and one that will permit orderly and timely preparation of equipment specifi- cations and bid evaluations. 4.13 The civil construction contract was awarded to the Yugoslav con- tractor RATKO MITROVIC in March 1973 after competitive bidding limited to local construction companies. Construction work started in August 1973 and is proceeding on schedule. Local and foreign equipment suppliers will provide assistance in erection and start-up and the usual performance guarantees. The Company's own Construction and Technical Departments will be responsible for the relocation of existing machinery. Similar arrangements have proven satisfactory in the Company's past expansions. The project can be implemented without interfering with existing production until final equipment erection and relocation of existing machinery. The financial projections assume a minimal production loss of one month in 1975. - 18 - E. Project Timing 4.14 Project completion is planned for the last quarter of 1975 in accor- dance with the implementation schedule shown in Annex 4-4. This schedu'Le is considered realistic. Construction of the new production bays has already begun and is expected to be completed by October 1974. Design and engineering of the equipment for the project is well advanced. Orders for equipment with delivery times of more than 18 months are already being placed and will be financed by the Company. Procurement action for foreign equipment to be financed by the Bank has been initiated. It is expected that the first firm orders for Bank financed equipment will be placed in April 1974. V. CAPITAL COST, FINANCING PLAN AND PROCUREMENT A. Project Cost 5.01 The capital cost of the project is detailed in Annex 5-1 and summarized below: Summary of Capital Cost Estimates -------Din million --- - -----US$ million----- Local Foreign Total Local Foreign Total % Civil Construction 173.0 - 173.0 11.2 - 11.2 12.8 Equipment & Spares 85.9 287.8 373.7 5.5 18.6 24.1 27.5 Erection & Installation 16.4 - 16.4 1.1 - 1.1 1.3 Transport & Insurance /1 27.6 - 27.6 1.8 - 1.8 2.0 Duty and Taxes 103.8 - 103.8 6.7 - 6.7 7.7 Engineering, Pre-operat- ing and Start-up Expenses 7.0 - 7.0 0.5 - 0.5 0.6 Physical Contingency /2 34.5 27.2 61.7 2.2 1.7 3.9 4.4 Price Escalation /2 49.8 40.2 90.0 3.2 2.6 5.8 6.6 TOTAL FIXED ASSETS 498.0 355.2 853.2 32.2 22.9 55.1 62.9 Incremental Working Capital 380.7 - 380.7 24.6 - 24.6 28.1 TOTAL PROJECT COST 878.7 355.2 1,233.9 56.8 22.9 79.7 91.0 Interest During Construction 97.0 26.0 123.0 6.2 1.7 7.9 9.0 TOTAL FINANCING REQUIRED 975.7 381.2 1,356.9 63.0 24.6 87.6 100.0 /1 F'or imported equipment only; the cost of domestic equipment and spares is given on a delivered basis. /2 For detailed rates, see para 5.03. - 19 - 5.02 Civil construction costs are based on the contract signed in May 1973 with RATKO MITROVIC (para 4.13). Equipment cost estimates are derived from actual prices prevailing in 1973 and from quotations received in the last quarter of 1972 or first half of 1973 from potential European and US suppliers. The prevailing import duties and taxes on the cif value (Yugoslav border) of imported equipment have been added. The estimates for engineering, pre-operating and start-up expenses reflect IMT's recent experience. 5.03 The cost estimates include physical contingencies equivalent to 10% for civil construction and equipment to be purchased from hard currency countries, 2% for equipment from clearing countries and 3% for locally procured equipment based on the assumptions detailed in Annex 5-1. These provisions are considered adequate in view of the advanced stage of project preparation and ITT's familiarity with the equipment to be procured. In addition, price contingencies equivalent to an escalation rate of 6% per annum have been applied to the cost of foreign equipment includJnzg import duties and taxes. As for local equipment, construction and erection costs, escalation rates have been forecast declining from 10% to 6% per year during the construction period. These rates are based on the assumption that the measures now __ taken in Yugoslavia to curb inflation will succeed. Assumed physical and price contingencies, therefore, amount to 17.8% of total fixed assets, a proportion not unlike those used for the Kikinda and FOB foundry projects. The capital cost escimates are considered satisfactory. B. Working Capital 5.04 The Company's present working capital is satisfactory. Incremental working capital required due to the project for the 1973-76 period is estimated at Din 380.7 million (US$24.6 million) and will be covered by a Din 30 million --sum-term loan and a Din 300 million long-term loan from Belgrade Bank. Details of IMT's working capital needs are given in Annex 5-2. Should actual working capital requirements be higher than anticipated, the Company is expected to finance them with short-term credits. C. Financing Plan 5.05 An estimated Din 1,356.9 million (US$87.6 million) will be required to cover the project cost, including Din 123.0 million (US$7.9 million) for interest during construction. Internal cash generation will provide Din 323.5 million (24% of the total), credits from the Belgrade Bank Din 714.3 million (53%), credits from local suppliers Din 17.2 million and credits from clear- ing countries Din 15.2 million. The proposed Bank loan of US$18.5 million would cover the remaining 21% of the financing requirements, equivalent to about 75% of the equipment cost. A summary of sources and applications of funds (Annex 7-2) follows: - 20 - Summarized Sources and Applications of Funds 1973-1976 (Din million) SOURCES APPLICATIONS Cash from Operations 506.0 Fixed Assets: foi Project 853.2 Loans for Replacement 5.0 IBR.U 286.7 858.2 Belgrade Bank 714.3 Interest during Credit from clearing construction (IBRD) 20.4 countries 15.2 Debt repayment 171.6 Local suppliers 17.2 Increase in working capital: Li 1,033.4 for Project 380.7 for Yugoslav regulations 39.5 420.2 Financial Assets /2 69.0 Total Sources 1,539.4 Total Applications 1,539.4 /1 Annexes 5-2 and 2-7. _/2 Power and construction deposits and long-term loans to suppliers and customers. 5.06 The Bank loan would be for 14 years, including a grace period of 3 years, at an assumed interest rate of 7-1/4% plus a guarantee fee of 1-3/4%, payable to the Republic of Serbia 1/, thus bringing the effective Bank lend- ing rate to IMT to 9%. The loan agreement, already signed, between IMT and the Belgrade Bank stipulates 11% interest per annum for a period of 14 years including 3 years of grace; it also provides a guarantee for the IBRD loan. 5.07 Agreements on the local suppliers' and bilateral credits from clear- ing countries are currently being completed. During negotiations, assurances were obtained that the Company will receive guarantees from the Belgrade Bank for these loans on terms and conditions satisfactory to the Bank. 5.08 Additional local or foreign resources needed for project completion 2/ irrespective of whether the need for such additional funds is caused by a cost 1/ The Federal Government, the Guarantor of the Bank loan, cannot accept such a fee. It will ask the Republic of Serbia, where the project is located, to receive the fee. 2/ On this context, project completion would require production and sales over 6 consecutive months at 90% of rated capacity and equivalent working capital build-up (minimum current ratio of 1.3:1). - Al - overrun or a shortfall in cash generation, would be provided by the Belgrade Bank on terms acceptable to the Bank. The Company provided documentary evidence of this completion and overrun guarantee during negotiations. 5.09 The proposed Bank loan of US$18.5 million equivalent would cover the cost of approxinately 75% of the equipment and spare parts. It would finance the cif cost of imported goods and the ex-factory cost of locally manufactured equipment and spares. A detailed list of the items to be procured under the Bank loan is shown in Annex 5-3. These items will be divided into 76 packages, all of which will be submitted to international competitive bidding in accordance with the Bank's Guidelines for Procurement. For the purpose of bid comparison, bids containing at least 20% domestic value added will be given the standard preference of 15% or actual customs duty whichever is less. 5.10 For most of the domestic equipment (estimated at Din 111.5 nillion to be financed by the Comnany, suppliers' credits or loans from the Belgrade Bankc), quotations have already been received from various suppliers and orders are now being placed. This equipment will be of the requisite quality, competitively rriced and supplied in accordance with the requirements of the project i-'-ementation schedule. As to equipment imported from clearing countries (estimated at Din 22.0 million), the Company intends partly to invite bids from selected Eastern European suppliers and partly to rely on sole source procurement. 5.11 Tne escimated disbursement schedule for the Bank loan is showr in Annex 5-4. It is based on detailed estimates of order placements, pavment schedules and expected delivery times for equipment in line with the construc- tion schedule kAnnex 4-4). VT. REVENUF, SU?PLIES AND OPERATING COST A Escalation ir, the Financial Projections 6.01 To provide a reasonably accurate picture of IMT's liquidity position during the forecast period, the Bank's financial projections have been expressed in current terms. Expected rates of cost increases were discussed with the Comoany and Yugoslav authorities and assume that the measures now being taken in Yugoslavia to curb inflation will succeed. The financial pro- jections assume (i) a 12.3% per annum increase of wage rates until 1978 and 8% per annum thereafter (Annex 6-3, page 2), (ii) escalation of material costs by 6% per year, and (iii) price increases as set out in Annex 6-1, page 2. Depreciation and financial charges are not escalated, since they relate to capital costs that remain on the books at historical values. The assumed price increases of 8% in 1974 and 6% in 1975 are realistic, but subsequent price assumptions for the 1976-1983 period are conservative in relation to operating cost increases and intended to demonstrate that IMT can remain financially viable even if its prices rise at a slower rate than the average rate of the Company's operating costs. - 22 - B. Sales Revenues 6.02 The implementation schedule foresees the start-up of (i) the tractor assembly plant in August 1975, (ii) the implement assembly shop in November 1975, and (iii) full production of the tractor parts machine plant by the end of 1975. The projected sales prices and revenue build-up are shown in Annex 2-3, para 8 and Annex 6-1, and are summarized below: Sales and Revenue Build-up - Selected Data 1972 1973 /1 1974 /1 1975 /1 1976 1977 (actual) Sales (Din million) 1,031 1,285 1,388 1,781 3,045 3,419 Tractors (units) 20-25 hp - - - 1,000 3,000 IlMT-533/40 11,926 13,600 13,600 16,400 22,500 22,000 INT-558/60 1,812 1,600 1,600 2,150 2,900 3,300 IfMT-575 275 650 450 550 1,600 1,800 IMT-585 47 - 200 350 1,200 1,500 above 100 hp - - - - 300 400 Total 14,060 15,850 15,850 19,450 29,500 32,000 Implements (units) 6,117 8,650 8,650 8,650 22,250 27,000 /1 Construction period. 6.03 Sales revenues have been calculated in current terms acording to the escalation rates detailed in Annex 6-1, page 2. As sales incentive, the Company intends to sell its 1976 production at 1975 prices and increase the dealer discount from 3.25% to 3.8%. Due to the expansion project net sales will increase by 57% in 1975 (over 1974) and another 66% in 1976 reaching Din 3,045 million. 6.04 Presently, exports to convertible and clearing areas account for about Din 53.8 million or 5% of total sales. The share of exports is expected to rise to 8.9% in 1977, of which Din 132.7 million (3.9%) would be to convertible currency countries and Din 174.3 million (5%) to the clearing area. Export projections have been based on the expected domestic market for IMT's products which receives priority and the export revenues required to earn a certain retention quota (Annex 2-7, para 17). In view of the Company's competitiveness on the world market (Annex 3), the export projec- tions understate the actual export potential. - 23 - C. Raw Materials, Parts and Supplies 6.05 Timely economical supply of raw material (steel), parts (engines, forgings, castings, tires, bearings, etc) and supplies are crucial for IMT's production which is primarily a machining and assembly operation. The Company is taking adequate measures, detailed in Annex 6-2, to minimize bottlenecks during and after expansion. Major items such as engines, castings, pressings and wheels are supplied by other 13141 member companies which have coordinated their respective production programs. Imports of materials amount at present to no more than 7-10% of total material costs and are projected to decrease to around 5-8% by 1976. 1/ No problems are foreseen in regard to the Yugoslav import regime and the availability of foreign exchange for imports of raw materials and components. As detailed in Annex 7-4 and Annex 8-2, I141 is expected to have adequate foreign exchange to meet possible shortfalls in domestic raw materials and parts supply through imports. D. 0p erating Costs 6.06 Operating cost projections are detailed in Annex 6-3 and summarized below. IMT's internationally competitive cost structure is in large part the result of prevailing low wage rates in Yugoslavia; i.e., in 1972 MTT's labor cost amounted to 14.5% of total operating cost compared to 25-30% in Western European companies with a similar product mix. Operating Cost ProJections - Selected Data 1972 1975 1976 1977 Production (units) Tractors 14,402 19,450 29,500 32,000 Implements 6,117 8,650 22,250 27,000 Operating Cost _ % (current Din million) 1. Production Mlaterial 775.1 81.5 1,305.6 2,180.0 2,392.0 78.3 Labor 72.1 7.6 140.0 230.0 269.0 8.8 Sub-Total 847.2 89.1 1,445.6 2,410.0 2,661.0 87.1 2. Haintenance and Repair 30.4 3.2 55.0 86.9 93.9 3.; 3. Administration and Selling 44.5 4.7 82.0 140.5 156.1 5.1 4. Depreciation 25.5 2.7 76.0 110.1 110.1 3.6 5. Others 2.9 0.3 7.6 30.0 32.3 1.1 Total 950.5 100.0 1,666.2 2,777.5 3,053.4 100.0 1/ At present imported components for the standard 533-558 models amount to about 4% of material cost compared to 45% for the 575/585 models (Annex 6-7). - 24 - 6.07 TNT's supnlv and operating cost situation is not expected to be substantially affected by the current energy shortage. Yugoslavia's power stations rely primarily on domestic natural gas and lignite and hydropower. In addition Yugoslavia imports 3.0 million tons per year of oil (approximately 25% ,f total consumption) from the USSR. As to potential direct and indirect cost increases, the Company should be in a good position to absorb such increases, since (i) energy costs amount to only 3% of IMT's operating costs, and (ii) nearly 90% of LMT's raw materials and finished products are obtained from and sold .o local suppliers and customers. 6.08 Because the project would expand in-house machining and implements production capacity the Company's value added is expected to increase from 22% in 1972 to 27% in 1977. Unit costs for the standard tractor models (TMT 533/558) are estimated to go up by 28% during 1972-77, which is equivalent to a 3% cost decrease in constant prices. Economies of scale in the manu- facture of tractors accrue mainly in the production of components. Therefore, by expanding its tractor production capacity from 15,000 units to 35,000 units per year, IMT is unlikely to reduce its operating cost in real terms by more than 3-5% during the first 5 years after project completion, because (i) InT will continue primarily to machine and assemble components produced by suppliers that account for nearly 90% of material cost; (ii) administration and selling expenses per unit will remain at the present level, since IMT has to strengthen its marketing, development and production scheduling activities; and (iii) the profit margin for the new 20-25 hp and over 100 hp models will be in the 2-5% range as compared to approximately 10% for the standard models (Annex 6-3). The Company realizes that the profit margins for the newly introduced models will be less than for the standard type. The reason for IMT's producing both 20-25 hp tractors and above 100 hp units is prompted by the Company's goal to establish itself in all segments of the tractor market so as to be in a position to react rapidly to changed in demand by the farmers. VII. FINANCIAL ANALYSIS A. Future Profitability 7.01 Detailed income and cash flow forecasts through 1983 are shown in Annexes 7-1 and 7-2, and selected items are summarized below: Selected Profitability Indicators (Din million) 1972 1973 1975 1976 1977 1979 1981 (actual) Net Sales 1,031 1,285 1,781 3,045 3,419 3,769 4,076 Operating Profit 81 93 115 268 366 307 223 Net Income After Taxes: 73 79 95 129 231 192 151 % of net sales 7 6 5 4 7 5 4 % of average equity 18 17 15 17 25 14 9 Cash Generation 61 92 136 195 283 246 217 - 25 - 7.02 IMT's net income which was Din 73.3 million in 1972 was expeeted to rise to Din 78.6 million in 1973; the increase of depreciation charges due to the completion of the interim expansion (12,000 tractors to about 15,000 tractors/ year) was offset by additional sales proceeds. As a result of the project, net income is projected to go up to Din 129.3 million in 1976 and reach Din 231.3 million in 1977. The fact that net income increases less rapidly than sales after the start-up of the project in late 1975 and even declines after 1977 in absolute terms is due to (i) the higher escalation rates assumed for production cost inputs as compared to selling prices, and (ii) the 10% increase of depreciation charges in 1980 after the completion of the Phase II expansion (para 4.02), which would not result in notable capacity increases or cost reduction. Since a major portion of net income after taxes will be needed to help finance the proj- ect, agreement was reached during negotiations that the Company will - until the project is completed - distribute income to its workers only to the extent that annual depreciation plus allocations to the Business Fund during that period would cover the requirements of the project. B. Financial Position 7.03 Balance sheet projections for 1973-1983 are contained in Annex 7-3 and significant indicators given below. For comparison purposes, IMT's income statements and balance sheet projections without the proposed expansion are given in ALnexes 7-1 and 7-3 respectively. Selected Indicators of Financial Position (Din million) 1972 1973 1975 1976 1977 1979 1981 (actual) uurrent Assets 402 432 652 968 1,022 1,057 1,241 Current Llabil.ies 168 118 284 369 358 416 412 Net Working Canital 24 314 3 5 664 641 829 Long-Term Debt 11 171 877 903 802 611 434 Equity 426 504 677 806 1,038 1,435 1,739 Current Ratio 2.4:1 3.7:1 2.3:1 2.6:1 2.9:1 2.5:1 3.0:1 Debt/Equity Ratio 16:84 25:75 56:44 53:47 44:56 30:70 20:80 7.04 The Company's long-term debt/equity ratio, which was satisfactory in 1972, is expected to rise during project implementation to a maximum of 56:44 in 1975. Thereafter, as full production is reached following completion of the expansion, repayment of loans causes steady improvements in the debt/equity ratio and, by 1981, IMT will have only 20% in debt. This proj- ected ratio is based on the assumption that the Company by 1978/79 will have proceeded with implementation of Phase II and that there will be no income distribution to the workers in excess of the 12.3% annual increase in earnings per emnloyee until 1978 and 8% thereafter. - 26 - 7.05 The Company's liquidity position remains satisfactory throughout the life of the project. As is the normal practice in Yugoslavia, net profits in excess of the funds required for the project or for operations would be distributed to the workers. In order to maintain the Company's sound financial position, agreement was reached during negotiations that IMT will not, without the prior consent of the Bank, (i) distribute and/or make cash outlays other than for normal operations if the current ratio were to fall below 1.3:1 in any year after such income distribution and/or cash outlay; (ii) undertake, until the completion of Phase II, additional capital invest- ments in excess of Din 50 million equivalent in any one year other than for the project and `'hase II; and (iii) incur, until the completion of Phase II, any indebtedness'in excess of Din 50 million equivalent in any one year other than for the project. In addition, it was agreed, that, after the completion of Phase II, IMT will not undertake any investment or assume any indebtedness in amounts exceeding in any one calendar year Din 120 million equivalent without prior consultation with the Bank. C. Financial Rate of Return and Major Risks 7.06 The project provides an incremental financial rate of return of 21.0% at real prices. Detailed assumptions for the calculation and the incremental cost/benefit streams are given in Annex 7-4. 7.07 An analysis has been carried out to determine the sensitivity of the projected rate of return to various changes in basic assumptions. The results of the sensitivity analysis are shown in Annex 7-4 and summarized below: Sensitivity Test on Financial Rate of Return Case Description Rate of Return (M) 1 Base Case 21.0 2 Six Months Delay in Project Completion 17.3 3 Capital Cost Increase 10% 18.3 4 Operating Cost Increase 10% 3.1 5 Sales Revenue Decrease 10% -1.6 7.08 The sentivity tests indicate the type of financial risk associated with investments in assembly operations such as IMT: (i) the project is not capital intensive, so that a capital cost increase of 10% results only in a drop of the rate of return to 18.3%, (ii) the return, on the other hand, is extremely sensitive to changes in operating costs and sales revenues. If operating costs were to increase by 10%, which could mean either a 12.5% increase of material cost or a 50% increase of labor cost, the rate of return would drop to 3.1%. However, the probability of a significant cost increase for materials and parts without at least partially offsetting price increases of IMT products is low. - 27 - 7.09 If revenues drop by 10%, ceteris paribus, the return would become negative. Such a case is also very unlikely to happen since, as mentioned above, there is a direct correlation between tractor and component prices. A revenue drop of 10% would be likely only if accompanied by a drop in materials and parts prices, which would go a long way towards restoring the financial rate of return to at least 10-12%. If, however, the drop in sales revenue was caused by a slackening of demand and a consequent reduction in sales volume, the Company would cut back its production of tractors and imple- ments. Since variable costs account for over 70% of total operating costs, a reduction in outpuit to 90% of rated capacity would not decrease the financial rate of return below 10%. Clearly, the financial risk of the project depends to a high degree on IMT's management, esDecially its ability to control operating costs, react to shifts of demand and maintain the leverage to pass on cost increases to consumers under competitive conditions. The financial risk of the project is acceptable in view of the Company's satisfactory management (Annex 2-1) and favorable cost structure comPared to international standards (para 6.08 and Annex 6-2). D. Debt Service Coverage 7.10 The 1-'ng-term debt service coverage based on the above financial projections and the proposed financing plan is adequiate. It falls to a low of 1.9 times covered in 1979, because of the high repayment obligation for medium and long-term loans during those years. The subsequent rise of the debt-service coverage is offset by decreasing net income. Debt-Service Coverage Projections 1974 1975 1976 1977 L2 1979 1980 1981 Times Covered 2.4 2.5 2.0 2.0 1.9 2.0 2.1 /1 First year Qif repayment of Bank loan. 7.11 In addition to traditional debt-service coverage, IMT is required, according to Yugoslav regulations, to generate sufficient foreign exchange in convertible currencies to service its convertible currency debt. Funds available to the Company up to 1983 and IMT's convertible currency requirements for interest and amortization are shown in Annex 7-5. Analysis indicates that there would be sufficient accumulated funds to meet projected needs, but hard currency funds generated by the Company in 1975 and 1978 barely match those years' requirements. The Belgrade Bank agreed during negotiations that it will make foreign exchange funds available to the Company to the extent that the convertible currency generated by INT through retention and depreciation quotas is insufficient to meet the Company's convertible currency debt service obligations. E. Break-even Points 7.12 In 1978, the first full year of repaymeit of the Bank loan, the profit break-even point would be about 80% of the Company's production - 28 - program, which is equivalent to 28,175 tractors and a proportionate mix of accessories, implements and parts. The cash break-even point in 1978 will be slightly lower than the profit break-even point in that year, since annual depreciation is higher than debt repayment. Further details on break-even are given in Annex 7-6. F. Auditing Requirements 7.13 The Company's accounting system follows Yugoslav regulations and procedures for accounting and economic/financial indicators. The accounts of Yugoslav enterprises are reviewed annually by the Social Accounting Service (SAS). The review primarily ensures that the enterprises' financial tran- sactions comply with Yugoslav law, but does not represent an audit in the normal sense nor does SAS provide a report on the accounts. SAS has initiated a training program under which its staff will be trained by Coopers & Lybrand of the U.K. in auditing methods consistent with Bank requirements. During negotiations it was agreed that the Company will invite SAS to undertake an annual audit of its 1974 and 1975 accounts as part of SAS's on-the-job training program in collaboration with Coopers & Lybrand. In the event that SAS is not, thereafter, able to achieve a consistent and satisfactory standard of auditing, IMT would retain, if the Bank so requested, an experienced independent auditing firm. VIII. ECONOMIC JUSTIFICATION A. Economic Rate of Return 8.01 Economic projections have been made in real value terms and are given in Annex 8-1. Costs have been based on the financial estimates with adjustments for taxes and duties. In view of the present and projected economic situation in Yugoslavia, no shadow pricing of labor and foreign exchange rates has been emnloyed. The calculation of sales revenues takes into account import prices (excluding taxes and duties) of comparable tractors and agricultural implements. The incremental economic rate of return for the project is about 16% in real terms. Economic sensitivity tests are illustrated in Annex 8-1. Because of the lower level of economic operating cost and benefits the economic rate of return is slightly less sensitive to operating and sales revenue changes than the financial rate of return. A 10% increase in capital cost lowers the economic return to 12.2%; a com- bination of 10% higher capital costs and 10% higher operating costs would reduce the return to 0.8% and a 10% loss in sales revenues would result in a negative economic rate of return. Nevertheless, the probability of operating cost changes without counteracting revenue changes is low, so that under foreseeable circumstances the economic rate of return is likely to be in the 8-15% range. B. Farm Mechanization and Agricultural Development 8.02 During the past decade agricultural development in Yugoslavia was disappointing (Annex 3): (i) total crop production fluctuated without regaining the high 1961 level: and (ii) the agricultural trade surplus dropped - 29 - continually during the sixties when Yugoslavia had to import large quantities of food grain and feed for livestock. Furthermore, the Yugoslav agricultural situation was aggravated by the loss of farm labor, since an estimated 500,000 peonle from rural areas migrated to Western Europe. 8.03 To reduce the need for imports and increase agricultural output and productivity, the Republics and Autonomous Provinces have recently concluded an Agreement for the Development of Agriculture, "Green Plan". The Plan stresses farm mechanization and modern agricultural methods as a means to achieving greater productivity both in the social and private sectors. 8.04 The IMT expansion project is important for the smooth implementa- tion of the "G7reen Plan". It will permit an increase in import substitution for tractors and agricultural implements, which minimizes the cost to the farmer and the economy as a whole. In addition, the Company has an established sales and services network (Map IBRD 10716), which can facilitate the channel- ing of credit. If the demand for new tractors were met entirely from imports, this would not only result in a substantial drain of foreign exchange to the economv, but would also continue the proliferation of types and makes of imported tractors and agricultural implements. This, in turn, would make the provision of adequate service facilities more difficult. C. Employment Effects 8.05 As detailed in Annex 4-3, the project creates directly 1,440 Jobs at an investment cost of US$36,000 per employee which compares favorably with about US$60,000 per employee in similar factories in the IJ.S. and Western Eturope. The Company selected relatively labor-intensive production methods for the project, since Yugoslav enterprises have a substantial comparative labor cost advantage. For example, at present the average wage rate per man-hour in IMT is US$0.70 as compared with US$3.50 in the Federal Republic of Germany. 8.06 In addition to the direct creation of new employment, the project has backward and forward linkages which contribute significantly to Yugoslav employment. As for forward linkages, rapid farm mechanization can maintain sustained agricultural growth in the face of the diminishing agricultural labor force, and will cause tractor dealers and service stations to recruit additional personnel. In regard to existing backward linkages expansion of an assembly-type operation such as IT4T is characterized by growth and employ- ment stimulating effects on suppliers and sub-suppliers. Furthermore, the Company intends to procure locally nearly 95% of its requirement of raw material, Darts and supnlies after project completion thtus concentrating indirect emplovment creation almost exclusively in Yugoslavia. D. Foreign Exchange Effect 8.07 Faced with the mounting debt service obligations on short and medium-term suppliers' credits, and an increasing gap in the balance of trade, Yugoslavia has a critical need to raise its foreign exchange earnings from exports. The direct net foreign exchange earnings of the project are given in Annex 8-2. They are estimated to amount to Din 1,728 million - 30 - (lJS$111 million) over the 1973-1983 period or an average of US$10 million a year. The annual figure implies that the foreign exchange component of capital investment in the project, US$24.6 million, will be covered in about 2-1/2 years of operation. Furthermore, the Yugoslav economy realizes consider- able foreign exchange savings. If IMT were not to expand, the incremental domestic demand for tractors would have to be met from imports. Foreign exchange savings for 1977 have been estimated at Din 340 million (US$22 million), so that the total net foreign exchange effect in that year would amount to Din 505 million (US32.6 million). IX. AGREEMENTS REACHED DURING NEGOTIATIONS 9.01 During negotiations the following assurances and agreements were reached with the Yugoslav Government, the Belgrade Bank and the Company. A. The Belgrade Bank will, on terms and conditions satisfactory to the Bank: (1) provide a project completion and overrun guarantee (para 5.08); (2) make foreign exchange funds available to the Company in the event the latter's foreign exchange funds are not sufficient to cover its obligations (para 7.11); (3) guarantee local suppliers' and bilateral credits on terms and conditions satisfactory to the Bank (para 5.07). B. IMT will: (1) introduce and maintain appropriate industrial safety practices (para 2.10); (2) submit to the Bank by mid-1975 a 5-year program for financing sales of IMT tractors and agricultural implements, which would support IMT's production program in the long-run, and provide information on ways and means of channeling the required funds to private farmers as well as the social sector (para 3.16); (3) submit to the Bank by mid-1975 a 5-year program for the expansion of its local and export marketing and servicing organization (para 3.23); - 31 - (4) provide information on a regular basis on the status of product developmnent of the 20-25 hp tractor and the above 100 hp tractor (para 4.05); (5) allocate adequate internally generated funds for the project (para 7.02); (6) observe certain financial covenants to maintain a sound financial position (para 7.05); (7) arrange for an external audit (as specified in para 7.13). 9.02 Based on the foregoing commitments and agreements, the project provides a sound basis for a loan to IMT of US$18.5 million equivalent for 14 years, including a 3-year grace period. Industrial Projects Department January 28, 1974 ANNEX 1 Page 1 YUGOSLAVIA - IMT FACTORY TRACTOR EXPANSION PROJECT DESCRIPTION OF TECHNICAL TERMS CKD Tractor Completely knocked down tractor for export and assembly in an overseas tractor assembly shop. Disc Harrow A disc harrow is a tractor attachment designed for primary tillage and preparation of a field in readiness for planting and seeding. It consists of a series of hardened steel discs, that may be conical and angled in relation to the direction of travel, attached to a steel frame which is hitched to the tractor. Full Cycle Time Total time required for the completion of an operation, including machining time as well as material handling and machine setting time. Heat Treatment and Surface Protection Thermal and/or chemical treatment of metal parts to secure desired hardness. Motorcultivator A power driven tiller used for soil tillage and for planting, bed shaping, chemical incorporation or cultivating for row crops. PKD Tractor Partly knocked down tractor. Rotavator A rotary tillage machine working the soil through the medium of blades mounted on a flanged rotor. The machine may be mounted or trailed behind a tractor. Scaffolding Tubular poles and couplings which can be assem- bled to provide a temporary platform for work- men, such as bricklayers and painters, to stancd on when working at a height above ground. Seed Drill A seed drill is a tractor attachment-designed to plant seed at precise spacing and predetermined depth. It consists of a container with openers in the bottom feeding press drills, which meter and place the seed in the required position. ANNEX 1 Page 2 Stroke Output frequency; i.e., 26 strokes for the assembly of a tractor model means that every 2.6 minutes an assembled tractor leaves the assembly line. Transfer Machine An automated complex machine capable of doing machining as well as machine setting up and inspection operations. Trumpet A bell-shaped, machined casting which houses the rear axle. Industrial Projects Department November 1973 ANNEX 2-1 Page 1 YUGOSLAVIA - TIT TRACTOR EXPANSION PROJECT DESCRIPTION OF EXISTING FACILITIES 1. IIT's existing facilities are: a) the main production unit "IMT Tractor and Agricultural Machinery Factory"; located in the new industrial area of Belgrade (population 1.2 million) about 12 km from the city center. The total labor force of 2,900 pro- duces tractors, tractor implements, accessories and spare parts (for detailed production program see Annex 2-3). b) "PfK-M1otorcultivator and Agricultural Machinery Factory, Knjazevac"; located on the outskirts of Knjazevac, Serbia, about 280 km southeast of Belgrade and 40 km from Zajecar near the Yugoslav-Bulgarian border (see Section B below and Map IBRD 10716); c) the PIT Service Center--Dobanovci; located in Dobanovci about 15 km northwest of Belgrade and conveniently linked to its service area by highway and rail (See Section C below and Map IBRD 10716. A. ItT Factory Belgrade 2. According to new zoning regulatious dated January 1, 1973, DIT's total property in Belgrade (168,500 m ) has been earmarked as an in- dustrial area. About 190 families have been living in small houses on the plant site. They will be relocated and the houses dismantled as soon as feasible. 3. TMT's production processes focus on machining operations, heat treatvient, nainting and assembly. Castings, forgings, stampings, electri- c;il e(oquiptmient, hvdraulic .accessories, tires, hardware and other components are suDolieed by local and foreign sub-contractors. Consequently, the plant consists of three main production units--the tractor parts machine shop, the tractor assembly shop and the implements production shop--which are located in separate buildings, as shown in the plant layout (Annex 4-2). The exist- ing principal facilities of the INT Belgrade factory include: a) the main building (18,000 m 2; constructed in 3954 and housing the tractor parts machine 2hop (9,800m'), the tractor assembly shop (5,665 m ), storage areas, the cafeteria and offices for the sales and services, production planning & inventory control departments. ANNEX 2-1 Page 2 b) the implements production shop (7,480 m ); located on FOB's property and which has to be dismantled by 1975 to make room for FOB's expansion. c) several small single storey; ho2ses built during 1940- 1948 and covering about 8,130 m , with offices for the industrial engineering, finance, personnel and develop- ment departments. 2 .l) 8 separated sheds (7,879 m ); without heating and tech- nical equipment, for the storage of raw material and components, and an open storage area for finished goods. 2 e) the annex building( 8,641 m ); housing the maintenance shop, laboratory, social services and instruction room and garage. To achieve the current production target of 15,850 tractors/year, the heat treatment installation is operated on a 3-shift basis, whereas all other production facilities operate on 2 - 2-1/2 shifts per day. Tractor Parts r4achine Shop 4. The machine silop is divided into heavy and light machine sections, the tool room, the heat treatment installation and surface protection facil- ities. Machining of hydraulic pump components is handled in an attached annex building. I'eat treatment and surface protection facilities are used for tractor parts as well as implement parts. 5. 'achining is carried out by 333 machine tools of which 65 are high-productivity machines and 68 are obsolete. Because of lack of space and machine tools the operations are arranged in 21 lines. This leads to machining of technically dissimilar parts on the same line and so results in increased mnachining and set-up time. During the 1972 production capac- ity expansion from 12,000 to 15,000 tractors/year, new machine tools (worth Din 43 million) were installed. However, the floor area was increased by only 720 m , aggravating the already overcrowded conditions in the machine shop. 6. Trumpet Potusing Machining. After loading and transporting of the components on roller conveyors from the transit store to the machine shop, the operation consists of (a) rough machining of flanges and bores, i.e., the final machining of bores, and (b) drilling of flange holes on two way multi-spindle radial drills. This system requires 10 machines, 7 workers and 8 minutes machine time/trumpet housing, which is inefficient. A transfer line for trumpet housing machining can decrease the required machining time to 5.2 minutes/trumpet housing, including inspection, and will be installed in the project. YUGOSLAVIA - IMT EXPANSION PROJECT PLANT LAYOUT AND MATERIALS FLOW - TRACTOR PRODUCTION w 1.1. Heat treatment shop 1.2. Plating shop 1 1.3. Painting roomRod 2. Implements p,od-tion shop 2.1. Paintig room 3. Smffolding p,od.ictioii slop OAoidig 4. O*rha and til shop 5. Storage of matecal 6. Covered storage space 2. 7. General maintenance 10. Bora r l roo ir n s_ 1t. Open stoi t11icn 12. Workers' rest of iant World Bank-800 YUGO"°-AVIA- IMT TRACTOR EXPANSION PROJECT AM= 2-1 Flow Chart of IMT Tractor Asmwbly System- (1973,15,000 Tractor I Yerw) AUXILIARY LINE MAIN LINE L Cntr Houing Cwting J G w Box nd SterIw A_iibl Trumpet Naiml Left J HydrJulb Punip Sbasembly Dlfweqntiel Subuiibly | Dlthr S _ | l Leulling Links on HyVuihie z Trun'ipet Homing AI lH Enghn,autch end Comprewlon Trurnpet Ho40uslRing t R| >. " &ub ly to GM box I _ _ _ _ _ _ _ _,L__ A . | Front xb r~~~~~~k uppon,bttry ar rb Dis Brok to Trumpet Housing inkbso pedlsoiutch psdh,ln-O PFhw Reduction plus hell shf Pnt teot from both mid. on trumpet housing Hydrulic Cover lubms_bly Induction Drying (IO min) F ~ Radiator Instrme hntlP Eubombly.FN | 8f Wp4WMfueI tonk C Engir hood.,Euetrbl wArhnte. thed mmp,er light.from 14ht Alr else,wrfront nid upportselr I I We r oll end tfuel I. I r Hydraulo a pointlhlnhgphVrl eon ttNW4 lAdulelr Proee De.isn _ _ __ _ _ _ l dor 1973 Finil I sirrtln Werl 1knitJ ANNEX 2-1 Page 5 7. Hleat treatment of tractor and implement parts requires carburation, nitridina, induction hardening, straight hardening and washing. In 1972, a new Degussa carburation furnace and ignition hardening equipment were in- stalled, resulting in the following capacities for the existing heat treatment facilities: tons/year Gas Carburation --Degussa 600 -- Chambered furnaces 1,000 Ignition Hardening 300 Nitriding 80 Direct quenching 1,500 Rotating furnaces and quenching presses 1,100 Iiiu, Ltion Hlardening 500 Sand blasting 2,800 Annealing 2,500 Salt Baths 600 This capacity will be insufficient for IMT's production volume after implementation of the proposed project. The facilities will then remain at the present site and be used for treatment of implement parts only. 8. Observations. The production bay has been repaired many times, the roof leaks, heating and electrical lighting are tnsufficienit and inadequate ventilation in the heat treatment area creates unhealthy condi- tions. Besides bad working conditions the major production bottlenecks are (a) lack of space for storing parts before and during machining and (b) over- crowded arrangements of the machine lines. Machined parts pile up in the working and transport areas and impede the production flow. Equallv, for lack of space, a number of heavy machines have had to be installed in the light machine area, resulting in increased machine and comnponents movement. In addition, the nickel and chrome plating sections are overloaded for the present production capacity. The facilities of the tractor parts machine shop, including floor space, machine tools, inside and outside storage, are presently being used to the maximum extent and do not allow any further increase of production without expansion. Tractor Assembly Shop 9. Ti-e tractor assembly shop located in the main production bay consists of two paint and drying shops, the main assembly line and six sub- assemblv lines. The flow chart in this Annex shows the present assembly system [or an annual production of 15,000 tractors. The assembly line pro- duces one IYT-533 tractor every seven minutes. ANNEX 2-1 Page 6 10. Observations. Although the assembly procedure is acceptable for a 15,000 units/year tractor production, the present facilities have been stretched to a riaxirnum and it will not be possible to achieve any signifi- cant ir,crease in the present production volume. The major bottleneck is inadequate internal transport of tractor parts and the lack of a proper con- veyor system between the auxiliary and main lines also: (a) Storage space for production components is lacking, as sheet metal components are trans- ferred by overhead conveyor lines; (b) There is insufficient space for sub- assembly lines, inefficient placing of tools and no systematic feeding of sub-assemblies through conveyors to the main line. Conditons particularly in the paint shop, do not meet minimum health standards: (a) the paint booths have no fluid curtain (water fall) system for absorption of spray and possible recycling of paint and (b) there is no airconditioned, dust-proofed cabin for the hydraulic pump and system. Tractor Attachment and Implement Production Shop 11. Tractor impleients and accessories are produced in the temporary production bay (7,480 m ) on FOB's property. For heat treatment, surface protection and painting the facilities in the main production building are used. The implement shop is crowded and lack of space impedes a more pro- ductive work organization and higher productivity. To achieve an increased production volume a reorganization of the material flow and assembly lines of all implement types as well as additional floor space and equipment are mandatory. Quality Control 12. The present quality control systems consist of (a) inspection of purchased raw materials and supplies by sampling, (b) control of 5 products from 20 work places per hour and (c) final inspection. The material flow of the existing assembly shops does not allow adequate quality control and will be improved under the project. IMT owns machanical, physical, metallo- graphic testing equipment which is located in FOB's laboratory. The project includes additional quality control and testing equipment which will be needed for the increased production volume. Scaffolding Production 13. The Scaffolding is produced partly in the implement production s1.-lp and partly in a separate building adjacent to the storage sheds. After project implementation the implement production shop will be dismantled, restricting scaffolding production to one building. Since no increase of scaffolding output is planned for 1976 the project does not envisage any ex- tension of the production facilities. YUGOSLAVIA - IMT EXPANSION PROJECT PLANT LAYOUT AND MATERIALS FLOW - IMPLEMENTS PRODUCTION 1.3 Pmatin s-emil-roNDR 2. hsemm pmods- o doP ~ 11 Ii Sc.ffisws slm iop 11 -' IzB x bII 'R ,.,~~~~ vsus em tI d,r 1.3- -B- .~~~~~1 | _ _2 RO O& W _ 4. = w J tam shop Bikng 5, saup Of lrd 10 W,. @iroom,; M1 OP- qe- -p 12Z WAh m' -t W.d P--0C ANNEX 2-1 Page 8 Storage and Other Facilities 14. The existing storage facilities for raw materials and parts are scattered over the property, consisting of an old building adjacent to the tractor production shop and several small wooden sheds. For lack of space, deliveries of raw material ana warts are dumped on internal roads, are piled up in front of entrances to and between various buildings restricting the trans- port on the factory site and requiring extensive cleaning before machining and assembling. 15. The existing general service facilities (locker-rooms, toilets, cafeteria, meeting rooms, parking, etc.) and offices were planned and built for a total labor force of 2,000. With regard to the present IMT labor force of 2,900 men, these facilities are grossly inadequate and contribute to sub- standard working conditions in the plant and office areas. Utilities 16. For details of existing and planned facilities, see Annex 4-1, para. 22-27. B. FMK - Knjazevac 16. FP1K - Motorcultivator and Agricultural Machinery Factory in Knjazevac employs about 450 people and produces motorcultivators in the 5- 9 hp range, a 2-axle (18.5 hp) tractor and a variety of implements under license from the West German Company "AGRIA WERKE" (for detailed production program see Annex 2-3, para. 4). 17. In 1971 DIT began an expansion of the existing facilities of FMK investing Din 41.2 million in fixed assets. Building construction and erection of new machines are scheduled to be completed by December 1973 and will increase FMK's capacity of motor cultivators, small tractors and the required number of implements. 18. The factory located on a 13,000 m site consists of a 6,400 m production shop, an open storage area for raw materials and parts, adequate restaurant, office and services areas, a garage and ambulance annex, covered finished goods store (1,000 m2), boiler and transformer station and special storage facilities for storage of inflammable liquids. After completion of the project facilities at FYK will be adequate and are not expected to require any additional investment during the eighties. C. PIT Service Center-Dobanovci 19. The service center in Dobanovci was founded in 1954 and merged with IMT in 1956. The service and repair facilities were expanded during the 1966-1968 period and presently employ about 170 people. The produc- tion program includes: ANNEX 2-1 Page 9 a) industrial overhaul of tractors (1,500 units/year), engines (5,000 units/year) and motor vehicles (120,000 cars/year); b) service of TIT tractors, IMR engines, DPA and fuel pumps (IPM, CAB, BOSCH) as well as TAM and FAP cars during and after the warranty period; and c) sale of spare parts and repaired tractors. Industrial Projects Department September 1973 ANNEX 2-2 Page 1 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT ORGANIZATIONAL AND MANAGERIAL STRUCTURE A. IMT - UMI Relations.ip 1. Industrija Masina I Traktora (IMT) is approximately the fiftieth largest industrial company is Yugoslavia. In 1970 IMT, together with six other metal manufacturing and processing enterprises located near Belgrade, formed the Associated Metal Industry (Udrverna Metalska Industrija-UMI), which is: now the 15th largest industrial group in Yugoslavia. The following companies are members of the UMI group: (a) Iron Foundry "FOB", Belgrade; (b) Diesel Engine Factory "IMR", Rakovica; (c) Vehicle and Vehicle Parts Factory, "Ikarus", Zemun; (d) Agricultural Machinery Industry, "Zmaj", Zemun; (e) Automobile Engine Factory "DMB", Rakovica; (f) Manufacturer of Precision Instruments "IPM", Belgrade; and (g) "IMT". 2. UMI's main management body is the Workers' Council which includes representatives of the seven member enterprises. The Workers' Council guides and coordinates the activities of the member companies, while a Gen- eral Manager is in charge of day-to-day operations. A special committee formed by UMI's Workers' Council selects the General Manager from candidates proposed by the Workers' Councils of the member enterprises. An Executive Board assists the General Manager in draft- ing the development and work programs of UMI and determining the use of UMI funds. At present, the administrative staff consists additionally of a secretariat, a planning division, a development division and a division for financial analysis which prepare long-term, medium-term and yearly plans for UMI member companies. 3. UMI's operations are financed, inter alia, by Joint Reserve Funds and Joint Development Funds created by contributions of member companies. In 1970 each firm contributed a certain percentage of its net income to the Joint Reserve Fund and 0.3% of the 1969 Business Fund to the Joint Development Fund. However, subsequent annual payments have varied according to the rates specified in UMI's annual economic plan. The Joint Reserve Fund provides interest-free loans in order to help cover losses incurred by member companies. The main objectives of the Joint Development Fund, on the other hand, are to organize cooperative programs of research and development, conduct market studies, and set up joint sales offices for the UKI group. This Fund could also be used to provide interest-free loans to member firms for expansion and development. ANNEX 2-2 Page 2 4. Currently, all annual investments by member companies of more than one million Dinars require prior approval from UMI. Future developments will show if this provision hinders the progress of orderly expansion or whether, in contrast, it coordinates and facilitates common as well as individual ex- pansion plans. B. IMT - Self-Management Organization 5. The IMT enterprise consists of four entities which joined together under a self-management agreement in March 1973. These are: (i) the Tractor and Agricultural Implements Factory, New-Belgrade; (ii) the Workers' Restaurant, New-Belgrade; (iii) the Motorcultivator and Agricultural Implements Factory, Knjazevac; (iv) Service and Repair Center, Dobanovci. The General Services Departments of the Tractor and Agricultural Implements Factory, i.e., the Financial, Sales and Services, Development and Personnel Departments, are in charge of the relevant activities in all four entities. After completion of IMT's expansion project, it is planned to separate the Tractor and Agricultural Implements Factory and establish two separate bodies for Tractor Production and for Implements Production. 6. As is common in Yugoslavia, IMT is managed internally by its workers. Through this system workers participate both directly and indirectly in decision making. The major organizational units for direct participation are the Labor Units and the Workers' Assembly, whereas indirect participation is guaranteed by the Workers' Councils and by the General Manager. 7. Labor Units and Labor Units Council Labor Units are departmental and functional units within the enterprise. They have the right to determine the distribution of personal income within the unit and sanction the unit's production targets. The chief of every Labor Unit, as well as other directly elected members, form the Labor Units Council which pays particular attention to work incentives, productivity improvement and social standards. The Labor Units Council is led by a President and Vice-President elected by its members. In case of dispute among the Labor Units, an arbitration commission is appointed whose decision is final. 8. Workers' Assembly The Labor Units Council is responsible to the Workers' Assembly of the relevant IDT entity, in which the employees participate directly in ANNEX 2-2 Page 3 making decisions on key issues. This Assembly can be convened any time on the initiative of at least one tenth of all workers. 9. Workers' Council In the organizational framework of the Yugoslav self-management system, the Workers' Council is the most important management body. The Workers' Council of IMT has 45 members, elected proportionately from ITT's four eatities. Each year, half the Council members are replaced by newly- elected members who serve a two-year term. Nobody can be elected to the Council for two consecutive termns. The Council determines the Company's policy by approving major investments, the annual investment plan and the appropriation of net income. In addition, its responsibilities include: (a) coordination of IMT's development plans with those of the UMI group, (b) decisions on business loans to UMI members, (c) organization of referenda to decide key issues such as mergers, integration and technical cooperation with other enterprises, change of location, and change of name, and (d) election and dismissal of members of executive bodies, commissions to deal with specific issues. The Workers' Council of IMT also forms special committees such as the Immunity Commission, the Committees for Production Problems, for Commercial-Economic Problems, and for Organizational-Judicial Problems. 10. General Manager The General Manager, as well as his deputy, are elected by the Workers' Council on the basis of a publicly-announced open competition. Election is for a four-year term with the possibility of re-election. The Council sets up a committee to consider all applications and make recommen- dations. Based on these recommendations, the Council elects the candidates who are considered to be the best qualified. Minimum requirements for the position of IMT's General Manager are (a) a university degree and six years management experience, (b) a high school education combined with 12 years of experience in management. 11. The General Manager is independent in his day-to-day operations and is responsible only to the Workers' Council. However, he can overrule the decision of the Workers' Council only if its decision conflicts with Yugoslav law. Any elected company official, and in particular the GCnera! Manager and his deputy, can be relieved of their duties before the expira- tion of their term if they have lost the confidence of the Workers' Coun- cil. 12. IMT's General Manager is assisted in his function by his deputy, two Advisors, and the Collegium. The General Manager may also appoint an Expert Council consisting of Company or outside experts if special problems arise on which he seeks advice. The Collegium consists of IMT's General Manager, his deputy, the Plant Managers of the four IMT entities and the Directors of all departments of the Tractor and Agricultural Implements Factory, New-Belgrade. They meet regularly once a week to discuss opera- tional problems. ANNEX 2-2 Page 4 C. Management 13. The present General Manager of IMT is Radosilav Radovic, 42, a mech-lnical engineering graduate of the University of Belgrade. He joined IMT in 1950 and, prior to his selection as General Manager in June 1971, has worked in various positions, including plant engineer, assembly line manager, chief of production preparation and Director of tractor produc- tion. 14. The Deputy General Manager, Mr. R. Anastasijevic, 39, joined IMT in 1953. He is an economist and was in charge of Spare Parts Service and later the Export Division. After his election as Deputy General Manager in March 1972 he has mainly been responsible for export-import arrangements, foreign currency and commrcial-financial questions. 15. The Directors of IMT's various departments were elected in June 1971 or March 1972 for a 4-year term. They report to the General Manager and are responsible through him to the Workers' Council. The mission has the impression that IMT can count on a competent and experienced management team; specifically, the Financial Director, Mr. P. Dubajic, 40, the Director for Production Planning and Control, Mr. D. Begus, 40, and the Director in charge of the Expansion Project, Mr. M. Predragovic, 63. Industrial Projects Department September 1973 YUGOSLAVIA - IMT EXPANSION PROJECT ORGANIZATION CHART WORKERS COUNCIL IMT GENERAL MANDGER IMT R. RADOVIC' COUNCIL R- ANASTASIJEVIC. .wLjmA__ I.. WALDETS ANDD NOTOWICULT#VA11Oi EACTORY TRACTOR AGRICULTURIAL MACHINERY SERVICE AND REPAIR SHOP lR JA2EVMF FACTORY BELGRAD DOBANOVCI WORKERS RESTAURANT VMKIERSASSEILY WORIKERS' ASSEMBLY WORKERS' AEBLY WORKERS' ASSEMBLI LA tOR ETS COUCIL LABOR UNITS COUNCIL LABOR UNITS COUNCIL LABOR UNITS *OUNC,L MA IA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ANAGER R TGER PUWTACER R aUCTOR MACHINER Y & R.~~~~~~~~~~~~.AOI BEGLVCS 5>ROIC L v SEIC REOAGOIC .RAOV{ INENTOR PARTS SHASSMLY NPLEM E_TS L S T____POR_ PAVILCA ZIVANOVIC BUKARICA PA4le L BRUJIC' VULOVIC h.u..iB ftoW~E EMI Wo.ld B.fdk-81O07(R) A,5U 1973 ANNEX 2-4 Page 1 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT ITT PRODUCTION AND PRODUCT LINE Production History 1. Iidu trija Masina i Traktora (IMT), of Belgrade, was founded in 1947, but started manufacturing agricultural machinery only in .955 after acquiring a iassey-Ferguson tractor license. Until 1956, INT assembled TE 20 (20 hp) tractors, but in 1957 changed over to MF-135 (35 hp) tractors. The initial program of assembling imported tractor parts was gradually replaced by PKD- CKD 1/ tractor production. 2. The Company's engineers were trained in foreign Massey-Ferguson plants and developed IMT's tractors on the basis of the licensing agreement. However, the present IMT product line, although similar to the Massey- Ferguson family, does not depend on licenses. The dependency on Massey- Ferguson had decreased continuously when switching from PKD/CKD to act or assembly to the purchase of specific components, and IMT's in-depend introduc- tion of a 35-85 hp tractor line in 1969. Thereidoes norw exist any manufactur- ing relationship between IMT and Massey-Ferguson, in contrast IMT acts as MF's sales and servicing agent in Yugoslavia. IMT's growth has been char- acterized by the following product range developments and capacity expansions: (a) First Expansion: In 1961, the IMT-533 tractor (35 hp) was introduced and manufacturing facilities were expanded to permit a production of 4,000 units/year, together with spare parts and machine tools. During 1963-1964, IMT de- veloped and began manufacture of a 50 hp tractor (IMT-555). (b) Second Expansion: During 1966-68, MT's production capac- ities were increased to 12,000 tractors/year, together with implements and accessories. The product line included an improved IMT-533 model, but the IMT-555 was discontinued and replaced by a 55 hp model (IMT-558). In 1966, IMT de- veloped its first series of agricultural machinery independ- ently of the Massey-Ferguson licenses. The new product line included 4 types of tractors IMT-533 (35 hp), IMT-555 (55 np), IMT-575 (72 hp) and IMT-585 (80 hp), as well as a wide range of tractor implements and accessories (see para 4). In ad- dition, IMT assembled 100 hp Massey-Ferguson Tractors. (c) Third Expansion (1971-1972) consisted of an increase of IMT's production capacity from 12,000 tractors/year to 15,850 units/ year (see Annex 2-4), and additions to IMT's implements product line. 3. IMT's Belgrade plant maintained the following production schedule during the 1968-73 period:- 1/ PDK - partly knocked down; CKD - completely knocked down. ANNEX 2-4 Page 2 Productioll Progran - IMT Belgrade (1968 - 1973) (units ) 1968 1969 1970 1971 1972 1773 I. Tractors?- (st. - 533 6,003 5478 8,003 10,526 11,926 13,600 IMT 558 315 1,472 1,150 1,300 1,812 1, 6{!o 1M E - 575 - - 100 230 142 250 - - - - 150 275 400 Over 100 hp - 82 75 180 47 - II. Tractor Sets CKD 2 500 2,160 1,400 365 200 1,000 Sub-total ^ ,1 9,192 10,728 12,751 14,liO 16,T III. Tractor Implements Trailer 3/3 T 1,157 1,600 1,688 2,667 4,503 5,500 Trailer 5/3 T 67 65 26 - - 5 Rotavator 50 50 100 100 164 450 Plow - - - - 1,000 1,00 Seed Drill - - - - 150 150 Cultivator - - - - 100 150 Disc Harrow - - - 100 200 400 Sub-total 0 1 42 8 7 5,630 IV. Tractor Accessories Pulley 661 1,085 1,002 402 974 2,150 Automatic Drawback 845 2,225 1,549 2,106 2,8b6 5,950 Cab - - 97 776 950 1,500 Stabilizers 806 505 1,702 613 2,410 3,000 Weights 216 200 832 1,391 1,620 2,500 Seat - 1,603 1,345 1,692 1,872 2,500 Othero - - - - - 600 Sub-total 2,528 1 6,527 1 1072 1],200 -1. Spare Parts & Components (million Dinar) 21.5 31.6 46.7 31.9 43.6 55,3 VI. Scaffolding (milBIon Dinar) 22.9 27.1 30.6 3b.3 32.2 . 1/ For hp of tractor types, see para 8. 2/ Export of tractor sets CDK (without tires, electrical equipment and engineq) to TAFFE - India. ANNEX 2-4 Page 3 4. FMK - Motor Cultivator and Agricultural Implements Factory. KnJazevac and IfMT, Belgrade merged in 1970. FMK Knjazevac produces motorcul- tivators in the 5-9 hp range, 18.5 hp tractors, implements (rotavators, ridgers, plows, trailers, harrows, cultivators, potato planters and snow clearing machines), weights and parts. FMK's implement production is suffi- cient to cover demand and offers a wide choice of designs. Product design for the FMK line is based on a licensing agreement with the (F.R.) German Agria-Werke, which was signed in 1967. Production Program - FMK Kniazevac (1970-1973) (units) 1970 1971 1972 1973 I. Motorcultivators and Tractors Motorcultivator AGRIA 2100 (5 hp) 20 50 70 50 Motorcultivator INT - 505 (5 hp) 440 410 401 1,000 Motorcultivator IMT - 506 (6 hp) 300 450 804 3,534 Motorcultivator IMT - 507 (7 hp) 60 65 110 100 Motorcultivator IMT - 509 (9 hp) 30 40 70 80 Tractor AGRIA 4800 (18.5 hp) 50 50 20 - Subtotal 900 1,065 1,475 4,764 II. Implements For AGRIA 2100 748 1,170 For IMT - 505 5,300 7,840 For IMT - 506 3,700 5,045 For IMT - 507 786 680 For IMT - 509 368 700 For AGRIA 4800 30 39 Subtotal 10,932 15,474 III. Parts for AGRIA-Werke 23,750 90,000 IV. Weights 6,100 7,000 During 1970-1972, FMK Knjazevac initiated an expansion program designed to triple the company's capacity by 1975 (for details, see Annex 2-4, para 16- 18). From a manufacturing point of view, the IMT tractor models produced in Belgrade incorporate a desirable degree of standardization and component integration. ANNEX 2-4 Page 4 7. A detailed review of tractor design specifications does not suggest specific improvements which need be incorporated at the present time. However, changes may be needed on a continuing basis according to market demand and farmers' preferences. IMT is aware of the need for on-going model improvement. The Development Department is currently testing improved tractor features (air brakes, safety cords) and has started the development of a road transport gear box and a higher capacity hydraulic pump and system. The program of the Development Department and the existing optional tractor specifications indicate that IMT should be equipped to meet changing market requirements by regularly introducing a number of design innovations. Future Tractor Product Line 8. The project proposes an increase of total tractor production in Belgrade to 35,000 units per annum, as well as changes in product range and product design improvements: IMT Belgrade Tractor Production (units) 1973 1974 1975V 1976 i1- 1977 IMT - Tractor (20-25 hp) - - - 1,000 3,000 IMT - 533/40 (35-42 hp) 13,600 13,600 16,400 22,500 25,000 ]IT - 558/60 (55-60 hp) 1,600 1,600 2,150 2,900 3,300 IMT - 575 (72 hp) 650 450 550 1,600 1,800 IMT - 585 (80 hp) - 200 350 1,200 1,500 I_T - Tractor over 100 hp - - - 300 400 Total 15,850 15,850 19,450 29,500 35,000 The product line changes and design innovations which have been tested and will be introduced before project completion are: (a) Partial replacement of the IMT-533 (35 hp) tractor by the IMT-540 (42 hp) model and the IMT-558 (55 hp) by the IMT-560 (60 hp). These additions involve minor technical changes; e.g. Diesel engines with higher rpm; newly styled head and rear lamps and sheel metal parts (fenders, hoods, radiator cover, grill); the introduction of higher hp models is a worldwide trend in tractor marketing; (b) improvement of models IMT-575 and IMT-585 by adding newly styled sheet metal parts. Both models will continue to have the same A-4.248 Perkins 4 cylinder 4 stroke Diesel engine (72 hp at 2,000 rpm and 80 hp at 2,250 rpm); 1/ Completion of the assembly facilities in September, 1975. ANNEX 2-4 Page 5 In addition, the project foresees the development and marketing of a new 20-25 hp tractor and of a tractor in the above 100 hp range. 9. 20 - 25 hp Tractor: IMT intends to produce about 3,000 tractors in the 20 - 25 hp range by 1976. IMT has, with the AGRIA 18.5 hp tractor and the IMT-533, tractors up to 18.5 hp and of 35 hp but no unit in the 20 - 30 hp range. As indicated in the market analysis (Annex 3), an important part of tractor demand by private farmers will be in this range. IMT therefore intends to enter this market as soon as possible, in order to build up its competitive position vis-a-vis the Pasquali tractor which "Ruen", Macedonia, plans to assemble in Yugoslavia. From a marketing point of view, the 20-25 hp tractor is an important addition to IMT's product line. 10. As for the type of 25 hp tractor, IMT is considering to introduce a) a special type of four-wheel tractor for vineyards and hop culture, and/or b) a classic small tractor to be used in hill areas. The Company is still discussing if the latter tractor should be a smaller version of its IMT-533 (35 hp) model or the Massey Ferguson 25 hp tractor which had been assembled by IMT in the past. License negotiations with Massey Ferguson are currently underway. A definite decision and development plan is expected by December 1973. In view of the work still required the production build-up and finan- cial projections assume production of 1,500 tractors in the 25 hp range in 1976 and 3,000 units in 1977. 11. Over-100 hp Tractors. Since 1969, IMT has assembled a limited number of Massey Ferguson 100 hp tractors. However, in 1976, ItT anticipates the production of its own above-100 hp tractors. Prototype production for the over 100 hp tractor is scheduled to begin in January 1974. The design of the new tractor relies on maximum inter-changeability of parts with IMT's 85 hp tractor and includes the newly developed transmission case, pumping and hydraulic system. The tractor will have a Perkins P6/354 engine which is already in serial production in Yugoslavia (IMR, ZMAJ, 14 October). For the proposed annual production of 400 over 100 hp tractors it is not econom- ical to develop the required heavier gearlinks; therefore, IMT has initiated negotiations to import this item from Danfors. Currently, domestic demand for tractors in this horsepower range is entirely supplied by imports. IMT's planned production volume of 400 tractors over 100 hp could fill about 70% of domestic demand after 1976. Tractor Implements and Accessories Production 12. Implements: IMT's implement production in 1973 consists of 3 - 5 ton trailers (6,000 units), rotavators (450 units), plows (1,500 units), disc harrows and a small number of seed drills and cultivators. All imple- ments that are being manufactured were developed by tMT, and their design ANNEX 2-4 Page 6 and performance characteristics are good. Owing to lack of production capac- ity, TNT manufactures only a limited number of implements needed for its tractors. To assure an adequate level of implement availability for its customers, IMT has established subcontracts and trade agreements with other producers. In 1973, INT expects to realize Din 78.3 million through sales of its own implements and about Din 120 million through sales of units supplied by cooperating implement manufacturers. 13. The 1976 manufacturing program proposes production of 16 types of implements, totaling 27,700 units of various models, i.e., seed drill/ fertilizer planters (3 maize and 3 beet models), seed drill, trailer (2 models), mold board plow (11 models including 3 reversible types), disc plow (3 models), disc harrow heavy duty (4 models), one gang disc harrow, offset disc harrow, heavy duty mounted disc harrow (5 models), rotavator (3 models), tillers (8 models). Owing to the high degree of integration of components, the proposed production of such a variety of models should not pose any problems. Although implement production will be tripled by the project, the total volume detailed below will remain modest (about 1 implement per tractor): Tractor Implements IMT Belgrade - Implements Production Projections (units) 1973 1976 1977 Trailer 3/3T 5,500 6,500 6,500 Trailer 5/3T 500 1,300 1,300 Rotavator 450 450 200 Plow 1,500 8,000 12,000 Seed Drill 100 1,000 2,000 Cultivator 200 1,000 1,000 Disc Harrow 400 4,000 4,000 Total (units) 8,650 22,250 27,000 Other Implements (million/Din) 71.7 89.4 105.3 14 In addition to the proposed implement line, IMT is considering to developing and manufacturing such items as post hole diggers, cranes, jig cranes, loaders, manure spreaders and grind mixers which could be powered by LIT tractors. To facilitate maximum utilization of Iff tractors, IMT is dis- cussing the possibility of long-term agreements with other Yugoslav farm implement manufacturers for development and supply of mowers, sprayers, threshers and harvesters. 15. Accessories: The production of tractor accessories (pulleys, draw backs, cabins, stabilizers, weights, seats) has increased fivefold since 1968, but accounts for only 4.5% of ITT's 1973 projected sales. The ANNEX 2-4 Page 7 accessories are well designed and by 1976 IMT will supplement its prodlLct line by a high speed road transport gear box and higher capacity hydraulic and pump systems which are currently being developed. The proposed 1976 production program reflects IMT's tractor production increase and the associated increase in demand for accessories: Tractor Accessories - Production Projections (units) 1973 1976 Pulleys 2,150 2,800 Automatic Drawbacks 5,950 7,700 Cabins 1,500 25,700 Stabilizers 3,000 1,400 Weights 2,500 700 Seats 2,500 2,100 Others 600 1,100 Scaffolding 16. IMT has traditionally been a producer of scaffolding. Although it does not directly fit into the Company's product line, IMT intends to maintain the present production level in the future. Spare Parts Production 17. Spare parts amounting to an estimated Din 48.0 million or 4% of total sales in 1973 have been a minor part of IMT's production program. Under the project the company's spare parts production will increase according to the requirements of the growing size of the IMT tractor fleet. In addition, the company believes there is significant export potential, particularly in components for Massey-Ferguson tractors. Industrial Projects Department September 1973 ANNEX 2-5 YUGOSLAVIA - hIMT TRACTOR EXPANSION PROJECT Historical Income Statements(1968-1972) (Din million) Years Ending December 31 1968 1969 1970 1971 1972 I. Sales Revenues Domestic Sales 217.2 307.5 334.7 574.2 793.9 Export 52.8 38.2 62.8 53.6 53.8 Others - 70.8 99.6 118.9 183.2 Net Sales -- 270.0 416.5 497.1 746.7 1,030.9 II. Cost of Goods Sold Materials, Supplies, Utilities 188.0 273.7 340.2 530.3 776.7 Labor 12.6 21.6 40.2 55.5 72.1 Inventory Changes 11.8 35.8 10.6 2.9 (1.6) III. Gross Profit 57.7 85.4 106.1 157.9 183.7 IV. Operating Expenses Maintenance & Repair 11.8 11.9 16.1 23.1 30.4 Selling & Administration 24.5 37.9 26.6 37.8 44.5 Depreci7 ion 9.7 10.3 18.4 22.6 25.5 Othersi-I 3.2 1.5 2.1 2.0 2.9 IV. Operating Profit 8.5 23.8 42.8 72.4 80.5 Other Income 10.2 7.4 8.8 8.7 12.7 Financial Charges 15.4 19.3 23.6 22.7 19.2 VI. Income before Taxes and Contributions 3.3 11.9 28.0 58.4 74.0 Taxes & Contributions 3.3 4.4 3.9 .6 .6 VII. Net Income - 7.5 24.1 57.8 73.3 VIII. Distribution of Net Income Appropriation to the Reserve Fund - 2.6 .9 1.2 4.0 Appropriation to the Collective Consumption Fund - 4.9 8.1 18.3 27.6 Compulsory Loans - - .6 5.8 6.1 Appropriation to the Business Fund - - 14.3 32.5 35.5 - for fixed assets - - 10.9 28.3 lb.3 - for current assets - - 3.4 3.5 21.2 1/ Including land and water taxes. insurances, contributions to association and chambers of commerce. NOTE: For explanation of terms see Annex 2-7. Industrial Projects Department October 1973 ANNEX 2-6 YUOOSLAVIA - D4T TRACTOR MXANSION P1DJECT Historical Balance Sheets (million Din.} Year Ending December 31 1/ 2- 1968 1969 197C 1971- 1972 ASSETS I. Current Assets Cash and Banks 10.6 1.2 10.6 2.7 25.4 Receivables 115.2 91.9 149.9 60.2 102.5 Inventory 128.1 143.4 175.8 201.0 273.8 Sub-total -- 253.9 236.5 236.3 263.9 01.7 II. Fixed Assets Gross Fixed Assets 148.9 138.9 140.1 247.9 355.9 least accumulated depreciation 2/ 49.3 52.9 65.6 180.0 209.0 Net Fixed Assets- 99.6 .0 67.7 i1i7 III. Financial Assets 11.6 3.2 37.0 36.0 31.0 IV. Other Assets 26.0 33.3 39.5 62.1 9l4.9 TOTAL ASSETS -_ 391.3 359.0 384.3 429.9 674.5 LIABILITIES I. Current Liabilities Accounts Payables 48.2 54.6 83.5 71.5 96.2 Short term debt 142.5 105.3 88.0 58.0 53.1 Current Portion of Long- tens Debt 14.8 14.9 19.0 21.8 18.2 Sub-total -- 205.5 174.o 190.5 151.3 i§U II. Long-term Debt 79.7 67.6 57.9 60.5 81.3 III. E Reserve Fund 8.9 10.8 8.8 10.1 18.6 Collective Consumption Fund 17.2 22.5 30.7 49.0 76.3 Cnpiulaory Loans - - .6 6.4 12.5 Business Fund --for fixed assets 42.2 42.0 55.1 85.5 211.5 --for current assets 37.8 141.3 40.6 64.1 106.8 Sub-total -- 80.0 83.3 95.8 149.6 318.3 Total Equity -- 106.1 116.6 135.9 218.2 425.7 TOTAL LIABILITIES 391.3 359.0 384.3 4?9.9 674.5 Current Ratio 1.2 1.35 1.2 1.7 2.4 Debt/Equity Ratio- 43:57 37t63 30:70 22t78 16s84 Note: Pbr explanation of tems see Annex 2-7 1/ Revaluation of fixed aseets included / Including worka in progreos Y/ Squity is defined in this context as Busineas Fund, Reserve Fund, Collective Consumption Fund and Comtpulsory Loana. Industrial Projects Departmsnt August 1973 AMNEX 2-7 Page 1 YUGOSLAVIA - IMT EXPANSION PROJECT DEFINITION OF TERMS USED IN FINANCIAL STATEMENTS A. INCOME STATEMENT 1. Depreciation of fixed assets has been calculated at the legal min- imum rate of 7% until 1971. In view of the exceptional use of the facilities by increasing tractor output from 12,000 to 15,000, IMT has adopted the fol- lowing depreciation rates for the 1971-75 period: (a) Land 0% (b) Buildings 3.5% (c) Machine tools and equipment 20.7% (d) Transport equipment 11.0% (e) Others 19.6% However, after the completion of the expansion project new and existing fixed assets will be depreciated at: (a) Land 0% (b) Buildings 1.9% (c) Machine tools and equipment 14.0% -d) Transport equipment 10.0% (e) Others 6.4% 2. Taxes and Contributions include (a) contributions to personal in- come as decided annually by the Workers' Council, (b) transportation, rent and vacation subsidies for employees, (c) a contribution for the Development of Disaster-hit areas, amounting to 0.75% of the gross personal income and, until December 1971, (d) a tax in form of a 3.5% interest payment on the Business Fund. B. BALANCE SHEET 3. Cash includes cash in hand, bank deposits and special funds for small investment (e.g., for repairs and maintenance, etc.). The account in- cludes funds which can only be used for current assets or for fixed assets or can be exchanged into convertible currency. 4. Receivables include receivables from domestic customers, advance payment for imports not covered by commercial bank credits, and prepayments for maintenance, worker's travel, etc. ANNEX 2-7 Page 2 5. Inventory includes raw materials and parts, semi-finished products, fini-led products and stores. On December 31, 1971, inventories were re- valuei as part of the general revaluation of assets. 6. Gross Fixed Assets include land, buildings, machinery and equip- ment, fixed assets under construction, license fees, etc. Under the Yugoslav accounting system, interest during construction and pre-operating and start-up expenses incurred by the Company are not capitalized; they are shown as cost items and deducted from sales revenue in the income statement. On December 31, 1971, there was a complete revaluation of fixed assets (ex- cluding land). 7. Depreciation: The legal minimum depreciation rate on machinery in Yugoslavia continues to be 7%. But since 1969 companies have been allow- ed to use higher depreciation rates. IMT's past and future rates are given in para. 15. The accumulated depreciation was also revalued on December 31, 1971. 8. "Other Assets" include collective consumption assets (e.g., cash from rent, credit to workers for housing, current value of assets such as canteen, business office, etc.) and reserve fund assets. 9. Financial Assets include investments in other enterprises, banks and chambers of commerce as well as time deposits for more than 12 months, such as (a) compulsory loans (see para. 13), and (b) the electric power deposit, i.e., a long-term loan to the power authorities amounting to 20% of any investment which is repaid after three years in 10 yearly installments. 10. Accounts Payables to suppliers, and short-term credit from other enterprises. Credits from commercial banks to cover receivables from foreign buyers as well as to make advance payments on raw materials imports for export production are excluded. (These items are netted out from both sides of the balance sheet). 11. Current Portion of Long-Term Debt includes repayment of principal due within the next 12 months to creditors - both domestic and foreign. 12. Long-Term Debt includes all outstanding debt (domestic and foreign) excluding current maturities. 13. Reserve Fund can be used to cover losses, to pay wages and salaries to employees in case of liquidity problems and to comply with court decisions to pay overdue debts. Annually, 2% of "Dahodak" (i.e., net sales minus cost of materials, supplies, and utilities as well as depreciation is allocated to the Reserve Fund from the net income ("Dobit"). ANNEX 2-7 Page 3 14. Collective Consumption Fund receives minimum annual allocations from net income of 4% of gross personal income. Higher allocations can be decided upon by the Workers' Council. In case the net income does not cover the legally required appropriations to the Collective Consumption and Reserve Funds, the allocation to the Collective Consumption Fund has priority. In case of losses, no appropriations are obligatory. The Collective Consumption Fund is mainly used to build houses and recreational facilities for workers, to meet travelling expenses during vacations, to defray hospitalization charges and to pay scholarships. How- ever, the Company can borrow without interest from this Fund up to one year for the following purposes: (a) to pay wages and salaries in times of liquidity problems; (b) to comply with court decisions to pay off overdue debts; and (c) to finance inventories and short-term credit sales in case of working capital shortage. In such cases of borrowing from the Pund, the Company has to contribute 2% of the amount to the Fund for the Development of Under- developed Regions. 15. Compulsory Loans include since 1971 (a) a loan to the Yugoslav State for the Development of Underdeveloped Regions. It amounts to 1.95% of the Business Fund, and is to be repaid after 3 years in 8 equal installments and at 4% p.a. interest, (b) a loan to the SFYR of 1.5% of the Business Fund, and (c) until 1975, a loan to the Mutual Reserve Fund of 3.5% of the "DAHODAK." These contributions to the Mutual Reserve Fund are at the disposal of th.e Local and Provincial Government for industrial development. However, when a Com- pany faces a severe working capital shortage and/or when it cannot get ade- quate external resources for expansion, it can approach both the Local Commune and the Provincial Government for loans. Credit to cover losses is not avail- able from the Mutual Reserve Fund. 16. Business Fund is comprised of net income, after appropriations to the Reserve Fund, Collective Consumption Fund and Compulsory Loans. Con- sequently, the Business Fund constitutes the main part of equity of an operating company. At the end of 1971, the Business Fund was revalued along with fixed assets. Business Fund appropriations are again earmarked for current assets and fixed assets. From January 1, 1973 on, Yugoslav legislation requires enterprises to finance at least 80% of their inventory by 1975 and 100% from 1976 through accumulated current asset appropriations to the Business Fund, or through bank loans with at least five years maturity. C. SOURCES AND USES OF FOREIGN EXCHANGE 17. Retention Quota: Yugoslav enterprises can use 20% of their annual export earnings without restrictions. 18. Depreciation Quota: Companies can change 10% of their total annual depreciation value into foreign exchange at the National Bank to repay and service foreign credits and/or to import equipment and spare parts. Industrial Projects Department September 1973 ANNEX 3 Page 1 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT MARKET ANALYSIS A. AGRICULTIURAL SETTING 1. The Yugoslav agricultural sector contributed about 20% to GNP in 1972. Crop production 1/ has been declining during the sixties, but reached the 1961 level of 57 million tons again in 1972. Yugoslavia is a traditional exporter of agricultural Droducts. However, despite a steady increase of farm prices, the value of agricultural exports fluctuated marginally around Din 4 million during the 1965-1972 period. Beginning 1970 the agricultural trade surplus decreased by more than 60% because of required import of feed for livestock. Regional Characteristics and Development 2. Yugoslavia is predominantly a mountainous country. Of the total territory of 25.6 million hectares, 14.6 million hectares are recorded as agriculturally productive, while the rest is taken up by forest, rivers and lakes. The fertile plain of Vojvodina, Croatia and Slovenia in the north-east represent only one-sixth of the country's total area, but contain nearly a third of arable land and produce more than half of the country's output of wheat and maize and over three-quarters of its sugarbeet. The hills (land up to 500 meters in altitude) covering much of Serbia, Slovenia and Bosnia are important for livestock raising and fruit production. The mountain region covering 44 percent of the country is generally unfavorable for crop produc- tion, but extensive un-land pastures make possible livestock raising. There are considerable regional differences in yields, which may vary up to 100 percent for cereals between the less favored areas of Kosovo and Montenegro and the most favored areas of Vojvodina, Slovenia and Croatia. The differences are less pronounced for fodder crops and potatoes. In the breeding sector, there are also wide disparities: in Bosnia-Herzegovina and in Montenegro the average weight of slaughtered cattle is only about half the national average. Farm Population Trends 3. Farm population has undergone a marked shift both in numbers and structure. Following a worldwide trend, the Yugoslav agricultural labor force is decreasing in absolute and relative terms because of migration to urban areas and Western European countries. 1/ Primarily wheat, maize, potatoes and sugarbeets. ANNEX 3 Page 2 Yugoslavia - Agricultural Labor Force (million) 1953 1961 1971 Labor Force in Agriculture Number % Number Z Number Social Farms .2 4.0 .4 9.0 .3 7.9 Private Farms 5.2 96.0 4.3 91.0 3.6 92.0 Total 5.4 58.3 4.7 56.3 3.9 47.4 Total Labor Force 7.8 100.0 8.3 100.0 8.3 100.0 Migration resulted in an increasing age of farm labor; for example, in 1971: (i) 39% of the active males were over 50 years of age; and (ii) over 50% of the fa;rms were without youths. In addition, the 1970 agricultural survey showed that about 44% of the labor force living on farms had either permanent or part-time employment off the farm. This indicates the difficulty of gene- rating sufficient income to support a family on a holding. The Social and Private Sector in Agriculture 4. One of the important characteristics of Yugoslav agriculture is the separate existence of two sectors viz, social and private with different farm structures. The social sector has its origin in the postwar collectivi- zation policy, and received further impetus by the Agrarian Reform of 1953, which limited the size of private, individual holdings to 10 hectares of cultivable land and 25 hectares of forest land, and brought 276,000 hectares of additional land under the social sector. Since then, the land resources of the social sector, consisting of: (i) agro-industrial "kombinats", (ii) agricultural estates, and (iii) general agricultural organizations have almost doubled due to reclamation, purchase and lease from private holders. The social sector in 1972 held about 14.5 percent of the total arable land, employed 4 percent of total agricultural manpower, produced 29 percent of the agricultural product and 44 percent of the marketed production. The major problems of social agricultural units at present are: (i) relatively high monetary obligations, (ii) unsatisfactory equipment, and (iii) shortage of skilled personnel. 5. On the other hand, the private sector covers about 86 percent of the cultivable land, and has 2.6 million individual holdings with an average of 3.9 hectares per holding. It employs about 96 percent of the farm popu- lation and accounts for 71 percent of the share of the agricultural product. Due to inheritance customs, fragmentation has led to a decrease in average farm size. However, only about 60 percent of the total land ir. the private sector is in holdings of 5 - 10 hectares. At the same time about 50 percent of the private holdings are in the mountainous regions where the conditions are less favorable for agriculture. The main constraints of further develop- ment of agriculture in the private sector are: (i) lack of capital, (ii) ANNEX 3 Page 3 lack of credit facilities, for the purchase of better quality seeds, fertili- zers and tractors, (iii) poor mechanization, and (iv) lack of extension services. 6. The relative importance of the social and private farms are illus- trated by the following investment and production data. Private and Social Holdings - Selected Data Social Farms Private Farms Million Million I. Investment Din _ Din _ 1947-1956 2.4 50 2.5 50 1957-1960 6.7 70 2.9 30 1961-1965 9.4 74 3.3 36 1966-1971 9.1 71 3.8 29 Social Farms Private Farms II. CroD Production (1972) %% Wheat 36.4 63.6 Maize 18.7 81.3 Sugarbeet 57.9 42.1 Sunflower 66.0 34.0 Fruit 4.6 95.4 Grapes 17.0 83.0 Meat 31.8 68.2 Milk 14.5 85.5 Eggs 37.3 62.7 Total Production 29.0 71.0 Market Production 44.0 56.0 Million Million III. Cultivable Land hectares % hectares % 1.5 14 8.7 86 IV. Farm Mechanization (1972) Number of tractors 25,100 95 ,400 Average hp 51.3 32.5 hp per hectare 0.86 0.38 7. Cooperation between the private and social sector is viewed in Yugoslavia as a means of improving productivity in both sectors. It takes the form of provision of services by the social sector, such as supply of fertilizers, harvesting, cultivation, marketing and credit and the contrac- ting of joint production. Although the number of cooperative arrangements ANNEX 3 Page 4 declined froim 1.3 million in 1964 to 0.9 million in 1970, farmers cooperating with social farms showed consistently higher average yields than independent private farmers during the same period. 1/ Agricultural Prospects and the "Green Plan" 8. The social development plan for 1971-75 projects an annual growth of aggregate agricultural production of 3.2 percent per year, with the social sector growing at 5 percent and the private sector at 2.8 percent per year. This target assumes a significant acceleration of growth in the private sector. To this end the Yugoslav Government has recently enacted a "Green Plan" to be carried out during 1973-85. The Plan stresses farm mechanization and modern agricultural methods to improve output and productivity and allo- cates for 1974 and 1975 annually Din 750 million (US$50 million) in financial assistance to the private and social sector. Although the legislation passed as to date states that the development target set by the "Green Plan" requires ^MMU6.L £LLVCDi.UiO o; Uu. CLf8s than Din 1,290 million in private holdings, .*',.. -1'~- /^e .* ~d tyvs and means of generating and channelling the necessary funds. B. THE MARKET FOR TRACTORS Structure of the Industry 9. Yugoslav tractor production increased steadily over the past decade. However, the domestic production of tractors cannot accurately be determined since the available statistical material does not distinguish between tractors, motorcultivators and other agricultural machinery such as mowers, crawler tractors, etc. 1/ Partly because small farmers in the underdeveloped mountainous regions have no access to social sector agricultural organizations. ANNEX 3 Page 5 Trends in Production of Agricultural Machinery /1 (Units) 1961 1965 1968 1969 1970 1971 1972 Yugoslavia 4,290 6,340 10,927 10,810 12,048 16,046 18,425 IMT-Belgrale/2 -2,288 3,329 4,816 6,989 9,325 12,236 14,202 IMT Market Share /3 56% 53% 44% 65% 77% 76% 76% /1 Including tractors, motorcultivators and similar agricultural machinery, but no CKD-PKD tractor sets. /2 Not including CKD-PKD tractor sets. /3 Tractors only. Source: SFRY Statistical Bulletin and IMT It has been estimated that the production of motorcultivators and miscella- neous agricultural machinery increased from about 850 units in 1965 to 3,500 units in 1972. 10. At present, IMT is the largest Yugoslav manufacturer of motor- cultivators and tractors accounting for 85% of the domestic production capa- city of tractors and for 55% of the domestic motorcultivator capacity. 1/ The company manufactures units of its own design relying to more than 95X on Yugoslav-sources for raw materials and components supplies; the five other producers are essentially assemblers of imported components. In view of the growing trend for farm mechanization in Yugoslavia, several companies are planning to expand their capacities or to enter the tractor assembly business. A number of these investment plans are still under discussions, so thrt the projected capacities presented below can give only a tentative idea of the future structure of the industry. 1/ IYT added motorcultivators to its product line in 1970 by acquiring the Motorcultivator and Agricultural Implements Factory, FMK Knjazevac. ANNEX 3 Page 6 Annual Production Capacity of Tractors and Motorcultivators 1972 1977 (Actual) (Projected) Units z Units x I. Motorcultivators DMT-Knjazevac 2,500 55 12,000 73 Gorenje Velenjef/1 2,500 45 3,000/4 18 Ruen Kocani - _ 1,500 9 Subtotal 4,500 100 16,500 100 II. 18-25 hp tractors T. Vinkovic/2 2,000 98 3,000/4 25 Ruen Kocani/2 - - 4,500 37 DNT-Belgrade - - 3,000 25 IMT-Knjazevac 50 2 - - Gorenje Velenji/1 200 1,600 /4 13 Subtotal 2,250 100 12,100 100 III. Over 30 hp tractors IMT-Belgrade 15,000 94 32,000 90 IMR Rakovic 500 3 5O0 1.5 Torpedo/3 150 1 500 1.5 Gorenje Velenje_ 300 2 2,400 7.0 Subtotal 15,950 100 35,400 /1 Steyr license. /2 Pasquali license. /3 KHD license. 74 Not yet finalized; the expansion of IMT Knjazevac has been completed, IMT Belgrade and Ruen Kocani are under construction, whereas the ex- pansions of the other companies are still in the planning phase. From a capacity point of view INT can be expected to remain the dominant producer of motorcultivators and tractors in the above 30 hp range. However, four manufacturers of 18-25 hp tractors are planning to expand their total production capacity to about 12,000 units/year which may result in consider- able competition in this product range. ANNEX 3 Page 7 11. The above table distinguishes between motorcultivators, 18-25 hp tractors and above 30 hp tractors; they constitute in the Yugoslav context separate market and production categories. On the one hand, motorcultivators (5-12 hp) serve a special market segment, because they are the only feasible and economical 1/ means of mechanization for orchards, vineyards and small holdings, but they require physical labor to operate. On the other hand, the present and projected production of 18-25 hp units in Yugoslavia include tractor as well as motorcultivator types: the Pasquali tractor (18.5 hp) can be described as riding motorcultivator, whereas the Steyr and planned IMT 25 hp tractors are small, less costly and maneuverable versions of a standard tractor. Users of Tractors 12. Tractors are primarily used for farming. However, equipped with special implements they have been employed for transport, construction and semi-industrial work as well as in the forestry field. Light industrial units - front end shovel loaders, rear mounted back hoes, etc. - are used primarily in the construction industry. These units are developed from standard agricultural tractors, the main changes usually being a heavier front axle, heavier tires, a high capacity hydraulic pump mounted at the front of the engine crankshaft, the agricultural 3 point hitch and hydraulic system deleted and often a shuttle reverse added between the standard clutch and transmission. No information on total usage of tractors for non-agricultural purposes in Yugoslavia is available, but IMT sold during the 1969-1972 period annually about 120 tractors for forest mechanization, 100 tractors to con- struction companies and about 300 units for general transport and haulage work. Supply and Demand Pattern Farm Mechanization in Yugoslavia 13. The Yugoslav tractor fleet has increased three-fold from 42,730 1/ The 1972 average price of a 7 hp motorcultivator in Yugoslavia was Din 13,000 compared to Din 28,000 for a 18.5 hp tractor and Din 38,000 for a 35 hp model. ANNEX 3 Page 8 units in 1962 to about 120,500 units in 1972. Yugoslavia - Tractors on Farms (1962-1972) (Uinits) 1962 1964 1966 1968 1970 1971 1972 Social Farms 35,287 40,284 38,785 31,642 27,402 25,747 25,087 Private Farms 7,446 9,812 12,180 30,090 50,297 68,617 95,400 Total -- Yugoslavia 42,733 50,096 50,965 61,732 77,699 94,364 120,487 Source: Federal Secretariat for Agriculture. Thereby, Yugoslavia reached a level of farm mechanization of 0.45 hp/ha which compares with the level of mechanization of Romania and the USSR (Table 1, page 9). In contrast, western European countries such as Italy and France have reached 1.6 hp/ha and 3.2 hp/ha, respectively. 14. The trend towards a higher level of farm mechanization in Yugoslavia shows five distinct characteristics: (i) the absolute and relative size of the tractor fleet varies considerably among regions. As shown in Table 1, Croatia and Slovenia have reached about 0.65 hp/ha whereas Montenegro is at a low of 0.05 hp/ha; (ii) mechanization in the social sector is far more advanced than in private farming (0.86 hp/ha compared with 0.36 hp/ha); (iii) the average size of a tractor used in Yugoslavia at present is about 38 hp. However, the average size of tractors on social farms in 1972 was 51 hp compared to 32 hp on private holdings (Table 2, page 27); (iv) the number of tractors on social farms decreased continuously starting 1967, due to a switch to higher horsepower tractors; and (v) the notable increase of the Yugoslav tractor fleet since 1969 is due to accelerated mechanization of private holdings; i.e., the number of tractors in the private sector increased by about 30% annually. The main factors strengthening private demand were the elimination of excise taxes on tractors and fuel in 1970, the availability of cash through workers' remittances and the considerable increase of farm prices after 1969. ANNEX 3 Page 9 Size Distribution of Tractors on Social Farms 1962 1972 hp Units %Units % Up to 25 2,182 6.2 327 1.3. 26 - 35 14,242 40.4 4,622 18.4 36 - 50 13,064 37.0 7,567 30.2 Over 50 5,799 16.4 12,571 50.1 Total 35,287 100.0 25,087 100.0 Source: Federal Secretariat of Agriculture. 15. Sales of tractors and other agricultural machinery between 1969 and 1972 have more than doubled. However, domestic production accounted for a declining share of domestic sales (57% in 1972 as compared to 63% in 1967). This indicates that the demand for tractors in Yugoslav, stimulated by the drive towards farm mechanization, increased at a faster rate than the Yugoslav tractor industry was able to expand its production capacity. /1 sales and Production of Agricultural Machinery- (1967-1972) E.xport/2 Import Apparent Domestic % of % of Domestic Production Units Production Units Sales Sales (Units) (Units) 1967 8,793 588 7 4,822 37 13,027 1968 10,927 637 6 3,969 28 14,259 1969 10,810 420 4 2,727 21 13,117 1970 12,048 512 4 5,460 32 16,996 1971 16,046 1,315 8 9,281 39 24,012 1972 18,423 1,182 6 12,760 43 30,001 /1 Including tractors, motorcultivators and similar machinery. /2 Not including CKD and PKD tractor sets or components. Source: UMI and SFRY Statistical Yearbook. ANNEX 3 Page 10 Imports 16. To meet excess demand, Yugoslavia has increased its import of tract- ors from about 5,460 units in 1970 to 12,76t) units in 1972. Import quotas are determined annually by a specialized Government agency to balance domestic demand and production. Nearly 65% of tractor imports during the past five years came from clearing countries, mainly because of bilateral trade agree- ments and the price competitiveness of East European tractors (para. 20). However, the proliferation of imports to meet Yugoslavia's growing tractor demand has created serious problems and diseconomies: Yugoslavia imported between 1965 and 1972 41,000 tractors or 304 different models from 21 coun- tries and 53 manufacturers. Even though a supply of spare parts and imple- ments comes with the tractor, it is unlikely to meet the need during the entire life of the tractor. In addition, the variety of types requires a high level of maintenance and repair skills. Consequently, utilization and useful life of imported tractors has been lower than of domestic units. 17. In the Yugoslav context of trade regulations, tractor imports are meant to supplement domestic production. After the planned local production increase, imports can be expected to drop sharply, but may remain at a minimum level to account for (i) arrangements with clearing countries, (ii) direct import by workers returning to Yugoslavia and (iii) special models which are not produced locally. Exports 18. Yugoslav enterprises have to export a minimum amount to earn the foreign exchange necessary for their operations through the retention quota system (Annex 2-7, para. 17). However, IMT accounts for nearly 98% of Yugoslavia's past export of agricultural machinery. The other producers export components or assembled parts under their license agreements. 19. Table 4 illustrates fiT's total tractor export by country. The heavy concentration of sales to India resulted from an agreement with TAFFE, the Massey-Ferguson license holder in that country. Sales began as whole tractors then gradually shifted to a partly knocked-down (PKD) and later to a completely knocked-down (CKD) basis as TAFFE increased its production of components. Sales to other countries represent complete tractors. IMT has made new commitments for 500 tractors each to India and Uganda in 1973 and won an IDA tender in Pakistan for 2,000 units. Due to the priority of domestic needs, the Company has been unable to merchandize exports aggres- sively. Suppy-Demand Gap 20. Despite the growing volume of imports in the face of increased domestic production, there is still a considerable supply-demand gap for tractors that has been estimated as high as 5,000 units annually. Indica- tions for an existing excess demand are ANNEX 3 Page 11 (i) IMT's increased sales on a deferred delivery basis of as long as 10 months Deferred Delivery Sales - IMT Year Number 1970 578 1971 734 1972 1,528 1973 (to 5/31) 1,135 (ii) a willingness on the part of farmers to make five-year time deposits to secure tractor loans for the full cost of the tractor, roughly double the time deposit but re- payable in full in two or three years. (iii) the purchase of IMT bonds for DM 20 million repayable in Dinars to secure preferential delivery of tractors. Prices, Tariffs and Competition 21. IMT's dominant position in the tractor market in Yugoslavia rela- tive to other domestic and foreign producers underlines the competitiveness of its product line. This is mainly due to: (i) a good design and a product line well prove from the standpoint of performance and reliability; (ii) a long history of successful and continually expanding production; (iii) ready availability of spare parts and matching imple- ments; (iv) a record of progressive product updatihg and improve- ment and additions to the product lines so that the current IMT line compares favorably in range of models and design with most major manufacturers worldwide (Annex 2-3); (v) Efficient production leading to low production costs with resulting very competitive retail prices (Annex 6-2, and para. 20); (vi) a nationwide sales and service network which has been expanded and strengthened concurrently with expansion of production (para. 51) of this Annex). 22. The domestic prices for tractors are initially determined by the manufacturing firm, but annual price increases have to be approved by the Federal Council for Prices. Export prices can be set freely by the enter- prises. Imports of tractors are controlled and the official customs duty of 18% plus 9% import duty and 1% custom evidence give an additional price protection of 29%. Prices of locally sold tractors compare as follows: ANNEX 3 Page 12 Tractor Price Comparison August 1973 (Din) Base Selling Price Base Tariffs Price Type per hp Price /1 29% (Yugoslavia) 30-40 hp tractor IMT-553 (35 hp) - 1,163 40,723 - 40,723 ZETOR (35 hp) - CZSR 1,057 37,000 10,730 47,730 URSUS (40 hp) - Poland 905 36,200 10,490 46,690 Steyr (32 hp) - Austria 1,977 63,278 26,366 89,644 Farmer ID (34 hp)-England f,777 60,438 24,687 85,125 Deutz-KHD (35 hp) - PRG 1,625 56,885 23,235 80,120 50-60 hp tractor IMT-558 (55 hp) - 1,066 58,673 - 58,673 ZETOR (56 hp) - CZSR 861 48,220 13,984 62,204 Steyr (52 hp) - Austria 1,549 80,556 32,904 113,460 John Deere (52 hp) - USA 1,542 80,230 31,010 111,300 70-80 hp tractor IMT-575 (72 hp) 1,249 89,972 - 89,972 URSUS (75 hp) - Poland 1,122 84,150 24,360 108,510 MTZ (70 hp) - USSR 750 52,500 15,225 67,725 John Deere (72 hp) - USA 1,602 115,380 34,460 149.840 80-90 hp tractor DIT-585 (85 hp) 1,195 101,582 - 101,582 MTZ (80 hp) - USSR 783 62,680 18,177 80,857 Deutz (85 hp) - FRG 1,521 129,300 37,497 166,797 /1 ex factory for IMT, cif Yugoslav border prices for all other units. 72 18% customs duty, 92 import tax and 1% customs evidence. Source: IMT Industry Survey. 23. IMT selling prices are about 6-15% below those for comparable tractors from Eastern European countries and about 35-100% below prices for Western European tractors. A notable exception are the Russian MTZ tractors in the 70-80 hp range which are sold 10-15% cheaper than the equivalent IMT tractor. 1/ However, Eastern European price quotations 1/ In the past, this has not impaired IMT's competitiveness since farmers prefer locally produced tractors for ease of supply of spare parts and repair facilities. ANNEX 3 Page 13 relate partly to barter agreements. Taking into account the 29% tariff protection the Company still maintains its considerable domestic price competitiveness vis-a-vis Western European countries. As to export prices IMT has maintained its domestic selling price in foreign markets. In order to allow for transport charges, the Yugoslav Government supports exports by paying a transport subsidy of 21% to developing countries and Japan, 15% to the USA and 7% to Western European countries. 24. As to qualitative difference between IMT tractors and foreign units, the IMT 30-60 hp models are (i) fully competitive with Western European and US models from a design and performance point of view and (ii) have a clear advantage in regard to the supply of matching implements and spare parts. For tractors in the 70-90 hp range, the IMT models meet the quality standards of Eastern European tractors, whereas Western European and US models offer more convenience features and advanced design. IMT's present development program is designed to overcome this shortcoming by introducing the newly developed transmission case, pumping and hydraulic system before 1975, and offering a wider choice of tractor accessories after project completion in 1976. C. PROJECTED TRACTOR DEMAND Domestic Market for Tractors Used in Agriculture 25. In developing a market forecast for tractors and farm machinery in a country, the following factors must be considered: h(i) hp/hectare required to provide an acceptable level of mechanization; (ii) size range (hp) of tractors required to permit effective and economic tractor utilization accord- ing to the size of farms and types of crops produced and degree of coopera- tion, (iii) replacement (useful life) period: (iv) obsolescence factor: (v) cash generating capacity of farms and/or availability of credits; (vi) alter- native means of farm mechanization (motorcultivator); and (vii) historical pattern of domestic sales and existing fleet. 26. The last point has been described above; the other considerations and assumptions for the market forecast are discussed in the following para- graphs as they apply to Yugoslavia. 27. Projected Level of Farm Mechanization. The hp required to achieve full mechanization in agriculture varies according to the predominant type of farming - intensive or extensive - the main crops grown and the size of farm operating units. In countries which might be considered at a medium stage in agricultural development tractor power is on the average in the order of 0.5 hp per hectare of cultivable land. Where agriculture is virtually completely mechanized hp per ha. ranges from 1.0 in countries with large farms up to 3 hp per ha. in countries where farms are mainly small but where agricultural production is on a very intensive basis (Table 1). In line with the above in Yugoslavia full agricultural mechanization would be achieved at a level of approximately 1.0 hp per ha. on the large farms in the social sector and approximately 2.0 hp per ha. on the small farms in the private sector. ANNEX 3 Page 14 28. Size Range (hp). In 1972 the average hp of tractors in the social sector was 51.3 compared with 32.5 hp in the private sector (Table 2). In the social sector there is a definite trend to tractors with considerably higher hp since on the large farms and big fields in this sector tractors of 80-100 hp can be used very effectively, particularly for heavy tillage work. There will always be a considerable requirement, however, for tractors in the 40-60 hp class for general haulage, seeding and planting and general chores work. The projections assume an increase of tractor sizes on social farms to an average of 60 hp. In the private sector, it has been assumed that the average tractor size will reach 38 hp by 1980, and average 40 hp per ha there- after. The main reasons for this are (i) a worldwide trend to higher hp units in agriculture, (ii) the use and an increasing availability of second-hand tractors for small holdings which otherwise would use motorcultivators or 18-25 hp tractors, and (iii) the possible spread of cooperative ownership or custom line work by private farmers with standard 40-50 hp tractors. 1/ 29. Replacement of tractors or their useful life varies with the in- tensity of agriculture and the available maintenance and repair services. In countries whose agriculture is considered to be completely mechanized the total tractor market is equivalent to the replacement market as shown below: Tractor Replacement Market in Highly Mechanized Countries ha. per Annual Sales - Z of Tractor parc Tractor hp per ha. Sales Tractor parc (Estimated) Canada 800,000 54.3 0.91 25,000 3.1 France 1,250,000 15.5 3.2 70,000 5.6 Italy 480,000 31.1 1.6 35,000 7.3 S. Africa 220,000 54.8 0.91 15,000 6.8 ISA 4,600,000 38.3 1.3 150,000 3.2 UK 350 ,0oo 20.6 2.4 30,000 8.5 Source: FAO Yearbook 1972 1/ A tractor is generally considered an economically sound investment, if employed in productive work for a minimum of 1,000 hours per year, which is about equivalent to the work of a 40 hp tractor on 40 ha. land. In Yugoslavia a private farmer and owner of a 40 hp tractor with only 10 ha. of land would need to work that tractor on neighboring farms either on a hire or cooperative basis for 75% of the hours of use each year. At present, cooperative machine work on approximately 12% of the cul- tivated area in the private sector. The trend in most countries is for a decrease in cooperative use of machinery, but to a significant in- crease in custom hire use; however, Yugoslavia levies excise taxes on tractors and fuel when used for custom hire work on farms making the latter a less economical proposition. ANNEX 3 Page 15 30. In countries where agriculture is on an extensive basis, as in the US and Canada, the replacement market is low in relation to the existing tractor parc whereas in Europe, where farming is much more intensive, replace- ment is higher. In all areas the rate of replacement is dropping, because of the better quality and thus longer life expectancy of tractors produced in recent years, and also because of the increasingly better maintenance and repair services. Taking into account the level of mechanical skill in Yugoslavia, the useful life of a tractor can be expected to vary between 10 years and 18 years. For the market projections it has been assumed that replacement amounts to 8% of tractor sales (12.5 years) until 1980 and 6% (16.6 years thereafter. 31. Obsolescence rather than wear-out is a major factor in tractor demand. Obsolescence also becomes of increasing importance as the level of mechanization in the market area increases. Most tractors are traded in not because they are worn out but because new models with improved perform- ance, durability and particularly convenience features have come on the market. The average farmer also invariably trades for a slightly higher hp unit. This is an important consideration for a manufacturer even if he does not have any significant competition. Unless tractors are continually and progressively updated the market will never reach the volume that it other- wise would. Motorcultivators 32. To mechanize the private sector (8.6 million ha. cultivable land) to a level of 2.0 hp/ha., about 17.3 million hp are required. It has been assumed that about 10% of the power requirements 1/ of private farms will be in the form of motorcultivators (5-12 hp), because of the large number of holdings below 3 ha (1.9 million ha), vineyards and orchards (about 464,000 ha) in Yugoslavia. In view of the capacity expansions of motor cultivators (para. 10) Yugoslavia can be expected to have a motorcultivator parc of 200,000 units averaging 9 hp by 1993 which is equivalent to a farm mechaniza- tion level of 2 hp/ha for this market segment. Availability of Cash and Credit 33. In the social as well as private sector the availability of cash or credit does not restrict total tractor demand in Yugoslavia at the present. Social farms receive tractor loans for 3 year, at 12% interest p.a. and with a 50% downpavment through the Agricultural Development Bank (Poliobanka) and regional credit institutions. However, the majority of private farmers have been making cash purchases. The private farmers, are able to do this, be- cause they supplement their farm income shown below, by off farm labor, sales 1/ At present, about 15% of hp units in the private sector are motorcultiva- tors. This percentage is expected to decrease with the overall trend to hp tractors and the introduction of small, maneuverable tractors compet- ing with motorcultivators. ANNEX 3 Page 16 of their working animals 1/ or workers remittances of relatives or friends. Farm Size and Income - Private Sector (1971) Average Household Income Per Farm Farms Area (Dinar/year) kNumber) (ha.) Total From Farm Off Farm Under 3 ha. 1,429,000 1,914,000 11,885 5,442 6,443 Under 5 ha. 1,964,000 4,065,000 12,611 6,584 6,027 Over 5 ha. 670,000 5,941,000 17,723 13,102 4,630 Total 2,634,000 10,006,000 Source: SRY Agricultural Survey. 34. To continue the rapid growth of farm mechanization, the less affluent farmers will have to be reached, which will in the future require credit facilities. From 1976 onward, almost 100% of tractor sales to social farms and 50% to private farmers may require financing of at least 50% of the sales price. This would result in annual credit requirements ot Din 400 million for the private sector and Din 65 million for the social sector. 2/ IMT as well as the Yugoslav Government are aware of the need for agricultural credit in the near future. To this end, (i) IMT will make avail- able from its projected cash supplies Din 75 million p.a. in credit for the 1976-78 period and Din 150 million thereafter, (ii) IMT intends to borrow from the Belgrade Bank up to Din 80-100 million for onlending to its dealers and customers, if the market situation so requires, and (iii) the "Green Plan" (para. 8) with its emphasis on farm mechanization will provide for such additional funds as may be required. However, the likely bottleneck will be the total amount of credit available, as well as the adequate channeling of credits to private farmers. Whereas the credit system for social farms is well established, private farmers, have in the past, 3/ received loans only indirectly through cooperation with social 1/ In 1969 there was a total of 2.5 million work animals on farms in the private sector (Table 3). In the last four years approximately 200,000 have been replaced by tractor power, leaving about one animal for each 3.75 ha of cultivable land. The proceeds from the sale of an animal has been sufficient to make the down payment on a tractor. It must be noted that the produce from approximately 25% of the land that an animal works is required to feed throughout the year. The replacement of work ani- mals by tractor power thus significantly increases the marketable produc- tion of the farm. 2/ Assuming an average tractor price of Din 50,000 and annual sales of 32,000 units in the private'sector, and Din 65,000 and 2,000 units in the social sector. 3/ One notable exception is Croatia and Slovenia, where agricultural credit is channelled to both sectors through banks and Agro-service organization. ANNEX 3 Page 17 sector organizations. Special attention should be given in setting up a nation-wide administrative system which would make available on a continuous basis loans for purchases of agricultural machinery. Demand Projections 35. The projected tractor parc and replacement needs for the private and social sector are presented in Table 5. They indicate a total domestic market for tractors in agriculture of 34,000 units per year during the next 20 years. In particular: (a) for the private sector, assuming (i) a 12.5 year replacement cycle until 1981 and 16 years thereafter, (ii) an increase of average hp per tractor from 32.5 hp to 38 hp until 1983 and 40 hp there- after, and (ii) a farm mechanization level of 1 hp/ha by 1980 and 2.0 hp/ha in 1993, about 32,000 tractors will be needed annually during the concerned period. (b) for the social sector, assuming (i) a 12.5 year replacement cycle until 1981 and 16 years thereafter, (ii) an increase of average hp per tractor from 51.8 hp to 60 hp, and (iii) 1 hp/ha by 1980 to meet the planned production increases, annual tractor sales of 2,000 units will be needed until 1981; thereafter, the replacement market requires an addition of 1,500 units per year. The annual demand by size category can be forecast as follows: Yugoslavia - Projected Average Annual Demand of Tractors in Agriculture by Size Range /1 (1976-1983) hp Category Social Sector Private Sector Total % Units % Units % Units 18-30 2.5 50 12.5 4,000 11.9 4,050 31-50 12.5 200 80.3 25,700 76.2 25,950 51-60 20.0 400 6.1 1,950 6.9 2,350 61-90 50.0 1,000 1.1 350 4.0 1,350 91 and over 15.0 350 - - 1.0 350 Total 100.0 2,000=1 100.0 32,000 100.0 34,000 /1 For the size distribution of the existing tractor parc, see Table 2. 7W 1,500 units after 1983. ANNEX 3 Page 18 Export Market Projections 36. IMT apnears to be the only tractor manufacturer which currently or in the foreseeable future is capable of exporting agricultural machinery to a notable extent (para. 10). The export market includes exports of (i) tractors, (ii) CKD or PKD tractor sets, and (iii) components and spares. Past exports (Table 4 and para. 17) give limited indication for the future, since IMT restricted exports to meet local demand. Regarding the export of assembled tractors, IMT is in a competitive position price- and product-wise (para. 19-21) on markets in Western Eurone and the developing countries. Sufficient credits will be made available by Yugoslav banks to facilitate export sales. However, to maintain a sizeable market share in any foreign country IMT is aware that it would have to establish permanent sales and services organizations or cooperative agreements with other manufacturers and dealers. 37. The major and continually increasing export market to developing countries is for caD and PKD tractor sets, rather than completely assembled tractors. Usually the developing country grants a manufacturing license to a limited number of foreign manufacturers on the basis that the manufacturers will progressively increase the percentage of locally produced parts so that within a 10 year period the tractor will have at least 50% local content. In turn the developing country by imposing high import duties on imported tractors gives their local licensees a virtual monopoly on the market. IMT's successful long-run exports to TAFFE, India, was such an arrangement and the Company has shown increasing expertise in providing a training program as part of exports to developing countries. The level of exports of tractor sets which IMT can expect depends on how thoroughly it develons such manufacturing agreements during the coming 2-5 years. 38. Regarding the export of components, IMT has a good potential in supplying parts and components to Massey Ferguson for use in its assembly plants worldwide, if design and quality control can be maintained to Massey Ferguson standards. 39. IMT's product line has considerable market potential. The future export market can be expected to range between 3,000 and 8,000 units annually depending on IMT's marketing strategy and effort for the different export market segments. This study assumes IMT's export market at 4,000 tractors or tractor equivalents per year, since during the coming 3-5 years the Company's staff will concentrate primarily on domestic expansion instead of initiating a massive export promotion program. Demand Projections for Non-agricultural Uses 40. Tn Western Europe and North America the market for light industrial units is approximately 10% of the agricultural tractor market. A 10% market share can be considered conservative in the Yugoslav context: Tractors are widely used for haulage and transportation of material, since the available ANNEX 3 Page 19 quantities of specialized equipment is not sufficient to allow to substitute tractors with specialized equipment to the same degree as in the developing countries. In addition, IMT has developed close cooperation with the Federal Center for Forest Mechanization in Yugoslavia and forecasts an annual tractor demand of 150 units in this field. In view of these market segments in Yugoslavia, an annual demand of at least 3,500 tractors for non-agriculturalf uses has been projected. Total Tractor Market and INT Prospects 41. The following table summarizes the total projected tractor market per year and TIT's production program after expansion. Yugoslavia - Projected Annual Tractor Market (1977-1983) Non- hp Agricultural Agricultural Total IMT Production category Use Use Export Market Program (1977) (units) 18-30 4,050 50 300 4,500 3,000 31-50 25,900 800 2,900 29,600 25,000 51-60 2,350 1,500 600 4,450 3,300 61-90 1,350 1,000 200 2,550 3,300 91 and over 350 50 - 400 400 Total 34,000 3,500 4,000 41,500 35,000 Tractors in the 31-50 hp range are forecast to continue to be the dominant sector of the market (67%') and of IMT's production program (71%). After 1983 it is likely that a considerable part of sales in this hp range will shift to units in the 51-60 hp category at the expense of tractors in the 31-40 hp range. 42. The above market fore-ast results in the following supply/demand comparison: ANNEX 3 Page 20 PROJECTED ANNUAL SUPPLY/DEMAND COMPARISON FOR TRACTORS (1977-1983) Hp Category 18-30 31-50 51-60 61-90 91 and Over Total Production /1 4,600 /2 27,900 3,650 3,200 550 39,900 Imports - 1,800 800 100 50 2,750 Total Supply 4,600 29,700 4,450 3,300 600 42,650 Domestic Demand 4,100 26,800 3,850 2,350 400 37,500 Exports 300 2,900 600 200 - 4,000 Surplus (Deficit) 200 /2 - - 850 200 1,150 /1 For capacity expansions see Annex 3, page 6. 72 Not including 7,500 units of riding cultivators which do also complete with the 18-30 hp. tractors. It has been assumed that import will continue to supplement domestic produc- tion to meet local demand and about 150 tractors in the above 65 hp range, will be imported to account for special equipment which are not locally produced. 43. To sell its projected tractor production IMT would have to esta- blish an overall market share of 84% which is in line with the Company's present market position among domestic producers. However, a comparison of the market forecasts with the projected capacity expansion of all Yugoslav tractor manufacturers indicates two possible problem areas: (i) In the 18-30 hp category, total tractor forecast of 4,150 units per year compares with a likely domestic capacity of about 12,000 units. Although this figure includes the Pasquali riding motorcultivator (para. 11), which may supply also to a certain extent the motorcultivator market, there will be considerable competition in this product category for the new IMT tractor. (ii) In the above 70 hp category, projected tractor demand of 2,550 units compares with IMT's production program of 3,600 units. This discrepancy results from the underlying assumption that the social sector will reach full farm mechanization at 1 hp/ha and average 60 hp per tractors. The actual demand could be higher, if the social sector requires a higher hp/ha level for adequate mechanization and/or the trend to even higher average hp units ANNEX 3 Page -21 accelerates. IMT can expect minimal domestic competition in this product category, but some import competition from Eastern European countries. The Company should monitor closely this market segment in order to adjust the production program to the actual demand. 44. IMT is aware of the increasing domestic competition and possible market constraints in the 18-30 hp and above 70 hp categories. Although the projected profit margin for these tractor types are below those of the standard models (Annex 6-2), the Company plans to enter the 18-25 hp and above 100 hp market in order to strengthen its market position by offering the full range of tractor products. It will be important for the Company to follow up closely on production cost and market success of the new models in order to incorporate changes or delete these product types if they prove uneconomical. D. TIIE MARKET FOR AGRICULTURAL IMPLEMENTS 45. An acceptable level of tractor utilization can be achieved only if 4mplements are available in the numbers, types and sizes required to match sales of tractors in the various hp categories and for the different types of soil, climate and cropping conditions prevailing in the country. It is important therefore that any expansion in tractor production be accompanied by a similar level of expansion in implement production. This is of parti- cular importance in an expanding market, where tractors are replacing work animals since animal-drawn implements cannot be adapted for use with tractors. When the tractor market reaches a static level and is basically a replacement market, however, the market for implements usually decreases significantly since (i) their useful life is longer than that of tractors, and (ii) the obsolescence factor is not as important. Structure of the Industry 46. From the standpoint of engineering development and production implement manufacturing presents an entirely different situation than the tractor business. A tractor is a sophisticated machine with a very high ratio of cost-to-weight, and where all design specifications and production tole- rances are measured in thousandths of an inch or the metric equivalent. Imple- ments on the other hand have a low cost-to-weight ratio and design specifi- cations and production tolerances are measured only in fractions of an inch. Tractor production consists mainly of precision machinery, while implement manufacturing is welding and the assembly of welded sections to rough castings and/or forgings. A good tractor engineer is therefore usually not successful in designing low cost, functional implements. Also in production, there is only a limited opportunity for the transfer of labor between, or the utili- zation of, the same facilities for tractor and implement production. Compared to tractor production, implement manufacture is characterized by higher need for diversity, greater ease of innovations and greater ease of entry into production. The latter is illustrated by the fact that there are about 20 ANNEX 3 Page 22 manufacturers of agricultural implements in Yugoslavia, but only 3-4 producers of tractors. However, the possibility of entering the implements market varies according to the type of implement. The production of the rather sophisticated implements - plows, disc harrows, seed drills and crop plan- ters requires expertise in design and relatively high toolage costs which cannot normally be provided by small manufacturers. Demand and Supply Pattern 47. Agricultural implements have been in short supply in Yugoslavia, particularly for the imported tractors. According to the present relatively low level of mechanization and use of modern farming techniques in Yugoslavia, demand and supply in the private sector has been concentrated on basic imple- ments such as trailers and plows. However, social farms require a broad range of implements and types which match the larger hp units. 48. There are no continuous statistics on implements production and sales in Yugoslavia. 1/ The following table sdmmarizes the available infor- mation: Major Agricultural Implements - Selected Data (1973 estimated units) Production per year Number on DMT Total Type Farms 'MT Cooperatives Others Imports Sales Plows 60,000 1,500 500 500 800 3,300 Trailers 40,000 6,000 500 600 1,320 8,420 Disc Harrow 45,000 400 20 100 120 640 Seed Drills 20,000 100 20 50 150 320 Source: Agricultural Institute and IMT. According to Yugoslav experts the supply of implements for IMT tractors has been adequate because of cooperative agreements with other implement manufac- turers, and IMT's recent expansion of its implements line. (Annex 2-3, Para. 12). 1/ According to the Statistical Buletin, implements production in Yugoslavia increased from 15,100 tons to 22,302 tons, but such information provides limited insight since weight and sales mix of farm implements vary widely. ANNEX 3 -age 23 Market Projections 49. Future demand for implements must be analyzed on a sectorial basis. In the social sector the average of tractors is moving from approximately 50 hp to 60 hp. However, tractors of more than 60 hp cannot effectively utilize the small 3-point hitch mounted implements used on smaller tractors which they replaced. Tractors in the over 60 HP class require large size semi- mounted or pull type implements of proportionately greater weight and strength per hp of power requirement. In the private sector where tractors in the under 50 hp range will continue to predominate, tractor 3-point hitch mounted implements will be the type required; and this market segment can be expected to absorb used implements from the social farms. Stated on the basis of a percentage of tractor sales, therefore, the market for implements relative to tractors should not be as great in the private as in the social sector. 50. The table below indicates the average annual sales of implements which can be anticipated in the period 1976-1983. This is based on average annual sales of tractors in that period of approximately 32,000 to the pri- vate sector and 2,000 to the social sector. Sales can be expected to peak and maintain high voiumes in the period 1978-1983 but fall off by 20-50% after 1983 when the implements market becomes basically one of replacement. Yugoslavia - Market for Major Implements 1976-1983 Average Annual Requirements Social Sector Private Sector % of % of Tractor Tractor Total Number Sales Number Sales Number Trailers 3 tons 60 4 15,000 50 15,600 Trailers 5 tons 600 40 600 2 1,200 Plows 1,125 75 18,000 60 19,125 Cultivators 300 20 9,000 30 9,300 Seed Drills 300 20 3,000 10 3,300 Planters 300 20 3,000 10 3,300 Disc Harrows 600 40 6,000 20 6,600 51. IMT expects to sell about 60% of the projected implement require- ment, of which 70% would be produced by IMT, Belgrade, after project complet- ion, and the balance subcontracted to its affiliated producers. ANNEX 3 Page 24 Major Agricultural Implements - Projected Annual Production INT Markel: Share Projected IMT Market Productioni Cooperatives Market Share Units % Trailers 16,800 7,800 1,200 9,000 54 Plows 19,125 12,000 2,500 14,500 63 Cultivators -9,300 1,000 1,800 2,800 30 Seed Drills 3,300 1,000 1,500 2,500 76 Disc Harrows 6,600 4,000 600 4,600 70 IMT's production projections can be considered realistic in view of the structure of the implements industry. An adequate supply of IMT tractors with implements can be assumed if IMT assures the supply of 50% of required trailers or cultivators and 75% of the more sophisticated implements as disc harrows, plow and seed drills. Since the above production volume will be assembled in two shifts after completion of Phase I, and in one shift after the Phase II expansion, IMT could increase its own implements production if the market so requires. The Company intends to monitor the development of the implements market closely in order to adjust the product volume and design if necessary. E. IMT's MARKETING AND SERVICE ORGANIZATION 52. IMT's marketing operations are directed by the Sales and Services Department which includes separate divisions for export, domestic sales, inventory and distribution, and service and spare parts. The department is assisted by the marketing research and advertising group of the UMI staff. Sales Organization 53. Over the past 15 years IMT has established a wide ranging dealer network in Yugoslavia for the distribution of tractors, agricultural imple- ments and spare parts. This consists of (i) 26 dealers (Map: IBRD 1050 3R) relating directly to IMT, and (ii) 100 sub-agents who work with IMT only through its respective dealer. The number of sub-agents per dealer varies from 2 to 12 depending on the size and agricultural importance of the area. IMT does not own any sales facilities in Yugoslavia or abroad. 54. The sales organizations are not exclusive dealers for IMT products, but distribute about 90% of agricultural machinery available for the Yugoslav market, i.e., about 30,000 tractors in 1972 and a proportional number of implements and spare parts. Accordingly, the dealer network has been handling nearly twice IMT's sales volume and can be expected to channel without notable adjustment problems 35,000-45,000 tractors per year after the completion of the IMT expansion. ANNEX 3 Page 25 55. The present dealer network fulfills only distribution functions instead of sales and promotion tasks due to the demand-supply gap for tractors during the past year. The Company is aware of this situation and realizes the need for more intensive marketing activities by its agents after the expansion. To this end IMT will: (i) make available to its dealers and customers medium-term credits in the range of Din 75-150 million per year; (ii) initiate a training program for dealers and customers. The training program foresees 2-4 week courses for about 100 dealers per year and the IMT sales personnel at the IMT service school in Belgrade. In addition, informatory courses and instruction for potential customers and technical personnel will be organized by IMT and its dealers at regular intervals; and (iii) establish exclusive dealerships during the 1978-1980 period. It can be expected that the Yugoslav market for agricultural machinery will become a buyers' market in the 1980s, so that IMT intends to have selected and trained, by that time, exclusive dealers who can adequately promote IMT's products. Services and Repair Organization 56. IMT-Belgrade directs the activities of the Yugoslav service and repair facilities and acts as servicing agents for Massey-Ferguson tractors in Yugoslavia. The service and repair organization consists of: (a) the Repair Center in Dobanovci, which is part of IMT (Annex 2-4, para. 19). It provides at present industrial overhaul of about 1,500 tractors per year. With increasing supply of new tractors the overhaul function is expected to decrease and Dobanovei will be equipped to handle the increasing service requirements and sales of spare parts for the IMT tractor fleet in its area; (b) 146 service workshops which are classified according to equipment and work program in 45 Type I workshops, 64 Type II workshops, and 37 Type III workshops. All workshops are independent entities which have signed service contracts with one of IMT's 26 dealers. The distribution, size and number of workshops have been continuously increased according to the increase of IMT's tractor fleet. 57. The dealer allocates the service and repair of IMT products to the workshops in his district, supplies spare parts, and settles warranting claims and on-the-spot emergency repairs; whereby, Type I workshops also perform general overhaul functions and render services to Type El and Type III workshops - if more sophisticated personnel and equipment is required. ANNEX 3 Page 26 58. The repairs and servicing system has worked satisfactorily in the past. To prepare for the increasing servicing requirements after project completion IMT intends (i) to strengthen the-existing workshops through training of its maintenance personnel, and (ii) encourage its dealers to sub-contract new workshops if needed. The traiaing program is expected to start in 1975 and will involve (i) 2-6 week courses for about 100 instructors of regional training centers, and for about 100 agricultural engineers of socially owned farms, at the EMT se-rvice school in Belgrade; and (ii) 1-4 week couirses for about 3,000 repair and maintenance people per year in 50 regional training centers. Industrial Projects Depqrtment November, 1973. ANNEX 3 Tpble 1 Page 27 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Levels of Mechanization - Selected Countries Cultivable Area Wheeled tractors 1/ ha/ Country (ha x 1000) in use tractor hp/ha 2/ Albania 556 6,ooo 92 0.53 Africa (total) 205,000 366,650 559 0.08 Canada 43,400 800,000 54 0.91 Czechoslovakia 5,334 139,000 38 1.3 France 19,265 1,240,000 15 3.2 Hungary 5,594 60,250 92 0.53 Italy 14,930 482,340 30 1.6 India 160,000 100,000 1,600 0.03 Japan 5,510 278,000 19 1.26 Kenya 1,670 5,890 283 0.17 Poland 15,326 205,150 74 o.66 Rumania 10,512 107,290 97 0.48 S. Africa 12,058 220,000 54 0.91 S. America (total) 84,000 406,440 206 0.24 UK 7,261 352,000 20 2.42 USA 176,440 4,600,000 38 1.30 USSR 232,809 1,977,500 117 o.42 Yugoslavia 10,153 120,500 84.3 0.45 a) Sector Private 8,664 95,40° 59.4 0.86 Social 1,489 25,100 90.8 0.36 b) Republic (Private Farms) Bosnia and Herzgovina 1,451 6,o57 239 0.13 Montenegro 166 280 592 0.05 Croatia 1,733 34,594 50 0.62 Macedonia 482 3,180 151 0.20 Slovenia 5147 11,500 47 0.65 Serbia (Total) 3,821 39,789 96 0.32 Close 2,464 20,389 121 0.26 Vojvodina 1,029 18,000 57 0.54 Kosovo 328 1,400 234 0.13 1/ 1970 data except for Yugoslavia sector where 1972 figures were used. 2/ Based on average of 50 hp per tractor except for Japan (25 hp) and Yugoslavia (51 hp - social sector; 31 hp - private sector). Industrial Projects Department September 1973 ANNEX I Page 28 Table 2 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT TRACTOR POPULATION, BY SIZE RANGE (1972) A. Social Sector HP Category Average HP No. Tractors Total HP 18-30 25 327 8,175 30-50 40 12,189 487,560 50-80 60 11,317 679,020 Over 80 90 1,254 112,860 Total 51.3 25,087 1,287,615 B. Private Sector HP Category Average HP No. Tractors Total HP 18-30 20 114,310 286,200 30-140 33 71,550 2,361,150 40S50 145 7,632 3143,1440 Over 50 60 1,908 1142,1480 Total 32.5 95,400 3,105,270 C. STRY Total Total HP No. Tractors Average HP 4,593,225 120,487 38.12 Source Federal, Secretariat for Agriculture Industrial Projects Department September 1973 Table 3 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT WORKING ANIMALS ON PRIVATE FARMS IN SFRY Total Working Worlkng Worldng Working Horses Oxes Buffalos Males Donkevs Cows Total 937.796 609.066 12.129 16.125 138.553 794.103 to 0,5 ha 11.501 4.235 149 1.248 15.0 7 5.21 0,5 - 1 20.997 11.769 385 1.763 1 180 13 1 - 2 74.547 52.661 2.352 3.o36 32.545 90.575 2 - 3 106.920 76.064 2.769 2.455 22.247 146.148 3 - 4 109.335 78.322 2.047 1.774 14.081 132.795 4 - 5 127.129 74.552 1.395 1.234 9.359 112.045 5 - 6 110.396 61.919 977 880 6.522 79.848 6 - 7 90.761 49.605 745 704 4.831 57.017 7 - 8 65.745 38.732 439 534 3.469 41.114 8 - 9 59.134 30.307 284 369 2.552 27.642 9 - 10 57.573 27.920 303 325 2.321 23.189 10 - 15 67.892 61.213 188 1.016 4.543 43.771 15 - 20 18.216 22.580 61 340 1.592 12.116 Over 20 ha 17.941 19.349 29 530 1.319 6.482 Source: SFRY Agricultural Survey Industrial Projects Department September 1973 ! b. Table 4 YUGOSLAVIA IKT TRACTOR EXPANSION PROJECT EXPORTS OF IMT TRACTORS, TRACTOR SETS AND COMPONENTS (units) Type of Tractor and Country 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 IMT-533 India 1,043 1,570 1,952 2,118 2,590 2,912 3,818 2,310 1,493 1,315 CDR 3 - 3 302 352 300 1 - - - Holland - - - - 203 100 115 70 - - Cyprus - - - - 3 74 60 64 60 24 Lybia - - - - - 15 325 52 39 4 Pakistan - - - - - - - - 135 152 Other Countries 2 3 3 18 120 74 19 3 - 2 Sub-Total: 1,048 1,573 1,958 2,438 3,265 3,475 4,338 2,501 1,730 1,497 IMT-555 India - - - - - - 2 - 359 352 Other Countries - - - 6 20 171 107 81 1 - IMT-558 Other Countries - - - - - - - 29 22 10 Grand Total: 1,048 1,573 1 ,958 2,hkk 3,285 3,646 k1547 2,611 2,112 1,959 Source: IMT Piarket Study Industrial Projects Department 1 September 1973 ° W .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ YUGOSLAVIA - IMT EXPANSION PROJECT Table 5 TRACTORS IN AGRICULTURE - PROJECTED YUGOSLAV REPLACEMENT MARKET AND TRACTOR PARC Private Sector Social Sector Year Sales Replacement- Tractor Parc hp/ha72 Sales Replacementl/ Tractor Parc 1972 95,400 0.38 - 25,087 0.86 1973 30,000 7,632 117,768 2,000 2,007 25,080 1974 30,000 9,421 138,347 2,000 2,006 25,074 1975 30,000 11,068 157,279 2,000 2,006 25,068 1976 32,000 12,582 176,697 2,000 2,005 25,v63 1977 32,000 14,136 194,561 2,000 2,005 25,058 1978 32,000 15,564 210,997 2,000 2,005 25,053 1979 32,000 16,879 226,118 2,000 2,004 25,049 1980 32,000 18,090 240,002 1.0 2,000 2,004 25,045 1.0 1981 32,000 19,202 252,800 2,000 2,004 25,041 1982 32,000 15,168 269,632 1,500 1,502 25,039 1983 32,000 16,178 285,454 1,500 1,502 25,037 1984 32,000 17,127 300,327 1,500 1,502 25,035 1985 32,000 18,020 314,307 1,500 1986 32,000 18,858 327,449 1,500 1,502 25,034 1987 32,000 19,647 339,802 1,500 1,502 25,032 1988 32,000 20,388 351,414 1,500 1,502 25,030 1989 32,000 21,085 362,329 1,500 1,502 25,028 1990 32,000 21,740 372,589 1,500 1,502 25,024 1991 32,000 22,355 382,234 1,500 1,501 25,023 1992 32,000 22,994 391,240 1,500 1,501 25,022 1993 32,000 23,474 399,766 2.0 1,500 1,501 25,021 1994 32,000 23,985 407,781 1,500 1,501 25,020 1995 32,000 24,470 415,310 1,500 1,501 25,019 1/ 15 years or 64% of previous years' parc 2 at average 32.5 hp in 1972, 38 hp until 1980 and 40 hp thereafter 3/ average of 51 hp per tractor in 1972-and 60 hp in 1980 Industrial Projects Department November 1973 ANNEX 4-1 Page 1 Y'JGOSLAVIA - IMT TRACTOR EXPANSION PROJECT Detailed Project Description 1. The project is to increase the capacity of IMT's Belgrade factory to an annual production volume by 1976 of 35,000 tractors, 27,000 implements and a proportionate number of accessories and spare parts. The new facilities will allow, in addition to the present IMT product range, the manufacture of about 3,000 20-25 hp tractors/year and 400 above-100 hp tractors/ year. A. IMT Expansion Program 2. IMT's overall progran for the Belgrade factory foresees an expansion in two stages. It will increase the plant facilities as follows: IMT Belgrade - Area and Facilities (MZ) Existing Phase I Phase II 1) Total area 168,500 388,250 388,250 2) Production covered Implement production 6,100 10,535 15,535 Tractor parts machine shop 9,870 21,600 21,600 Tractor assembly shop 5.665 16,200 16,200 Sub-total 21,635 48,335 53,335 3) Offices a) administration + production planning 1,690 6,835 6,835 b) development + laboratory 2,650 2,650 3,800 c) Sales + Finance Department 1,848 1,848 8,000 d) others 1,095 1,095 included in above Sub-total 7,283 12,393 18,635 4) Covered storage area a) cellar 1,450 1,450 1,450 b) raw material stores 2,300 9,995 9,995 c) other stores 3,423 4,340 8,980 Sub-total 7,173 15,785 20,425 5) Open storage area 36,000 36,000 36,000 ANNEX 4-1 Page 2 Expansion Phase I ("The Project") 3. The first expansion phase (or the project) is designed to enable the Company to meet the production targets stated in para. 1. The main factors characterizing the IMT project are the following: (a) Construction of a new tractor parts machine shop (21,600 m2) with additional 5,400 m2 of auxiliary floor area. Heat treatment and surface protection facilities will be installed, as well as 690 machine tools (265 existing and 425 new) which will be arranged in 50 production lines. The existing 265 machines including the tools store will be shifted to the new building. However, some tractor parts, particularly welded components, will be produced in the implements shop. (b) Construction of a tractor assembly plant (16,200 mi2) with additional 4,050 22 auxiliary floor area. The existing usable machines will be shifted to the new building and supplemented by new transfer lines, conveyors and paint shops. (c) Construction of a front and side annex (5,145 m2), with connection to the existing production bay, which will include offices for the Production Planning and Quality Control Departments, a cafeteria, locker-rooms, etc. (d) Reorganization and rehabilitation of the existing tractor production and assembly plant into a main implement production and assembly area. The existing heat treatment facilities will remain and be used exclusively for implements. The existing maintenance and tools shop will also remain and more machine tools will be added. The new layout will improve work conditions and health standards to the acceptable level. The present implements shed, which had been built on the property of FOB, will be dismantled. (e) Construction of three Dutch barns (3,800 m2), an oxygen bottle shed (40 m2), underground fuel and lubrica- tion store (500 m2) and raw material stores (7,695 m2) with appropriate storage equipment facilities. (f) Building of access roads within the factory area. (g) Installation of electronic data processing equipment for production planning, inventory control and accounting. (h) Installation of additional laboratory equipment (test rig equipment, microfilm equipment, vibration exciter, etc.). ANNEX 4-1 Page 3 (i) Compressor station (350 im2) and annex to the old production hall (2,000 m2). 4. The plant layout (Annex 4-2, page 1) illustrates the proposed expansion. Production on a one-shift basis in the tractor assembly plant and two shifts in all other production facilities will permit the manufac- ture of 35,000 tractors, 27,000 implements, various attachments and spare parts. The proposed project includes a high degree of flexibility in product range. By producing in 3 shifts IMT could increase its tractor output to 50,000-70,000 units/year. On the other hand, by changing the product mix and manufacturing more implements, accessories and spare parts than presently proposed, the Company could economically decrease the tractor production to 20-25,000 units. Expansion Phase II 5. Preliminary planning for Phase II has been completed in the framework of the overall expansion program. Phase II will primarily consist of the construction of new buildings to improve the working conditions of the administrative and service departments: Expansion of Facilities (Phase II) in2 1. Tools & maintenance shop 6,500 2. Development Department 3,800 3. Spare Parts Department 3,600 4. Expansion of the Scaffolding Production Shop 4,175 5. Stores for paint equipment, fire resistant material, fuel, salts, chemicals, scrap 4,000 6. Garage & fire station 2,000 7. Sales pavillion 3,000 8. Head office 5,000 9. Kindergarten & medical center 2,700 10. Central kitchen 1,000 Since these facilities are not mandatory for reaching the planned capacity, IMT has not finally decided on the exact period of Phase II project execution. The implementation schedule will primarily depend on the avail- ability of funds. Phase II expansion is estimated to cost about Din 200 million, of which about 10% would be in foreign exchange. IMT's projected financial situation (Annex 7-2) should allow the Company to undertake Phase II in 1978-79. For the purpose of this report the project refers solely to the Phase I expansion. The proposed Bank loan will be used for Phase I, whereas IMT's cash generation after full expansion to 35,000 tractor/year in 1976 should be sufficient to finance the Phase II expansion. ANNEX 4-1 Page 4 B. Tractor Parts Machine Plant 6. The layout of the new tractor parts machine plant is given in Annex 4-2, page 1. The bay includes the machine shop with 40 lines, repair, heat treatment and surface protection facilities. Certain tractor parts (hydraulic pump and front axles, welded, pressed and rough machined parts) will not be manufactured in the new plant, but in the implement shop and its Annex. The improved features of the proposed tractor parts machine plant are a) its short production cycle, b) its completion of each part on one machine line only, c) good production process planning and rational grouping of machines. The plant will work on a two-shift basis, although its capacity could be expanded by going over to three shift operation. 7. The machine shop manufactures gears, differentials, gear assemblies and miscellaneous tractor parts on 40 machine lines. The five major machine groupings are castings, steel parts, gears, high volume small parts, and grinding. Internally, medium weight parts are transported by roller conveyor, whereas light parts rely on overhead monorails. Heavy parts which do not require heat treatment are conveyed directly to the assembly shop. To facilitate the production flow, parts requiring heat treatment are produced near the heat treatment shop, and conveyed directly to the heat treatment, plating or grinding operations. 8. MIachine Tool Requirements. DIT estimates that out of 333 existing machine tools, 265 could be effectively used in the expansion program. The present manufacture of 12,000 tractors is effected on 333 machine tools of which 65 are of high productivity (18.3%). After expansion (35,000 tractors/ year), a total of 690 machine tools will be used out of which 245 will be highly productive (34.0%). The project includes 275 standard machine tools and the following additions of high productivity machine tools: 4 multi spindle bar automatics, 25 automatic and semi-automatic machine tools, 42 front operated lathes, 10 drilling machines with rotary tables, 23 multi spindle drilling machines, 3 deep hole drilling and boring machines, 3 automatic grind- ing machines with charger, 5 profile grinding machines, 2 heavy duty surface grinding machines, 2 centerless profile grinding machines, 1 external broach- ing machine, 24 single spindle bar-automnatices, 2 internal gear hobbing ma- chines. 9. Machine Tool Utilization. From the production point of view, this selection of machine tools will facilitate a significant reduction of machine time. Tne machine time on an IMT 533 tractor with differential lock and cab will be reduced from 121.0 hours to 85.5 hours, thus saving 35.5 hours (29%). However, a transfer machine 1/ is used only for rear axle trumpet housing. No other components are mw. .ilned on transfers. The trumpet housing transfer 1/ A transfer machine is a complex, automated machine capable of doing different operations including setting up of the machine and inspection. ANNEX 4-1 Page 5 machine reduces the present 10 machines, 7 workers and 8 minutes stroke and 52 minutes full cycle time to one transfer machine with two workers/shift and 2.6 minutes stroke and 5.2 minutes full cycle time. 10. The machine tool utilization for both shifts is satisfactory (92%). In order to prevent transfer of a component from one line to another, a num- ber of auxiliary and cheap machines are installed in the line, although the percentage utilization of such a machine may be low. Similarly, on lines re- quiring close tolerance gear cutting, the grinding machines are added on the same line. For spiral gears requiring high tolerance which cannot be obtained by copy lathe, an additional grinding machine is added on the line. 11. Heat Treatment in the tractor parts machine plant a second heat treatment unit will be installed. A transfer of the existing facilities would be too costly and, moreover, they can be used economically in the old building for implement parts treatment. The operation involves, consecutively, gas carburation, hardening heating, quenching in pools with water, oil thermal solutions, and under pressure machines, inductive hardening, ignition harden- ing, soft nitriding, annealing, normalizing, degreasing, washing and sand blasting. The proposed production program requires the following capacities: tons/year Gas carburation 4,100 quenching 7,150 soft initriding 150 ignition and inductive hardening 1,850 pressure hardening machines 1,250 sand blasting 5,730 The installation of the new equipment will fundamentally change the technological level of IMT's heat treatment operation: a) the heating of the gas carburation furnace will be by propane-butane gas which results in higher productivity; b) hardening by ignition or intermediate frequency currents achieves a higher productivity than classical heating; and c) the installa- tions can be arranged near the machine line, thus improving material flow and production time. 12. Surface Protection of tractor parts and implements will be carried out partly in the existing bay and partly in the new tractor parts machine plant. The process consists of four basic operations (galvanizing, plating- copper, nickel or chrome, phosphate treatment and burnishing), and the corres- ponding final operations (degreasing, pickling, rinsing, drying, oil coating, anodizing, mounting, demounting, partial isolation of surfaces, copper de- plating, and uncoating of foiled galvanic films). ANNEX 4-1 Page 6 The Droject requires an annual capacity for surface protection of: galvanizing 6,813,000 pcs or 2,900 dm2 copperplating 5,700 pcs or 12,740 dm2 decorative chromeplating 304,000 pcs or 129,000 di phosphate treatment 3,806,000 pcs or 3,646 kg Tne surface protection equipment in the new plant will include gal- vanizing and phosphate treatment facilities only. The galvanizing process is similar to the existing one. Automatic equipment has not been selected since the size of the treated parts varies widely which would impede continuous operation. A special disposal installation will neutralize the waste liquid resulting from the surface protection and hardening operations. C. Tractor Assembly Plant 13. The layout of the tractor assembly plant is given in Annex 4-2, page 2. The new 16200 m2 bay will provide areas for the main assembly and sub-assembly lines, two paint and drying shops, tractor accessories assembly, final tractor inspection and adjustment, engine storage, transit storage and storage of parts from outside suppliers. The layout of the assembly shop is spacious with 2 horizontal and 3 longitudinal passages each of which is 5 meters wide, and a number of service passages along the work area. The layout of the plant is sound. It provides good working conditions and suf- ficient floor space for Later modification. 14. The new assembly shop consists of eight major assembly group lines (center housin-, gear box assembly, engine preparation, front axle prepara- tion, main assembly, parts painting, sheet metal painting, final assembly) and a number of sub-assembly work areas. The assembly operations are designed to be carried out as selected group activities, i.e., based on time and motion study, norms for each operation in assembly have been established, and the work so designed that each worker is engaged equally with no idle manpower capaciry. Required hardware is stored in boxes or special carriages on wheels along the assembly line which increases the productivity of the assembly operation considerably. Internal transportation is by conveyors, synchronized through a central control system. 15. The improved material flow and machine grouping of the new tractor assembly shop will permit assembly of the model IMT 533/540 at 2.6 min/stroke 1/ and the model IMT 558/560 at 3.7 min/stroke as compared to 7.0 min/stroke and 8.9 min/stroke for the present operation. 1/ Output frequency, i.e., 2.6 min/stroke means that every 2.6 minutes a tractor rolls out of the assembly shop. ANNEX 4-1 Page 7 Quality Control 16. The proposed project will overcome the deficiencies of the present quality control system. The improved material flow and machine organization of assembly and sub-assembly lines will allow for the introduction of a line inspection system on all assembly operations, 17. Painting Shops the tractor assembly plant includes two painting and drvino qhrnc for sheet metal and parts. The new paintshops will be heated by oil instead of the electric powered infra-red rays of the present facilities. This technologically more advanced solution is cheaper, safer and results in a higher drying productivity. About 82 items will be processed through the sheet metal paintshop, where the following operations are carried out: (a) washing, (b) painting, (c) vaporizing, (d) drying and cooling. The parts are painted red, grey and blue-green. D. Implements Production Shop. 18. The project envisages the transfer of the existing implements pro- duction shop to the existing main production bay. The implements heat treat- ments and assembly operation will occupy about 1/3 of the building which will also accommodate offices, the repair shop, the tool room, and the raw material and parts storage. 19. The implement production shop producing about 27,000 units/year in two shifts, will require 127 new machines and reorganization of the four major assembly lines in a) a trailer line with a floor conveyor, mechanized painting booth and oven (80°C); b) a plow line with an overhead conveyor, painting booth and oven (140-180°C); c) a cultivator line with a floor conveyor, paint- ing booth and oven (140-180'C); and d) a common line for small machines. In addition, a fifth ground painting booth will be installed. E. Storage and Material Handling Facilities 20. Internal Transport has been primarily by forklifts. The expansion project aims to reorganize the production flow and will introduce conveyors as far as possible. In particular, conveyors will be used for transport of a) sheet metal through the paint shop and assembly line, b) parts within the machine shop, c) prepared engines to the assembly line. Transport of heavy parts will be carried out in pallets by forklifts. However, the Company has not yet determined the internal transport system in sufficient detail. Assu"- once should be sought during negotiation that adequate steps have been taken. 21. Storage. The proposed covered and open store areas are adequate and take into account the supply of raw material and parts from outside sour- ces, IMT's production of semi-finished and finished components as well as the ANNEX 4-1 Page 8 internal and external material movement2system. The project includes the following storage facilities a) 7,695 m raw material storage and preparation bay, b) a storage area in the existing production hall primarily for forgings, castings and components, c) an engine and finished components store, in the tractor assembly bay, d) 3 sheltered stores of 3,800 m2 each for tires and engines, e) an underground flame-proofed fuel and lubricants store, f) an open storage area for tractors and implements, and g) an oxygen bottle shed. F. Utilities 22. Electricity. The existing transformer sub-station (35/10 KV), which is also used by FOB, will not have sufficient capacity to meet both companies increased needs after project completion. Therefore, an agreement was reached with BEOGRADSKE ELEKTRANE, the local power company, for the supply of addi- tional electricity as well as installation of a main transformer station along with transmission lines. A new 110/10 KV transformer to be built in the IMT complex will be connected through a 3 km double circuit 110 KV overhead trans- mission lines will be shared by IMT and FOB according to their projected power needs; 50%, of the transformer investment cost will be provided by BEOGRADSKA ELEKTRANE and 25% each by IfT and FOB. Total annual consumption of electric energy is expected to increase from 12 MW to 31.5 MW after project completion. On a per unit basis, this implies an average electricity consumption increase per tractor from 600 kwh to 700 kwh due to improved ventilation, heating and lighting in the plants, a higher degree of mechanization of machining and internal transport as well as additional in-house tractor parts production. 23. Water. IMT is connected with3the Belgrade water supply system and uses at present an average of 550,000 m water/year. The existing wells on the property have not been exploited during the past ten years. The project envisages the construction of a) a water recirculation system, primarily for cooling water used in the compressor station and the hardening process, and b) extension of the existing water neutralizing facilities. The recircula- tion of water is expected to result in a decrease of annual water consumption to about 390,000 m3. Water supply does not pose any problem. 24. Compressed air is supplied by FOB which3has sufficient capacity to supply IT7 s present 3average consumption of 6.2 m /minute. After expansion a capacity of 49.8 m /min. will be necessary. As part of the project flT plans to install its own compressor station (capacity: 3,000 m ) in one of the existing buildings. 25. Cas. Th1e heat treatment ovens as well as the paint booth in the existing production hall use liquid propane gas, whereas the drying process after painting relies on electric power. The installation of additional sur- face protection, heat treatment facilities and paint shops will more than ANNEX 4-1 Page 9 triple IMT's annual gas consumption. After expansion, IMT intends to pXrchase natural gas for heating of the automatic heat treatment ovens (142.5 Nm /h) and the drying installations (199.5 Nm3/h). NAFTAGAS has been informed of the Company's natural gas requirements of 351 Nm3/h. 26. Heating. The existing production facilities on IMT's property are heated partly by FOB's steam boiler and partly by 130C water from the Central Heating Station in Belgrade. The covered area of 30,670 m2 with a capacity of 152,520 m3 requires about 5,000 x 16 KCal heating energy per year. The Central Heating Station Belgrade agreed to supply DMT's total projected heating requirements of about 25.106 KCal/h. after21975. This hot water supply will be sufficient for heating of the 123,205 m covered area (823,040 m3) and servicing of the ventilation system io Lhe tractor parts machine plant and tractor assembly plant. 27. Transportation. The IMT Belgrade factory is located in an indus- trial area with direct access to the main highway and the urban road system. The Company has no direct rail-link. The project envisages an annual trans- port requirement of 130,000 tons for raw materials, parts and supplies: (a) fuels, greases and liquified gas will be delivered by NAFTAGAS using special vehicles, (b) IMT will transport engines from IMR (13,420 tons), castings from FOB (24,000 tons), tires from REKORD (4,000 tons), paints and lacquers (300 tons) with its own trucks and forklifts. Transport of the re- maining quantities will be arranged through rail and outside transport enter- prises. Industrial Projects Department September 1973 YUGOSLAVIA - IMT EXPANSION PROJECT PLANT LAYOUT EXISTING PLANT* [Zz PROJECT (EXPANSION PHASE 0I -ROADS j EXPANSION PIHASE 11 | 'OER STATION,' COMIMUNICATION ROAD 12.-12, World Bsok-80041R) ANNEX 42 Page 2 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT LAYOUT OF TRACTOR ASSEMBLY PLANT I , . , , - , +_ .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ..... I , , , , ,~~~~~~I I -, - -I= , I 4 t § j = 571 111- l 9 =. W---- W: IW ---' %- N +~~~~~~~~~~~~ ~~~~ ~ ~ C=+ C=I ~~~~~~~~~~~~~~~~~I + 4 &- -t --t L|_ _ ___ z i--~~1 1. Y!2ii -- o- --- _-: InduStrial Projects Department September 1973 World Bank-8046 ANNEX 4-2 Page 3 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT LAYOUT OF TRACTOR ASSEMBLY PLANT 1. Central Housing 2. Rear Axle Assembly 3. Brake Assembly 4. Gear Box Assembly 5. Engine Preparation 6. Sheet Metal Parts Painting and Drying Plant 7. Tractor Painting and Drying Plant 8. Cabin Assembly Line 9. Main Assembly Line 10. Readjustment of Tractors 11. Paint Touch-up 12. Tractor accessories Sub-assembly 13. Tractor Production Control 14. Repair Shop 15. Engine Store 16. Transit Store 17. Components and Parts Store Industrial Projects Department September 1973 ANNEX 4s-2 . ael YUGOSLAVIA -IMT TRACTOR EXPANSION PROJECT LAYOUT OF TRACTOR PARTS PRODUCTION PLANT .~~~1 _ ..]/.___ S~~~~~~~~~~~~~~~~I I 12 I®- _z __ _ _ _ __ _ _ _ _ __ _ _ _ _ *I . _ ______,________._______.________r___ __________________________________________________________ I I I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ _.,,. .97 .o .J _.-.8 = ANNEX 4-2 Page 5 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT LAYOUT OF TRACTOR PARTS MACHINE PLANT 1. Unloading ramp 2. Axles, shafts, general line I 3. Straight tooted bevel gear; general line II, levers 4. Spur driving and bevel gear 5. Broaching, copying and inner grooves for parts 6. Grooving of shafts and axles 7. Broaching of cylindrical gears 8. Spur gears, carden joints, rings, ball joints 9. Crown wheels, bars, balls, front wheels 10. Rear axles 11. Sleeves and carriers 12. Brake drum, hydraulic cover, support front axle 13. Hub, flange, cylinder, piston planetary ring carrier 14. Axle and differential housing 15. Transmission case 16. Central housing 17. Repairs 18. Steering mechanism housing 19. Gear grinding 20. Small components grinding 21. Shaft grinding 22. Grinding of the steering mechanism, differential and pulley components 23. Machine automates for small components 24. Heat treatment 25. Surface protection Industrial Projects Department September 1973 ANNEX 4-3 Page 1 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT MANPOWER PROJECTIONS AND TRAINING 1. As of May 1973, IMT employed 3,524 workers and employees, of whom 2,905 were in Belgrade. The labor force is distributed according to qualifi- cations and plant locations as follows:- IMT Mampower (1973) Service IMT FIK Center Belgrade Kniazevac Dobanovei Total I. Professional Training VSS - University (2 degrees) 136 10 3 149 VSS/1 - University (1 degree) 116 24 3 143 SSS-intermediate training 321 39 15 375 NSS-basic training 144 22 13 179 ' Sub-total 717 95 34 846 II. Skill Level VK-highly skilled 372 33 23 428 KV-skilled 969 239 87 1,295 PK-semi-skilled 479 16 5 500 NK-unskilled 368 65 22 455 Sub-total 2,188 353 137 2,678 Total 2,905 448 171 3,524 Manpower Projections 2. The proposed expansion project will increase IMT s manpower by 1,440 men by 1976. Both in relative and absolute figures highest employment generation will occur among highly skilled workerS:- ANNEX 4-3 Page 2 IMT Belgrade-Labor Force Projections for the Tractor Expansion Project Qualifications 1973 1974-83 Number % Number % I. Professional Training (staff) VSS-University 136 5 180 4 VSS/1-University 116 4 142 3 SSS-intermediate 321 11 435 10 NSS-basic 144 2 145 3 Sub-total 717 25 902 20 II. Skill Level (workers) VK-highly skilled 372 13 457 10 KV-skilled 969 33 1,615 37 PK-semi-skilled 479 16 922 21 NK-unskilled 369 13 499 10 Sub-total 2,189 75 3,493 79 Total 2,906 100 4,395 100 Out of 3,443 workers, 2,151 will be associated with tractor production and 584 with implements manufacturing. 3. About 523 new staff will be needed for the General and Services Departments, according to the following projections:- IMT Belgrade - Staff Projections Department 1973 1976 Number Number Development 130 220 Pro_.ction and Inventory Control 422 473 Maintenance 197 300 Machine Tools 118 200 Sales & Services 141 180 Managr^ent and Auxiliary Staff 296 463 Total 1,304 1,836 Despite this considerable increase of services and auxiliary staff, the im- portant contribution of the expansion project is the employment generation for skilled and unskilled workers. IMT projects that by 1976 57% of the person- nel in the tractor and implements production will be direct labor as compared to 47% in 1973. ANNEX 4-3 Page 3 4. A comparison between IMT's projected total labor force and the per- centage of indirect labor indicates that the number of workers required is about 10-15% above US standards for plants of similar size. However, the INT labor force projections are acceptable in view of the selection of machine tools, the lack of emphasis on fully automated transfer lines and economic con- siderations. DMT's plant layout is relatively labor-intensive and therefore has a positive effect on the Yugoslav employment problem. Training and Recruitment 5. DIT does not anticipate any difficulties in recruiting the addi- tional number of workers and employees required for each skill level. The Company is well known in Yugoslavia for its technical excellence as well as social and economic benefits, and has continuously attracted applicants. 6. The manpower program for the expansion project foresees direct re- cruitment of workers and staff as well as training of the present labor force. The project includes Din 7.0 million for training purposes. IMT plans to hire 324 of the required 646 highly skilled (KV) workers according to the following skill types and time plan: 1973 1974 1975 Total Grinding machine operators - 2 12 14 IIilling machine operators 6 11 15 32 Automechanics 10 25 25 60 Auto-tinsmiths 4 2 4 10 Auto-locksmiths - 1 2 3 Tool makers 6 20 20 46 Metal abraders 14 20 30 64 Machine locksmiths 12 38 30 80 Temperers - 3 12 15 52 122 150 324 In addition, 70 - 90 semi-skilled (PK) workers presently employed by IMT, will annually complete the prescribed course at the Workers University in Belgrade and receive the KV qualification. For the training of unskilled workers (NK) for skilled (PK) qualifications, IMT uses its own school and on the job training. 8. To attract professional staff IMT has been giving scholarships to students who join the Company upon completion of their studies. The projected need for VSS level staff in 1976 will be covered by this type of recruitment. Industrial Projects Department September 1973 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT PROJECT IMPLEMENTATION SCHEDULE YEARS 1973 1974. 1975 LIONTHS ~ A I m I| J JI|A Is I | OI|N |ID J | JJ|A|SO|N I D J I F I-M- A I M I J TRACTOR PARTS PRODUCTlO PLANT . . . - . ~~~~I . __________ -X-- M ASEML PAN ONUTIXTIONT _Iili mmGM l G ___ i__s -___ UrEM I I IES UlILUTIES -- _I COWMfUCTION | l l __ EOIJIPENT | UEnimneenring _ Civil Works 4 Tendering & Contracting 5 Equiprnent Delivery ||||||||| Equipment Erection Test Runs of Equipnent Ind1et4 Project Dapartent September 1973 ANNEX 5-1 Page 1 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Detailed Project Cost Estimate (Din Million) Local Foreign Total 1. Building and C-vil Works Design 4.8 - 4.8 Buildings 87.9 - 87.9 Installation 40.7 - 4o.7 Infrastructure 39.6 - 39.6 Subtotal 173.0 173.0 2. Equipment and Spare Parts Standard Machine Tools 35.1 132.1 167.2 Special Machines 5.6 85.0 90.6 Heat Treatment & Surface Protection Equipment 5.3 23.9 29.2 Assembly Equipment 23.6 11.2 34.8 Internal Transport Equipment 10.0 9.6 19.6 Control and Laboratory Equipment o.4 2.6 3.0 Shop Inventory 5.9 0.3 6.2 EDP Center - 10.3 10.3 Spare Parts - 12.8 12.8 Subtotal 85.9 287.8 373.7 3. Transport and Insurance 27.6 - 27.6 4. Duty and Taxes 103.8 - 103.8 5. Erection and Installation 16.4 - 16.h 6. Engineering, Pre-operating and Start Up Expenses Engineering and Design 2.2 - 2.2 Training 2.0 - 2.0 Project Management 2.5 - 2.5 Fees and Sundries 0.3 - 0.3 Subtotal 7.0 7.0 7. PhXyical Contingencies 34.5 27.2 61.7 8. Price Escalation h9.8 40.2 90.0 TOTAL FIXED ASSETS h98.o 355.2 853.2 9. Incremental Working Capital 380.7 _ 380.7 TOTAL PROJECT COST 878.7 3552 1,233.9 NOTE: For description of cost items, see Chapter 4 of this Annex. Industrial Projects Department October 1973 ANNEX 5-1 Page 2 I. EXPLANATION OF COST ITEMS A. Building and Civil Works Cost (Item 1) 1. Total cost of building and civil construction amounts to Din 173.0 million. IMT signed the construction contract in May 1973 with Gredjevinsko Preduzece "RATKO MITROVIC," a well-known contractor in Belgrade. "RATKO MITROVIC" was selected from five Yugoslav construction companies which had submitted their bids following local competitive bidding procedures. Specifications, and terms and conditions of the contract have been reviewed and are satisfac- tory. The contractor "RATKO MITROVIC" is responsible for all major buildinig and civil construction related to IMT's expansion program, including a) ground levelling and final engineering, erection or installation of b) main buildings and annexes, c) water, electric and heating systems, d) power, gas and com- pressor stations, e) open and covered storage spaces and f) roads and land- scaping. 1/ B. Equipment Cost (Item 2) 2. Equipment cost estimates are based on a) actual prices prevailing in 1973 or b) on late 1972 or 1973 quotations from potential suppliers in the USA, and Western and Eastern European countries. IMT has divided all equip- ment items according to the financing and procurement sources: a) Din 111.5 million or about 25% of total estimated equipment cost will be procured from Yugoslav manufacturers, b) some standard machine tools, heat treatment and inventory equipment totalling Din 22.0 million are earmarked for purchases in clearing countries, c) an estimated Din 47.6 million of equipment will be imported from IMT sources of convertible currency. These items originally ear- marked for Bank financing are now being directly procured and paid for by DMT, in order to meet the project schedule. Bids for the paint shops and the equip- ment for internal sheet metal transDort have already been received and are presently being evaluated. d) Bank-financed equipment is estimated at approxi- mately 60% of total equipment cost. It is expected that most of this equipment will be imported, since items for which competitive Yugoslav suppliers exist have generally been included in the exclusively locally procured category. 3. Detailed cost estimates for foreign and local equipment are given below. It includes a provision for spare parts for equipment from convertible mirrency countries only. IMT maintains that the remaining equipment consists of' .s:-!ard machines and that the ordering and supply of spare parts from "'astern European and Yugoslav equipment manufacturers is adequate so that an increase of spare parts inventory for these equipment items will not be neces- sary. 1/ During the mission's visit construction work, i.e., filling of the terrain, was underway. ANNEX 5-1 Page 3 Equipment Cost Estimates (Din million) IMPORTED EQUIPMENT /1 LOCAL /2 TOTAL Bank Convertible /5 Equipment Item Financed Currency Clearing Total 1. Standard Machine Tools 115.5 - 16.6 132.1 35.1 167.2 2. Special Machines 65.5 19.5 - 85.0 5.6 90.6 3. Heat Treatment & Surface Protec- tion Equipment 22.2 .8 .9 23.9 5.3 29.2 4. Assembly Equipment - 11.2 - 11.2 23.6 34.8 5. Internal Transport Mechanization 3.6 6.0 - 9.6 10.0 19.6 6. Control & Labora- tory Equipment 1.2 - 1.4 2.6 .4 3.0 7. Shop Inventory 0.3 - - 0.3 5.9 6.2 8. EDP Center 10.3 - - 10.3 - 10.3 9. Spare Parts 10.9 1.9 - 12.8 - 12.8 Sub-total -- 229.5 39.4 18.9 287.8 85.9 373.7 10. Contingencies /3 22.9 3.9 .4 27.2 8.6 35.8 11. Priqe Escalation /4 33.2 4.3 2.7 40.2 17.0 57.2 Total Equipment Cost Estimate 285.6 47.6 22.0 355.2 111.5 466.7 /1 cif Yugoslav border /2 cif cost at plant _3 10% for equipment from countries with convertible currencies, 2% for clearing countries, 3% for local equipment /4 3% semi-annual price escalation for imported equipment, for local equipment 5% semi-annual increase in 1973, 4% - 1974 and 3% thereafter /5 financed by IMT C. Transport and Insurance (Item 3) 4. Transport and insurance cost relates only to foreign equipment since, for all locally procured items, the cif cost at plant are given. It covers trans- port and insurance expenses between IMT and the Yugoslav border, i.e., it in- cludes no foreign exchange component. The estimate of Din 27.6 million based on recently quoted railway, handling and insurance charges. ANNEX 5-1 Page 4 D. Duty and Taxes (Item 4) 5. Duty and taxes, totalling Din 103.8 million, are calculated accord- ing to the Drevailing tariff rates for machine tools and equipment which came into effect on February 26, 1973. The present customs duty for machine tools and special equipment varies from 19-21% of the cif value (Yugoslav border). For the capital cost estimate 21% duty has been uniformly assumed. In addi- tion to the customs duty, taxes of 9% on the cif value (Yugoslav border) - 3% import tax and 6% special tax - have to be paid for all imported items. E. Erection anid Installation Cost (Item 5) 6. In line with IMT's past experience erection and installation cost have been estimated as 4.5% of foreign and local equipment cost value. F. Contingency (Item 6) 7. To the total cost estimates, based on a detailed breakdown into buildings, civil works, equipment as well as financing and procurement sources, the following contingencies have been added to account for minor changes and omissions: a) 10% for buildings and civil works as well as equipment from convertible currency countries; b) 2% for equipment from clearing countries and c) 3% for locally procured equipment. The lower contingencies for Yugoslav and Eastern European equipment seems justified, since these items are predominantly standard machine tools whose design changes infrequently and with which IMT is familiar. Considering the advanced stage of project preparation, the contingency provision should be adequate. G. Price Escalation (Item 7) 8. Civil construction and local as well as Western European equipment cost have been increasing at the rate of 6-10% p.a. during the past two years. In order to account for future price and construction cost increases, price escalations have been included in the investment costs. In view of the steps being taken by the Federal Government of Yugoslavia, the domestic inflation rate is expected to drop, so that the following escalation rates have been assumed for civil works, domestic equipment, erection, transport and insurance costs: 1974-8% and 1975-6%. With regard to foreign equipment, a 6% inflation rti Per year has been adopted uniformly for clearing and convertible currency countries. Based on these assumptions, total price escalation is estimated at Din 90.0 million (49.8 on domestic cost and 40.2 on foreign exchange costs), i.e., about 11% of total fixed assets. H. Engineering, Pre-operating and Start-up Expenses (Item 8) 9. 1 According to Yugoslav law, these expenses are allowed to be capital- ized only if they are costs incurred outside the company, i.e., consulting services, fees, outside training. However, all costs related to on-the-job ANNEX 5-1 Page 5 training and project services performed by IMT staff are charged directly to the income statement. IMT envisages special training costs of about Din 2 million and consulting fees of about Din 4.7 million. I. Incremental Working Capital 10. Details of calculations and underlying assumptions are given in Annex 5-2. J. Interest During Construction 11. Interest during construction is calculated on the basis of expected disbursements for local and foreign loans. All foreign interest charges re- late to the Bank loan, since interest on bilateral credits from clearing countries is payable in Dinar. According to Yugoslav regulations interest during construction may not be capitalized. However, the enterprises have the right a) to borrow from their house bank an amount up to the interest during construction, to be paid back in several installments after construction completion and b) to charge the total interest during construction to the income statement during this later period. For the current projections, interest during construction is charged to the income statements for the period 1976 to 1980. Industrial Projects Department September 1973 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Estimated Working Capital Requirement - With Expansion (Million Current Din) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 A. Current Assets Cash 25.0 27.0 38.0 60.0 61.8 63.5 65.6 67.8 70.0 72.0 74.0 Accounts Receivables 71.4 77.1 12565 256.0 270.9 287.0 298.5 310.4 322.8 335.8 349.1 Inventory (a) Raw Material 179.8 181.2 310.2 436.6 462.8 490.6 520.1 551.3 584.3 619.3 656.5 (b) Work-Process 41.0 44.5 7L f6 108.3 115.8 124.8 132.7 141.1 150.1 159.1 168.6 (c) Finished Goods 54.7 59.4 63.5 67.8 72.3 76.8 81.5 86.6 92.0 97.5 103.4 Subtotal 275.5 285.1 449.3 612.7 650.8 692.2 734.3 779.0 826.4 865.9 928.5 Total Current Assets 371.9 389.2 612.8 928.7 983.5 1,042.7 1,098.4 1,157.2 1,219.2 1,283.7 1,351.6 Less: Accounts Payable 83.9 90.6 ?']F.2 242.5 257.1 272.6 288.9 306.3 324.6 344.1 364.7 B. Working Capital 288.0 298.2 404.6 686.2 726.4 770.1 809.5 850.9 894.6 939.6 986.9 C. Incremental Working Capital -17.5 +10.2 +106.4 +281.6 +40.2 +43.7 +39.4 +41.4 +43.7 +45.0 +47.3 Assumptions for Working Capital Estimates: 1. Cash: 1 week labor cost and Tin 2.0 million petty cash (1973-75), Din 5.0 million thereafter. 2. Accounts Receivables: 197T-1P75 23 days; 1976 and thereafter 30 days; accounts receivable do not include IMT's credit to customers with 3 years maturity. _. Inventory: 1973-75: raw materials - 60 days; work-process - 12 days; finished goods - 16 days; 1976 and thereafter: raw materials - 72 days, work process - 15 days; finished goods - 9.5 days. 4. Accounts Payable: 30 days for raw-materials, supplies and uitilities. 5. No incremental working capital requirements in foreign exchange is needed since foreign estinated accounts receivables exceed foreign accounts payable. Industrial Projects Department September 1973 A_E 5-3 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT BANK FINANCED ITEMS Amount of Loan Allocated Category Expressed in Dollar Equivalent (000 US$) I. Standard Machine Tools including 7,,450 tu.rning machines, toothing slot and spline machines II. Seial Machines including drilling, milling and grinding machines, presses, honing and sharpening machines 4,230 III. Heat Treatment and Surface Protection Equipment -1,430 IV. Equipment for Internal Transport Mechanization 230 V. Control and Laboratory Equipment 70 VI. Shop Inventory Equipment 20 VII. Equipment for Electronic Data Processing Center 670 VIII. Spare Parts 710 IX. Contingencies and Price Escalation 3,690 TOTAL 18,500 Industrial Projects Department September 1973 ANNEX 5-LI YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT ESTIMATED SCHEDULE OF DISBURSEMENTS (IBRD LOAN OF US$18.5 MILLI'J) (in 000 US$ equivalent) Undisbursed Amount Amount at End Year Disbursement Oustndn of' Quarter 1974 I Quarter - - 18,500 II Quarter 2,700 2,700 15,8oo III Quarter 3,M0O 6,200 12,300 IV Quarter 2,700 8,300 10,200 1975 I Quarter 4,ooo 12,300 6,200 II Quarter 5,000 17,300 1,200 III Quarter 1,200 18,500 IV Quarter Industrial Pro-ects Department January 1974 YUGOSLAVLA - IKT TRACTOP EXPANSION PROJECT PRODUCTION, PRICE AND REVENUr BUILD UP (1973 - 1976) nteUt ~l/ Net Revenue Ouantity Net Unt Prices- (million din) ITEM 1973 1976 1971E/ 19763/ 1973 1976 A. TRACTORS4/ IlT Tractor 20-25 HP - 1,000 _ 34,841 - 31-8 INT Tractor 533/540 13,600 22,500 48,360 54,589 657.7 1,228.3 IMT Tractor 558/560 1,600 2,900 57,052 64,402 91.3 251.2 IMT Tractor 575 650 1,600 104,280 110,898 67.8 177.4 IMT Tractor 585 - 1,?OG - 110,898 - 133.1 Tractor Sets CKD 1,000 - 5,365 - 5.4 - Tractor over 100 TDP - 300 - 237,639 - 71-3 Sub-total 16,850 29,500 n.a. n.a. 822.1 1,967.1 B. TRACTOR ACCESSORIES Pulley 2,150 2,800 1,906 2,151 4.1 6.0 Automatic Drawbar 5,950 7,700 898 1,014 5.3 7.8 Cabin 2,500 700 1,779 2,009 4.1I 1.4 Stabi1izer 3,000 1,400 262 296 .8 .4 Weight 2,500 2,100 745 841 1.9 1.8 Seat 1,500 25,700 6,279 7,088 9.4 182.2 Other Accessories n.a. n.a. n.a. n.a. 32.0 39.7 Sub-total 17,600 40o400 n.a. n.a. 57.9 239.3 C. AGRICULIATRAL IMPLRMENTS Trai1lr 3/3T 5,500 6,500 15,807 17,843 86.9 116.0 Trailer 5/3T 500 1,300 24,691 27,871 12.3 36.2 Potovator 450 200 10,203 11,517 4.6 2.3 P1ow 1,500 8,000 6,884 7,700 10.3 61.6 Seed Urill 100 1,000 10,642 12,975 10.3 12.9 Cultivator 200 1,000 3,730 4,211 .7 4.2 Di-c Harrow 400 4,000 6,300 7,112 2.5 28.4 Other Implements n.a. n.a. n,a. n.a. 71.7 105.3 Sub-total 8,650 22.2'0 n.a. n.a. 190.3 366.9 D. SPARE PARTS AND CL71PONEZNTS n.a. n.a. n.a. n.a. 55.3 149.0 E. SCaFFOLDING n.a. n.a. n.a. n.a. 47.9 54.1 F. KITiJAZEVAC - Motorcultivators and Implements n.a. n.a. n.a. n.a. 117.7 268.9 TOrAL n.a. n.a. n.a. n.a. 1,285.3 3,0J5.6 1/ ex factory selling prices assuming a 14% increase over 1973 prices by 1976 (see also Annex 6-1, page 2) 2/ 3.25% discount rate T/ 3.8e discount rate I, For detailed production build up 1973-1977, see Annex 2-3, para 8. n.a. - not applicable Industrial Projects Department October 1973 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Revenue Projections 1973 - 1983 (Din Million) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Gross Revenues 1/ 1,328.5 1,434.8 1,838.8 3,161.3 3,554.2 3,767.5 3,918.2 4,074.8 4,237.8 4,407.4 4,583.7 (Current Prices)- Discount21 43.2 46.6 57.8 115.7 135.0 143.1 148.9 154.8 161.0 167.5 174.2 Net Revenues 1,285.3 1,388.2 1,781.0 3,045.6 3,419.2 3,624.3 3,769.2 3,920.0 4,076.8 4,239.9 4,409.5 (Current Prices) Net Revenues (Constant Prices) 1,285.3 1,285.3 1,531.6 2,43b.4 2,773.0 2,773.0 2,773.0 2,773.0 773.0 2,773.0 2,773.0 1/ Prices are fixed annually by a Federal Price Commission. At present and in the future, INT does not intend to differentiate export and domestic prices. The projections assume a selling price increase of 87% in 1974 and 6% in 1975. For 1976 prices have not been increased, since it is the first year of full production and IMT expects to undertake a special marketing effort. However, price increases of 6% p.a. have been assumed in 1977-1978 and 4% thereafter. 2/ Assuming 3.8% discount in 1976 and 3.257% in all other years. a' Industrial Projects Department September 1973 ANNEX 6-2 Fake I-' - YUGOSLAVIA - DMT TRACTOR EXPANSION PROJECT Raw Materials, Parts & Supplies A. Suppliers' Classification and Problems 1. Timely and economical supply of raw material, parts and supplies is crucial for IMT's production, which is primarily an assembly type operation. The project more than doubles DMT's demand for raw material and parts thus requiring careful inventory planning and control. The Company is aware of the importance of adequate supply arrangements for successful project implemen- tation. The measures to be taken are described below and should minimize bottlenecks after expansion. 2. Purchasing and inventory control of raw material, parts and sup- plies are handled directly by the Production Planning and Control Department. After project completion this function will be computerized. To establish a reliable supply system, domestic and local suppliers are classified in four groups A, B, C and D according to the: a) range of the suppliers' production program and com- patibility with IMT's needs; b) extent of similar business interests between IMT and the supplier; c) extent of suppliers' specialization; d) membership in the UMI group; e) capability to expand supply according to IMT's expan- sion program; and f) distance between the suppliers' plant and Belgrade, and transport facilities. Category A suppliers are those who fulfill or score high on all the above criteria. Suppliers classified in Category B presently do not meet all criteria, but have been reliable suppliers in the past or are currently under- taking currently expansion programs in line with IfT's development and pro- duction program. Category C and D suppliers do not meet more than two of the above criteria. 3. Long-term contracts have been established or are presently negotia- ted with Category A and B suppliers. IMT expects to eliminate all regular purchases from C & D suppliers for major items until project completion by seeking out and engaging additional companie:; which qualify for the B cate- gory. The present distribution of suppliers by category is as follows: ANNEX 6-2 Page 2 Suppliers Category Number of Suppliers 1. spare parts & assembly A 18 components B 28 2. raw material A 6 B 4 3. semi-products & forgings A 2 B 3 4. castings A 2 B 1 5. other supplies A 3 B 1 C&D 11 6. tools A 4 B 4 C&D 5 4. Total requirements for raw materials and parts during any period are supplied by at least two different companies to avoid total dependence on one supplier. The majority of domestic supply arrangements are one-year contracts: a) fLT informs its suppliers by June 15 of the projected yearly demand; b) contracts for the following year are signed by the end of October;' and c) definite orders for the first quarter are given in October and, for the remainder of the year, in January. Despite the relatively long lead tiAi given, prompt delivery is not guaranteed. Therefore, all components necessaky for tractor or implements assembly are classified according to importance a i availability in four groups: Group I parts -- delivery 10 days before asseu - ling; Group II parts - 3 months prior to assembling; Group III parts 6 mont i prior to assembling; Group IV parts -- annual production requirements. Abou 90% of LMT's annual requirements of parts have been Group I and II supplies. 5. Although the supply situation regarding the main raw materials and parts for the production of tractors, implements and machine tools is not expected to be a major bottleneck for IMT's expansion, the Company's depen- dence on timely delivery of components and parts is relatively high. Supply problems will warrant the management's continuous attention. B. IMT Requirements and Suppliers h. The proposed expansion project will increase DIT's requirements for raw materials, components and supplies up to the following quantities: ANNEX 6-2 Page 3 IMT SUPPLY REQUIREMENTS - 1977 Quantity Weight Piece (Tons) Engines 35,000 13,500 Forgings - 11,000 Grey iron castings - 24,700 Non-ferrous castings - 300 Steel sheets - 23,500 Screws, nuts - 2,500 Metallurgic material - 24,500 Steel tubes - 4,000 Bearings - 500 Accumulators 70,000 2,500 Tires 192,000 6,000 Dyes, lacquers - 600 Fuels, lubricants - 2,500 Salts, chemicals - 400 Propane-butane gas - 500 Others - 9,000 126,000 7. Steel Products. IMT requires various steel products including steel bars, steel wires, flat and rolled steel and steel pipes primarily for the machine tool production. At the present, there are eight steel plants in Yugoslavia with a total capacity of about 2.,6 million tons per year of crude steel equivalent. Their capacity is expected to increase to about 5 million tons by 1975, and 7 million tons by 1980. IMT will continue to cover its demand for steel products from local suppliers, i.e., ZELJEZARA NIKSIC, RAVNE, STORE, SKOPJE, SISAK, JESENICE, ZENICA, SMEDEREVO and K.O.M. PROKUPLJE. Domestic steel works do not produce certain steel products, such as bar and flat carbon steel or the special steel tubes required by IMT. The projected annual requirement of about 2,000 tons of such products, after expansion, will be covered by imports. 8. Castings. There are some 250 foundries in Yugoslavia producing nearly 400,000 tons of steel iron and non-ferrous castings. DMT purchases its total requirements for gray castings (e.g., flywheels or engine blocks) and nodular castings (e.g., axle housing or transmission blocks) from FOB. FOB and LMT had been one enterprise until 1971 and occupy production facili- ties adjacent to each other. 9. In October 1972, IMT signed a long-term (8 years) contract with FOB. To meet IMT's demand for steel castings after project completion, IMT is supporting FOB's expansion program with a Din 30 million loan at concessionary terms. However, even after expansion FOB will not be able to supply a suf- ficient number of castings for engine blocks and heads. The foundries ATMOS - Maribor and PETAR DRAPSIN - Mladenovac have agreed to supply the necessary quantities on a year-by-year negotiable basis. In addition, ATMOS - Maribor will continue to meet IMT's silium casting requirements. ANNEX 6-2 Page 4 10. Forgings. IMT's main suppliers of forgings CRVENA ZASTAVA, KOVACKA INDUSTRIJA, aMAJ, MASINSKA INDUSTRIJA AND TOVARNA VERIG will continue to cover IMT's total requirements for expansion. At present, the Company imports rear axle forgings, but a local firm BRATSTVO - Novi Travnik is negotiating a long-term contract with DMT. 11. Pressings. The main supplier of pressings is IKARUS, another UMI member. The expansion plans of both companies have been coordinated. 12. Rubber and Plastics. IMT will be able to meet the requirements of plastic products from three domestic suppliers; i.e., JOZE KERENCIC, GIP and DES. Rubber goods will continue to be supplied by REKORD, MILOJE, ZAKIV, VITOJEVAC, and GIP. 15 X 30 tires are currently imported from England, but Rekord is testing local prototypes and should be able to supply IMT's need by 1976. 13. Engines. IMT purclhases engines primarily from TMR, a UMI member. The 3-year contract between the two companies stipulates the supply of a) TˇR manufactured diesel engines of type S-4 and b) DIR-assembled Perkins engines. rIT makes availaiYle the necessary foreign exchange to purchase the foreign engine components. The present capacity of DIMR is 17,000 engines per year. The company is expanding to produce 40,000 engines annually, which would be sufficient to meet IMT's requirements from a quantative point of view. IMT has asked DPR to broaden its product range and produce 3-5 types of engines. Such a change in DIR's production program would require an investment of Din 40 million. INT proposed to make available the amount required. 14. Brakes. The local suppliers RUEN, KOCANI and FAK, will continue to meet TNT's demand after expansion. 15. Clutches are supplied by FRAD, New Belgrade and RUEN, Kocani. FRAD is a member of the UMI group; the Company will expand its capacity in accord- ance with IMT's increased production. 16. Steering Wheel and Steering Assmbly. The available capacities of IMT's local suppliers, JOZE KERENCIC, Ormoz and SOKO, Master, will be suffi- cient to meet IMT's future requirement. 17. Batteries and Electrical Equipment. All batteries are supplied by TELSA, Brcka on the basis of a 4-year contract. The Company SATURNUS, Ljubljana has agreed to provide head lamps and direction lights according to a 3-year contract between the two companies. In exchange IMT has agreed to meet Saturnus' foreign exchange obligations for imports of raw materials and components. The main suppliers of other electrical equipment (battery cables, cable terminates, etc.) are 26 SEPTEMBAR, Krupanj, STANDARD, Bosanska Gradiska, AGROVOJVODINA, Novi Sad and AGROPREMA, Belgrade. These companies will con- tinue to meet DIT's requirements after project completion. ANNEX 6-2 Page 5 18. Wheels. The major Yugoslav producer of wheels is LUBRAVA, Sremska Mitrovica. This company is presently completing an expansion program which would result in production capacity sufficient to supply IMT's increased demand. DMT is negotiating with ZMAJ, Zemum as back-up supplier. 19. Tools. IMT will require the following quantities of machine tools after project completion: Fastening tools 3,200 positions Lamps 1,500 positions Other fastening tools 19700 positions Cutting tools 5,900 positions Measuring tools 4,950 positions Forgings & pressing tools 1,090 positions Accessories 5,700 positions Total 24,040 positions Approximately 88% of the required quantities will be manufactured by IMT, but tv1 company expects to purchase in the future more machine tools from domestic or foreign specialized suppliers. In particular, INT will im- port Harbetok knives for conic straight toothing, Klingelnberg knives for toothing, Oerlikon knives for toothing plate holders from hard metals, plates from hard metals and micro drillers. 20. Other Parts and Supplies. IMT has discussed with the present: sup- pliers of other parts and supplies its requirements after project completion. The capacities of these companies should be sufficient and no bottlenecks are expected. The potential and present main suppliers are: a) for fuel and oil - JUGOPETROL, Belgrade; b) for paints and lacquers - KOLOR, Medvode; c) for instruments and flexible shafts - TELEOPTIK, Zemun and RUDI CAJAVEC, Banja Luka; d) for springs - SLAVKO RODIC, Bugojna and FENOR, Nova Raca; e) for screw parts - TVIK, Krin, VIS, Svilajinac, ELIND, Valjevo, IGMAN, Konjic; and f) 10 small companies for the supply of seals, washers, tubings, pins and chains. C. Imports 20. Imports of raw materials and parts are allowed under three main systems: (a) the GDK system; (b) the RK system; and (c) the LB system. Un- der the GDK system, companies which export are allowed to import about 25% of their raw material requirements for export production. Under the RK sys- tem, imports of specific items are determined as commodity contingents by the concerned Yugoslav industrial associations. Under the LB system, no limits are imposed on the import of specific items. In addition, companies can use their retention quota (20% of exports) after foreign debt service payments to import raw material and parts without restriction. ANNEX 6-2 Page 6 21. The following table shows the custom duties on the import of IMT main supply items and the import system under which they fall: Taxes & Custom Duties Import _ System Electrical Equipment 19% GDK Steel products 22% GDK Forgings 28% RK Castings 28% RK Engines 28% GDK Tires 26% GDK Bearings 26% RK Machine Tools 19% RK 22. Neither the present Yugoslav import system nor the availability of foreign exchange for raw material and supplies is expected to pose any problems for IMT's expanded production program. Imports of materials amount at pre- sent to 7-10% of total material costs and are projected to decrease to 5-8% by 1976. Selected components, tools and special steels will be imported from the following countries: (a) England--bearings, liners, pumps, valves, small tractor parts, steel; (b) FRG--needle bearings, cutting tools, micro drills, extruders, steel: (c) Italy--semi-shafts, front axle, steel: (d) Austria--bear- ings, compressors; (e) Belgium--diamond tools; (f) Switzerland--knives and steel; (g) Sweden--tools; (h) Spain--tires. 23. At present, the import content of the standard tractors IMT 533/558 is 3-5% compared to 45% for the 575/585 models. IMT plans to decrease imported components for the 575 and 585 models to 8-10% until 1975 by procuring the engines locally (IMR - Perkins). The new ones 100 hp model will rely on imported gearlinks. Since the envisaged production volume for this product size does not allow economical in-house development and production. 24. Many of IMT's suppliers do not dispose of adequate import contin- gents and foreign exchange rights to guarantee supply of import-dependent parts and components. In these cases IMT will continue to finance directly the import content of its supplies by making available to the suppliers its own accumulated surplus foreign exchange rights. Industrial Projects Department September 1973 ANNEX 6-3 Page 1 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT OPERATING COST PROJECTIONS A. Production Cost Material Cost 1. Based on the production program given in Annex 6-2, and the cor- responding raw material, parts and supplies requirement detailed in Annex 6-2, the following direct and indirect material costs have been projected: Material Cost and Production Build-Up 1972 1973 1975 1976 1977 (actual) I. Production (units) Tractors 14,402 15,850 19,450 29,600 35,000 Implements 6,117 8,650 8,650 22,250 27,000 II. Material Cost (current Dinar million) Direct Material Cost Tractors & Accessories 482.0 727.9 1,020.6 1,719.6 1,878.1 Implements 102.8 148.2 165.9 324.6 367.4 Others 177.4/1 76.8 92.3 97.8 103.7 Indirect Material Cost 12.9 14.6 26.8 38.0 42.8 Total 775.1 967.5 1,305.6 2,180.0 2,392.0 /1 Including Dinar 135.1 million for implements purchased from subcontractor. 2. IMT depends on outside suppliers for all major components. After project completion there will be no essential change from the assembly type operation. IMT will expand the machining operation for tractor parts dispro- portionately, thereby increasing the Company's value added to material cost from about 5% in 1972 to not more than 8% after expansion. ANNEX 6-3 Page 2 Labor Cost 3. The proposed expansion project will increase IMT's labor force by 1,440 men. Detailed manpower projections are given in Annex 4-3. Labor cost projections have been based on an average of 184 hours/month, one shift in the tractor assembly plant and non-productive departments and two shifts in all other production facilities as well as the following number of employees and salary scales:- Manpower and Salary Scale Projections 1973 1976 (actual) (projected) Qualification Salary Number of Salary Number of Salary Category Din/h Employees Din/h Employees Direct Labor VK - highly skilled I 12.0 16.4 II 10.5 372 14.4 457 III 9.0 12.4 IV - skilled 8.4 969 11.4 1,615 PK - semi-skilled 6.6 479 9.0 922 NK - unskilled 5.7 369 7.8 449 Indirect Labor VSS - University 15.5 136 21.2 180 VSS/1 - University 12.5 116 17.1 142 SSS/intermediate training 10.5 321 14.4 435 NSS/basic training 6.6 144 9.0 145 In accordance with labor agreements between the city of Belgrade and ITT an annual salary increase of 12.3% has been assumed until 1978 and 8% thereafter. Operating and Tractor Unit Costs 4. Taking into account direct and indirect costs as well as depreciation (see Annex 2-7, para. 15), the operating costs can be summarized as follows: ANNEX 6-3 Page 3 Operating Cost Projections 1972 1975 1976 1977 Production (units Tractors 14,402 19,450 30,500 35,000 Implements 6,117 8,650 22,000 27,000 Operating Cost % . (current Din million) 1. Production Material 775.1 81.5 1,305.6 2,180.0 2,392.0 78.3 Labor 72.1 *7.6 140.0 230.0 269.0 8.8 Sub-Total 847.2 89.1 1,445.6 2,410.0 2,661.0 87.1 2. Maintenance and Repair 30.4 3.2 55.0 86.9 93.9 3.1 3. Administration and Selling 44.5 4.7 82.0 140.5 156.1 5.1 4. Depreciaticn 25.5 2.6 76.0 110.1 110.1 3.6 5. Others 2.9 0.3 7.6 30.0 32.3 1.1 Total 950.5 100.0 1,666.2 2,777.5 3,053.4 100.0 Due to the assembly type operation, and the relatively low lev7el of wages in Yugoslavia, IMT's cost structure is dominated by costs for raw materials, parts and components. Total direct and indirect material cost decreases from 81.5% of operating cost in 1972 to 78.4X in 1977, since the expansion of IMT's production facilities allows an increase of machining of tractor parts and components. 5. Although tractor unit costs are expected to increase because of the inflationary cost increases during project implementation, the project should realize some economies of scale and cost decreases in constant prices as illustrated by the following table: Tractor Unit Cost Comparison (Index 1972 = 100 constant prices) 1972 1977 Production Unit Cost Production Unit Cost Model (units) (Index) (units)- (Index) 533 11,926 100 25,000 97 558 1,812 100 3,300 99 575 142 100 1,800 74 585 275 100 1,500 79 ANNEX 6-3 Page 4 Unit cost for the standard IMT 533/558 models are estimated to decrease by 1-3% only, since they have already been produced on a large scale in 1972. In addition, the project is not expected to decrease unit costs of maintenance, administration and selling expenses for at least 3-5 years after project completion, since the Company has to strengthen its marketing activities, and past maintenance and repair cost had been particularly low in anticipa- tion of the expansion and the related new investment. In the case of the IMT-575 and IMT-585 models, the Company should realize economies of scale of 20-25% per unit by (i) increasing the present pilot production to economical production lots of about 1,500 tractors/year, and (ii) decreasing the import content of these models from a present 45% to an average of 8-10% by 1975 (Annex 6-2, para. 23). 6. IMT has not yet prepared unit cost calculations for the new 20-25 hp tractor and the above 100 hp model which IMT intends to introduce after project completion. The Company expects to realize for these tractors profit margins which are substantially lover than those for its standard models (2-5% as compared with 10%). As for the 100 hp tractor, the projected annual production of 400 units does neither allow economies of scale nor does it justify special development effort on the part of IMT's research and develop- ment department. Consequently, to break-even, the tractor model will rely to a large extent on parts used for the IMT-575/585 models and imported com- ponent. As to the small 20-25 hp tractors the model choice and production strategy (licensing vs. own development) has not been finalized. However, in view of the considerable competition in this products range and IMT's initial cost of tooling up, the Company does not expect to realize notable profits for the 20-25 hp tractor during the first few years of produc_.ion. Nevertheless, IMr desires to enter the market segments for the 20-25 hp tractors and above 100 hp units in order to (i) offer the full range of tractor types on the domestic market and (ii) thereby strengthen its market position vis-a-vis present and potential competitors. Industrial Projects Depar.ment November 1973 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Projected Incom Statement - With Expausion (dil2on cm'rent Din) Year Ending December 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 I. Net Sales (Actual) Domestic 977.11/ 1,224.4 1,315.9 1,704.8 2,764.3 3,112.2 3,286.9 3,385.0 3,477.8 3,621.6 3,773.2 3,929.9 Exports: Convertible 23.3 26.3 31.3 32.9 121.6 132.7 145.9 166.1 191.1 202.6 214.7 227.6 Clearing 30.5 34.6 41.0 43.3 159,7 174.3 191.6 218.1 251.1 252.0 252.0 252.0 1,030.9 1,285.3 1,388.2 1,781.0 3,045.6 3,419.2 3,624.4 3,769.2 3,920.0 4,076.2 4,239.9 4,409.5 II. Cost of Goods Sold Materials, Supplies, Utilities 775.12/ 967.5 1,044.8 1,305.6 2,180.0 2,392.0 2,567.0 2,688.3 2,828.0 2,964.4 3,142.0 3,284.0 Labor 72.1 85.5 96.0 140.0 20.0 269.0 305.4 329.8 356.2 384.7 415.5 448.7 II1. Gross Profit 183.7 232.4 247.4 335.4 635.6 758.2 752.0 751.1 735.8 727.1 682.4 676.8 IV. Operating Expenses Maintenance and Repair 30.4 37.6 41.0 55.0 86.9 93.9 103.2 110.1 117.5 125.4 133.8 142.8 Administration and Selling 44.5 54.5 60.6 82.0 140.5 156.1 173.5 186.7 200.9 216.1 232.1 249.7 Depreciation 25.5 42.1 42.1 76.0 110.1 110.1 110.1 110.1 120.0 120.0 120.0 120.0 Other Expenses 2.9 4.9 6.3 7.5 30.0 32.3 34.8 37.3 40.1 43.1 45.7 48.4 V. Operating Profit 80.5 93.3 97.2 114.9 268.1 365.8 330.4 306.9 257.3 222.5 150.8 115.9 Other Income 12.7 - - Financial Charges 19.2 13.8 19.5 18.0 137.0 132.1 122.6 112,7 102,2 70.0 60.7 51.7 VI. Income before Taxes and Contributions 74.0 79.5 77. 7 96.9 131.1 233.7 207.8 194.2 155.1 152.5 90.1 64.2 Taxes and Contributions 0.7 0.9 1.7 1.5 1.8 2.4 2,3 2.2 1.9 1.9 1.5 0.4 VII. Net Income 73.3 78.6 76.0 95.4 129.3 231.3 205.5 192.0 153.2 150.6 88.6 63.8 VIII. Appropriations Reserve Fund 4.0 4.7 5.2 5.4 5.6 8.5 7.4 6.9 6.0 5.9 5.4 3.2 Collective Consumption Fund 27.6 15.0 15.0 15.0 20.0 30.0 30.0 30.0 30.0 30.0 30.0 20.0 Compulsory Loans 6.1 9.0 15.4 16.4 18.2 20.2 19.5 19.2 18.4 18.2 16.0 5.4 Business Fund 35.6 49.9 40.4 60.1 85.3 172.6 148.6 135.9 94.tj 96.5 Y1.2 35.2 1/ Including income from trade of implements and parts produced by others (Din 183.2 million). No such income has been assumed for projections. 21 After inventory charges. NOTE: For explanation of terms used, refer to Annex 2-7. Industrial Projects Department January 1974 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Projected Income Statement - Without Expansion (Current Din Million) Year Ending December 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 (Actual) I. Net Sales Domestic 977.1- 1,224.4 1,315.9 1,386.9 1,470.1 1,558.4 1,651.8 1,717.1 1,783.9 Exports: Convertible 23.3 26.3 31.3 32.9 34.9 37.0 39.2 41.6 44.1 Clearing 30.5 34.6 41.0 43.3 45.9 48.6 51.2 54.6 57.9 1,030.9 1,285.3 1,388.2 1,463.1 1,550.9 1,644.0 1,742.6 1,813.3 1,885.9 II. Cost of Goods Sold Materials, Supplies, Utilities 775.12/ 967.5 1,044.8 1,107.5 1,174.0 1,244.4 1,319.1 1,398.3 1,482.1 Labor 72.1 85.5 96.0 107.8 12'.1 135.9 152.7 164.9 178.1 III. Gross Profit 183.7 232.4 247.4 247.8 255.9 263.6 270.9 250.1 225.7 IV. Operating Expenses Maintenance and Repairs 30.4 37.6 41.0 44.2 47.7 51.5 55.6 59.3 63.2 Administration and Selling 44.5 54.5 60.6 67.3 74.7 82.9 92.2 99.2 106.8 Depreciation 25.5 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 Other Expenses 2.9 4.9 6.3 7.5 8.7 10.0 11.4 12,9 14.4 V. Operating Profit 80.5 93.3 97.2 86.7 82.7 77.0 69.6 36.6 (0.8) Other Income 12.7 - - - - - - - - Financial Charges 19.2 12.5 11.8 11.2 10.9 10.6 10.2 10.1 10.0 VI., Income (Loss) before Taxes and Contributions 74.0 80.8 85.4 75.4 71.8 66.4 59.3 26.5 (10.8) Taxes & Contributions 0.6 1.0 1.1 1.2 1.4 1.5 1.7 1.9 - VII. Net Income (Loss) 73.3 79.8 84.4 74.2 70.4 64.9 57.6 24.6 (10.8) VIII. Appropriations Reserve Fund 4.0 4.7 5.2 5.3 5.7 6.8 8.6 7.0 - Collective Consumption Fund 27.6 15.0 15.0 15.0 15.0 15.0 15.0 10.0 _ Compulsory Loans 6.1 9.8 15.8 16.5 9.4 10.2 10.7 7.6 - Business Fund 35.5 50.2 48.3 37.3 4C.o 32.9 23.2 - - -for Fixed Asset 14.3 23.7 34.6 16.0 12.4 9.3 - - - -for Current Assets 21.3 26.6 13.7 21.3 27.6 23.6 23.2 - 1/ Including income from trade of implements and parts produced by others (Din 183.2 million). 2/ After inventory charges. NOTE: For explanation of terms used, refer to Annex 2-7. Industrial Projects Department September 1973 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Projected Source and Application of Funds (Million Current Dinar) Year Ending December 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 I. SOURCES 1. Net Appropriation to Business Fund 49.9 40.4 60.1 85.3 172.6 1l8.6 135.9 98.8 96-5 37.2 35-2 2. Depreciation 42.1 42.1 76.0 110.1 110.1 110.1 110.1 120.0 120.0 120.0 120.0 Subtotal 92.0 82.5 136.1 195.4 282.7 24 218.8 216.5 157.2 155.2 3. Decrease in Working Capital 17.5 - - - _- - . _ _ _ 4. Increase in Short-Term Debt - - 26.4 - - - 38.5 - _ _ 5. Increase in Long-Term Debt for Fixed Assets: - IBRD - 128.6 158.1 - - - - - - _ _ - Clearing - 5.2 10.0 - - - - - - - - - Beogradska Banka 48.1 170.2 116.0 - - - - - - - - Local Suppliers' Credit - 7.0 10.2 - - - - - - - - Subtotal 48.1 311.0 294.3 - - - - - - _ _ 6. Increase in Long-Term Debt to Current Assets 60.0 20.0 150.0 150.0 - - - - - - - TOTAL SOURCES 217.6 113.5 606.8 345.4 282.7 258.7 284.5 218.8 216-5 157.2 155.2 II. APPLICATIONS 1. Increase in Fixed Assets: - Expansion Program 82.2 349.5 421.5 - - 80.0 120.0 _ - - - Replacement & New Investment - - - 5.0 10.0 12.0 14.0 17.0 22.0 24.0 27.U Subtotal 82.2 349.5 1i2I 5.0 10.0 92.0 134.0 17.0 22.0 24.0 27.0 2. Increase in Working Capital - 10.2 106.4 281.6 0.2 43.7 39.4 41.4 43.7 45.0 47.3 3. Decrease in Short-Term Debt 37.0 2.9 19.5 20.1 - - 38.5 - - - 4. Repayment of Long-Term Debt for Current Assets 3.4 14.6 17.2 17.3 44.3 43.5 43.6 29.6 29.6 29.6 29.6 for Fixed Assets: - IBRD - - - - 8.8 18.4 19.8 21-3 22.9 24.5 26.k - Others 14.7 19.2 18.7 33.5 53.0 39.0 38.1 38.1 37.5 33.7 33.7 Subtotal 18.1 33.8 35.9 50.8 106.1 100.9 101.5 89.0Q 2DQ 87.8 89.7 5. IBRD Interest during Construction - 6.0 19.5 (5.1) (5.1) (5.1) (5.1) (5.1) - - - 6. Net increaae in Financial Assetsl2/ 20.3 11.1 44.0 (6.4) 112.4 34.4 37.7 30.4 55.4 15.2 1.8 7. Net increase of Inventory C 2verag-/ 60.0 - (20.5) _ (39.5) - - - - - - TOTAL APPLICATION 217.6 413-5 606.8 345.4 244.2 265.9 307-5 211.2 211.1 172-0 165.8 (Deficit) Surplus Cash - - - - 3°.5 (-7.2) (-23-0) 7.6 5 .4 (-14.8) 10.6 Accumulated Surplus Cash - - - _ X 31.3 8.8 15.9 21.3 6.5 -4.1 NOTE: For explanation of terms used, refer to Annex 2-6. 1/ Deposits and long-term loans to customers and suppliers, not including compulsory loans. 2/ According to Yugoslav regulations, 80% inventory has to be covered by the business fund for current assets or long-term debt by 1973 and 100% by 1975. Industrial Projects Department January 1974 YUGOSLAVIA IMT TRACTOR EXPANSION PROJECT Balance Sheet Projects - Without Expansion (million current dinar) Year Ending December 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 ASSETS (Actual) I. Current Assets Cash and Banks 25.4 25.0 25.0 25.0 15.7 16.6 30.0 30.0 15.0 Receivables 102.5 71.4 77.1 81.3 86.2 91.3 119.0 119.3 122.5 Inventory 273.8 275.5 285.1 303.2 322.4 342.9 330.2 325.0 298.0 Subtotal 401.7 371.9 387.2 409.5 424.3 450.8 479.2 474.3 435.5 II. Fixed Assets Gross Fixed Assets 355.9 435.9 478.0 520.1 562.2 604.3 645.5 697.6 738.3 Less: Accumulated Depreciation 209.0 251.1 293.2 335.3 377.4 419.5 461.6 513.7 555.9 Net Fixed Assets 146.9 184.8 184.8 184.8 184.8 184.8 183.9 183.9 182.4 III. Financial Assets 31.0 49.7 81.0 94.8 106.3 116.2 121.1 128.6 136.0 IV. Other Assets 94,9 114.6 134.8 155.1 175.9 197.7 221.3 243.3 265.7 TOTAL ASSETS 674.4 721.0 787.8 844.1 891.2 949.4 1,005.5 1,0l301 1,019.6 LIABILITIES I. Current Liabilities Accounts Payable 96.2 83.9 90.6 96.1 101.8 107.9 114.4 121.3 128.6 Short-Term Debt 53.1 12.5 11.5 10.2 - - - - - Current Portion of Long-Term Debt 18.2 23.3 22.0 18.9 12.8 8.9 7.0 7.0 6.5 Subtotal 167.5 119.7 124.1 125.2 114.6 116.8 121.4 128.3 135.1 II. Long-Term Debt 81.3 95.8 73.8 54.9 42.1 34.2 27.2 20.2 13.7 III. Equity Reserve Fund 18.6 23.3 28.5 33.9 39.6 46.5 55.1 62.1 62.1 Collective Consumption Fund 76.3 91.3 106.3 121.3 136.3 151.3 166.3 176.3 176.3 Compulsory Loans 12.5 22.3 38.2 54.7 64.4 73.5 85.3 93.0 93.0 Business Fund 318.3 368.5 416.8 454.1 494.1 527.0 550.2 550.2 539.4 Subtotal 425.7 505.4 589.8 664.0 734.4 798.4 856.9 881.6 870.8 TOTAL LIABILITIES 674.4 721.0 787.8 844.1 891.2 949.4 1,005.5 1,030.1 1,019.6 NOTE: For explanation of terms used see Annex 2-7. Industrial Projects Department January 1974 YUGOSIAVIA INMT TRACTOR EXPANSION Projected Balance Sheet - With Expansion (million current Dinar) Year Ending December 31 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1tq87 1983 (Ac tuas I ASSETS I. Curnt Assets Surplus Cash- - 60.0 60.0 39.5 39.5 38.5 31.3 8.3 15.9 21.3 6.5 - Cash 25.4 25.0 27.0 38.0 60.0 61.8 63.5 65.6 67.8 70.0 72.0 69.9 Receivables 102.5 71.4 77.1 125.5 256.0 270.9 287.0 248.5 310.4 322.8 335.8 349.1 Inventory 273.8 275.5 285.1 449.3 612.7 650.8 692.2 734.3 779.0 826.4 865.9 928.5 Subtotal 401.7 431.9 449.2 652. 3 98.2 1*2.0 1 =0710 1.05 173.1 1,240.5 =04.Z 1,347.! II. Fixed Assets Gross Fixed Assets 355.9 438.1 787.6 1,209.1 1,214.1 1,224.1 1,316.1 1,450.1 1,467.1 1,489.1 1,513.1 1,559.7 Less: Accumulated Depreciation 209.0 251.1 293.2 369.2 479.3 589.4 699.5 809.6 929.6 1,049.6 1,169.6 1.289.6 Net Fixed Assets 146.9 187.0 494.4 839.9 734.8 635.8 617.7 641.6 538.6 440.6 344.6 251.6 tll. Financial Assets Compulsory Loa,ss 12.5 21.5 36.9 53.3 71.5 91-7 IU.2 X3(1l,J4 148.8 167.0 183.0 188.4 Others 14 & f 7L1 37-1 12.214 6 2719 _bl 5.2 371.3 39615 388.3 Subtotal Z o U - 2 l7 IV. Other Assets 94-9 ,6 138 _2 180.8 2I. 256,7 293.6 329.6 35 llOW>9 424.1 TOTAL ASSETS 674. 5 7 93.7 1.837.8 2,077*7 2.197.4 23 2.2462.8 2.506.0 2.,584.9 2.605.2 2.599.9 LIABILITIES I. Current Liabilities Accounts Payables 96.2 83.9 90.6 208.2 242.5 257.1 272.6 288.9 306.3 324.6 344.1 364.7 Short-term Debt 53.1 16.1 13.2 39.6 20.1 - - 38.5 - - - - Short-term portion of Long-term Debt 18.2 18.1 33.8 35.9 106.1 10l.; 88 90.0 87.8 89.' i1 Subtotal 167.5 118.1 138.0 283.7 J1.4 433-7 45 II. Lone-term Debt For Fixed Assets -IBRD - - 128.6 286.7 277.9 259.5 239.7 218.5 195.6 171.1 144.7 llb14 -Others 55.0 88.4 251.6 369.1 315.3 276.3 238.2 200.1 162.9 128.9 95.2 61.5 For Cur rent Assets 26.3 82.9 88.3 221.1 32225 266.0 222.h 8 6 16 ,0 7 Subtotal 8L.3 171.3 468 5 86.9. 111. Equity Reserve Fund 18.6 23.3 28.5 33.9 39.5 48.0 55.4 62.3 68.3 74.2 79.6 82.8 Collective Consumption Fund 76.3 91.3 106.3 121.3 141.3 171.3 201.3 231.3 261.3 291.3 321.3 341.3 Compulsory Loans 12.5 21.5 36.9 53.3 71.5 91.7 111.2 130.4 148.8 167,Q 183.0 188.4 Business Fund 318.3 368.2 408.6 468.7 554.0 726.6 875.2 1011.1. 1,109.9 1.206,4 1.243.6 1278.8 Subtotal 425.7 504.3 580.3 677.2 806.3 1.037.6 1.243.1 1lj 4 9 1f9 ! 18S1.3 TOTAL LIABILITIES 674.5 79 .7 1,186.4 1,837.8 2.077.? . . -w Current Ratio 2.4:1 3.7:1 3.3:1 2.3:1 2.6:1 2.9:1 2.~Osl 2..5.1 3.0:1 3.0:1 3.0$1 3.0:1 Debt/Equity Ratio 16:84 25:75 44:56 56:44 53:47 hs:56 31:69 30:70 25:75 2o:o0 16:84 l2:88 NOTE: For explanation of terss used, refer to An:mex 2-7 1/ including inventory coverage required by Yugoslav law. D 5. LbItrial Projectsi Departmet r Jasnuary 19741 ANNEX 7-4 Page 1 YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECT I. FINANCIAL PROFITABILITY Input for the Financial Rate of Return Calculations 1. The financial rate of return calculations are based on financial cost and benefit streams expressed in real value terms i.e. The financial projections in case of expansion and without expansion (Annex 7-1) as well as the project cost have been adjusted to reflect real prices. A comparison of IMT's financial cost and benefit streams with and without expansion results in the following incremental position: Incremental Financial Cost and Benefit Stream of the INT Tractor Expansion Project (real prices) Incremental Investment Cost Incremental Project Operating Fixed Assets Working Capital Other Investments/i Cost Revenue 1973 82.2 -17.5 -10.2 -0- -0- 1974 349.5 10.2 -11.0 -0- -0- 1975 422.6 106.4 -11.7 258 318 1976 - 281.6 - 7.4 1,241 1,494 1977 - - - 3.2 1,418 1,775 1978 - - 78.0 1,551 1,881 1979 - - 119.3 1,6.8 1,956 1980 - - 1.4 1,748 2,034 1981 - - 5.4 1,831 2,076. 1982 - - 6.4 1,954 2,319 1983 - 8.4 2,036 2,163 1984 - 8.9 2,158 2,293 1985 - 9.4 2,286 2,430 1986 - 10.0 2,425 2,576 /1 including replacement and Phase II expansion in 1978/79. 2. The financial rate of return calculation and its sensitivity tests assume a 14-year production period including 3 years construction and zero scrap value. ANNEX 7-i . Page 2 II. SENSITIVITY TEST ON FINANCIAL RATE OF RETURN Operating Cost Revenue Vs Return / vs Return 21~~IW ms l _t "do Sa _ _t caDitall W 234 ' >~~~~~ C-ost A& 20 0 /. 20 Bas0 Case Decrease Increase % Variation in Input OPERATINe RATE OF CASE CAPITAL COST COST nzNUE R1,ETUM}T 1. Bas k t x k r M g \UR < t L~~~~~~!~i HE Z E GO V A,,i t ,-.. 4 . NUN l// t4SE Xt1-4y ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ lAVA C 7979 9~~~~~~~~YUOSLVI A, IMT- TRACTOR EXPANSION PR0ECT,LOCATION OF PLANTS ,E & SALES AND SERVICE CENTERS ) 0 ;- 0 .......... C P ALB~~~042\ ~ ~ Se20n2 0' rxuT 0"se s.nX ' , 0 / \\\ />s^sw *~~ ~ ~~~~~~~~~~@hfuN NSAGtb:KtL;fF * 0 ; _ t ; A; ;/7-slUhiF Z iit SQUF6nHr9h-Ts ' 0 ;; ; 4 ' 2 ; lt ;$ c )wesM A tF D s a~~~~~~~~~~M A D VEh rn t1Ul1nT 5; 4 Or-ClykHFGv4T k fi \ 1 ; 0; 0 01 Q4 ;0 {! X K 2 _ > _ (20 tt \ w T U C O S; A VI A8 lSt-|7:;XA V IT#vt; ~~~~ bordevo gg t T | Sp up G 9p 1 iX \t A 0D;9iW W > }5)ti \ 0 \ ;~~~~~~~~~~Jp s *,- , - ,>) > zar Zo2N45l^. wo er s 8 arrnr J 0 0 S5; 0 u 9 GtiR; i t l X E > ', 5t',AtF FFF o@teAa ffIte PvrtF 0:< t 0\t4 ,S,0i 0 )>S5 ,